NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	September 30, 2014			December 31, 2013
Commercial
Commercial and industrial	$	229,669		$	180,378
Agricultural	48,314			30,323
Commercial Real Estate
Farm	73,253			76,082
Hotel	80,588			108,226
Construction and development	47,427			35,731
Other	564,703			546,970
Residential
1-4 family	406,562			403,733
Home equity	258,017			244,277
Consumer
Direct	43,987			45,129
Indirect	704			1,077
Total loans	1,753,224			1,671,926
Allowance for loan losses	(24,549		)	(27,609		)
Net loans	$	1,728,675		$	1,644,317

Activity in the allowance for loan losses for the nine months ended September 30, 2014 and 2013 and the recorded investment of loans and allowances by portfolio segment and impairment method as of September 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	(699		)	(548		)	1,427			1,320			1,500
Losses charged off	(166		)	(4,786		)	(1,925		)	(2,166		)	(9,043		)
Recoveries	1,048			2,112			298			1,025			4,483
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

	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	366			506			1,659			1,203			3,734
Losses charged off	(1,058		)	(5,270		)	(1,767		)	(2,364		)	(10,459		)
Recoveries	262			564			375			1,146			2,347
Balance, September 30, 2013	$	3,464		$	19,957		$	3,447		$	981		$	27,849

As of September 30, 2014
Ending Balance individually evaluated for impairment	$	12		$	1,676		$	95		$	—		$	1,783
Ending Balance collectively evaluated for impairment	3,462			15,312			3,114			878			22,766
Total ending allowance balance	$	3,474		$	16,988		$	3,209		$	878		$	24,549
Loans
Ending Balance individually evaluated for impairment	$	537		$	24,232		$	10,167		$	118		$	35,054
Ending Balance collectively evaluated for impairment	277,446			741,739			654,412			44,573			1,718,170
Total ending loan balance excludes $5,108 of accrued interest	$	277,983		$	765,971		$	664,579		$	44,691		$	1,753,224

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.

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $2,856 at September 30, 2014 and $5,783 at December 31, 2013.

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

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867
Provision charged to expense	(685		)	(548		)	464			769			—
Losses charged off	(17		)	(131		)	(548		)	(795		)	(1,491		)
Recoveries	975			673			183			342			2,173
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2013	$	3,635		$	20,108		$	3,459		$	800		$	28,002
Provision charged to expense	(121		)	175			288			658			1,000
Losses charged off	(91		)	(584		)	(448		)	(864		)	(1,987		)
Recoveries	41			258			148			387			834
Balance, September 30, 2013	$	3,464		$	19,957		$	3,447		$	981		$	27,849

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2014. Performing troubled debt restructurings totaling $2,706 were excluded as allowed by ASC 310-40.

September 30, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	88	$	71	$	12
Commercial Real Estate
Farm	76		76		21
Hotel	1,912		1,909		617
Construction and development	—		—		—
Other	3,084		2,633		1,038
Residential
1-4 Family	831		788		90
Home Equity	169		169		5
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	6,160		5,646		1,783
With no related allowance recorded
Commercial
Commercial & industrial	128		55
Agricultural	413		411
Commercial Real Estate
Farm	1,010		772
Hotel	11,487		11,441
Construction and development	84		78
Other	6,732		4,617
Residential
1-4 Family	7,816		6,869
Home Equity	2,548		2,341
Consumer
Direct	141		115
Indirect	3		3
Subtotal — impaired with no allowance recorded	30,362		26,702		—
Total impaired loans	$	36,522	$	32,348	$	1,783

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 nine month periods ending September 30, 2014 and September 30, 2013, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Nine months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	247	$	9	$	9
Agricultural	206		—		—
Commercial Real Estate
Farm	921		—		—
Hotel	6,225		—		—
Construction and development	318		—		—
Other	10,305		75		75
Residential
1-4 Family	8,108		16		16
Home Equity	2,472		11		11
Consumer
Direct	276		7		7
Indirect	6		6		6
	$	29,084	$	124	$	124

Nine months ended September 30, 2013	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,171	$	4	$	4
Agricultural	—		—		—
Commercial Real Estate
Farm	1,426		11		11
Hotel	1,492		1		1
Construction and development	1,694		45		45
Other	19,501		55		55
Residential
1-4 Family	10,716		3		3
Home Equity	2,572		4		4
Consumer
Direct	922		16		16
Indirect	15		—		—
	$	39,509	$	139	$	139

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

Three months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	211	$	1	$	1
Agricultural	412		—		—
Commercial Real Estate
Farm	852		—		—
Hotel	12,450		—		—
Construction and development	78		—		—
Other	8,656		4		4
Residential
1-4 Family	7,449		11		11
Home Equity	2,629		4		4
Consumer
Direct	104		2		2
Indirect	2		5		5
	$	32,843	$	27	$	27

Three months ended September 30, 2013	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	751	$	2	$	2
Agricultural	—		—		—
Commercial Real Estate
Farm	1,255		3		3
Hotel	—		1		1
Construction and development	1,302		44		44
Other	16,472		23		23
Residential
1-4 Family	10,421		—		—
Home Equity	2,500		1		1
Consumer
Direct	858		5		5
Indirect	12		—		—
	$	33,571	$	79	$	79

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, 2014 and December 31, 2013:

	Non-accrual				Past due over 90 days and still accruing
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Commercial
Commercial and industrial	$	38	$	159			$	14
Agricultural	410		—
Commercial Real Estate
Farm	848		1,093
Hotel	1,912		—
Construction and development	78		329
Other	4,832		11,489
Residential
1-4 Family	6,363		7,635		59
Home Equity	1,552		1,452
Consumer
Direct	77		174
Indirect	3		10
Total	$	16,113	$	22,341	$	59	$	14

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

September 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	$	229,669	$	210	$	54	$	39	$	303	$	229,366
Agricultural	48,314		—		—		—		—		48,314
Commercial Real Estate
Farm	73,253		—		—		332		332		72,921
Hotel	80,588		1,912		—		—		1,912		78,676
Construction and development	47,427		—		—		—		—		47,427
Other	564,703		137		206		2,262		2,605		562,098
Residential
1-4 Family	406,562		1,587		1,660		3,387		6,634		399,928
Home Equity	258,017		876		482		967		2,325		255,692
Consumer
Direct	43,987		42		3		58		103		43,884
Indirect	704		—		—		3		3		701
Total — excludes $5,108 of accrued interest	$	1,753,224	$	4,764	$	2,405	$	7,048	$	14,217	$	1,739,007

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 September 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 September 30, 2014 and December 31, 2013 was $20,554 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 $1,569 and $3,566 at September 30, 2014 and December 31, 2013. The Company has allocated $697 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 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 September 30, 2014 and 2013 and decreased the allowance for loan losses by $20 and increased the allowance for loan losses by $30 for the nine month periods ending September 30, 2014 and 2013. These troubled debt restructurings resulted in charge offs of $0 and $22 during the three month periods ending September 30, 2014 and 2013 and $3,848 and $442 during the nine month periods ending September 30, 2014 and 2013.

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

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the nine month period ending September 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
Home Equity	1	34		34
Consumer
Direct	1	26		26
Total	7	$	16,577	$	12,765

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

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the nine month period ending September 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 September 30, 2014 and 2013:

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the three month period ending September 30, 2014	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	34	$	34
Consumer
Direct	1	26		26
Total	2	$	60	$	60

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
For the three month period ending September 30, 2013	Number of Loans	Investment		Investment
Residential
1-4 Family	—	$	—	$	—
Total	—	$	—	$	—

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, 2014:

For the nine month period ending September 30, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53
Home Equity	1	14

Total	3	$	1,498

For the nine month period ending September 30, 2013	Number of Loans	Recorded Investment
Residential:
1-4 Family	2	$	89
Home Equity	1	15
Consumer
Direct	1	4
Total	4	$	108

For the three month period ending September 30, 2013	Number of Loans	Recorded Investment
Residential:
1-4 Family	1	$	52
Home Equity	1	15
Consumer
Direct	1	4
Total	3	$	71

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 September 30, 2014 and 2013, respectively. For the nine month periods ending September 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 September 30, 2014 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2014 of $162. 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 September 30, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

September 30, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	189,192	$	5,537	$	1,867	$	38
Agricultural	47,494		—		410		410
Commercial Real Estate
Farm	71,357		976		72		848
Hotel	64,614		2,575		11,487		1,912
Construction and development	47,147		—		—		78
Other	427,484		16,231		8,811		4,832
Total	$	847,288	$	25,319	$	22,647	$	8,118

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

September 30, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	33,035	$	—	$	—
Commercial Real Estate
Construction and development	202		—		—
Other	107,336		9		—
Total	$	140,573	$	9	$	—

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	$	—

September 30, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	401,515	$	1,660	$	3,387
Home Equity	257,002		48		967
Total	$	658,517	$	1,708	$	4,354

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

September 30, 2014	Performing		Substandard		Loss
Consumer
Direct	$	43,923	$	15	$	49
Indirect	704		—		—
Total	$	44,627	$	15	$	49

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

For the three month period ending September 30, 2014

Number of Loans

Recorded Investment

Residential:

Home Equity