Note 5 – Loans

Loans, excluding loans held for sale, were comprised of the following:

	December 31,
(in thousands)	2013		2012

Commercial	$	122,553	$	126,192
Commercial real estate:
Construction and land development		41,822		48,812
Commercial real estate		364,616		355,433
Residential real estate:
Residential		171,917		161,033
Home equity		87,797		91,313
Consumer		5,966		5,922
Total loans	$	794,671	$	788,705

Net deferred loan (fees) costs included in the above loan categories are $(299,000) for 2013 and $(128,000) for 2012.

Overdraft deposits were reclassified to consumer loans in the amount of $71,000 and $110,000 for 2013 and 2012, respectively.

Acquired Loans

Interest income, including accretion, on loans acquired from MidCarolina for the year ended December 31, 2013 was approximately $17.8 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at December 31, 2013 and 2012, are as follows:

(in thousands)	2013		2012
Outstanding principal balance	$	134,099	$	219,569
Carrying amount		124,828		203,981

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies ASC 310-30 (formerly SOP 03-3), to account for interest earned, as of the indicated dates is as follows:

(in thousands)	December 31, 2013		December 31, 2012
Outstanding principal balance	$	21,014	$	26,349
Carrying amount		16,644		20,182

The following table presents changes in the accretable discount on acquired impaired loans, for which the Company applies ASC 310-30 (formerly SOP 03-3), for the year ended December 31, 2013. The accretion reflected below includes $1,764,000 related to loan payoffs.

(in thousands)	Accretable Discount
Balance at December 31, 2012	$	2,165
Accretion		(2,635	)
Reclassification from nonaccretable difference		2,516
Balance at December 31, 2013	$	2,046

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2013.

(in thousands)	30- 59 Days Past Due		60-89 Days Past Due		90 Days + Past Due and Still Accruing		Non- Accrual Loans		Total Past Due		Current		Total Loans

Commercial	$	27	$	-	$	-	$	11	$	38	$	122,515	$	122,553
Commercial real estate:
Construction and land development		-		51		-		877		928		40,894		41,822
Commercial real estate		667		-		-		2,879		3,546		361,070		364,616
Residential:
Residential		642		202		-		880		1,724		170,193		171,917
Home equity		109		18		-		424		551		87,246		87,797
Consumer		21		1		-		-		22		5,944		5,966
Total	$	1,466	$	272	$	-	$	5,071	$	6,809	$	787,862	$	794,671

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2012.

(in thousands)	30- 59 Days Past Due		60-89 Days Past Due		90 Days + Past Due and Still Accruing		Non- Accrual Loans		Total Past Due		Current		Total Loans

Commercial	$	219	$	-	$	-	$	52	$	271	$	125,921	$	126,192
Commercial real estate:
Construction and land development		417		-		-		1,208		1,625		47,187		48,812
Commercial real estate		1,120		-		-		1,526		2,646		352,787		355,433
Residential:
Residential		672		168		-		2,130		2,970		158,063		161,033
Home equity		144		-		-		397		541		90,772		91,313
Consumer		33		-		-		3		36		5,886		5,922
Total	$	2,605	$	168	$	-	$	5,316	$	8,089	$	780,616	$	788,705

Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2013.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	19	$	19	$	-	$	20	$	1
Commercial real estate:
Construction and land development		18		18		-		261		4
Commercial real estate		936		936		-		950		13
Residential:
Residential		880		888		-		1,200		11
Home equity		424		424		-		433		-
Consumer		-		-		-		-		-
	$	2,277	$	2,285	$	-	$	2,864	$	29
With a related allowance recorded:
Commercial		-		-		-		-		-
Commercial real estate:
Construction and land development		1,468		1,507		68		1,551		33
Commercial real estate		2,266		2,264		488		1,198		7
Residential
Residential		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		18		18		3		19		1
	$	3,752	$	3,789	$	559	$	2,768	$	41
Total:
Commercial	$	19	$	19	$	-	$	20	$	1
Commercial real estate:
Construction and land development		1,486		1,525		68		1,812		37
Commercial real estate		3,202		3,200		488		2,148		20
Residential:
Residential		880		888		-		1,200		11
Home equity		424		424		-		433		-
Consumer		18		18		3		19		1
	$	6,029	$	6,074	$	559	$	5,632	$	70

The following table presents the Company's impaired loan balances by portfolio segment, excluding acquired impaired loans, at December 31, 2012.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	39	$	39	$	-	$	276	$	11
Commercial real estate:
Construction and land development		2,302		2,335		-		1,562		-
Commercial real estate		305		306		-		557		8
Residential:
Residential		270		541		-		861		15
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
	$	2,916	$	3,221	$	-	$	3,256	$	34
With a related allowance recorded:
Commercial	$	110	$	110	$	107	$	35	$	-
Commercial real estate:
Construction and land development		-		-		-		-		-
Commercial real estate		-		-		-		-		-
Residential:
Residential		-		-		-		-		-
Home equity		-		-		-		-		-
Consumer		21		21		21		10		-
	$	131	$	131	$	128	$	45	$	-
Total:
Commercial	$	149	$	149	$	107	$	311	$	11
Commercial real estate:
Construction and land development		2,302		2,335		-		1,562		-
Commercial real estate		305		306		-		557		8
Residential:
Residential		270		541		-		861		15
Home equity		-		-		-		-		-
Consumer		21		21		21		10		-
	$	3,047	$	3,352	$	128	$	3,301	$	34

The following table shows the detail of loans modified as troubled debt restructurings ("TDRs") during the year ended December 31, 2013, 2012, and 2011, included in the impaired loan balances.

	Loans Modified as a TDR for the Year Ended December 31, 2013
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		-	$	-	$	-
Commercial real estate		1		1,190		1,190
Residential real estate:		-		-		-
Consumer		-		-		-
Total		1	$	1,190	$	1,190

	Loans Modified as a TDR for the Year Ended December 31, 2012
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		1	$	11	$	10
Commercial real estate		9		2,421		1,403
Residential real estate		1		11		11
Consumer		1		22		21
Total		12	$	2,465	$	1,445

	Loans Modified as a TDR for the Year Ended December 31, 2011
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		-	$	-	$	-
Commercial real estate		4		417		369
Residential real estate		1		316		287
Consumer		-		-		-
Total		5	$	733	$	656

During the year ended December 31, 2013, 2012, and 2011, the Company had no loans that subsequently defaulted within twelve months of modification. The Company defines default as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure subsequent to modification.

The following table summarizes the primary reason loan modification were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Balances represent the recorded investment at the end of the year in which the modification was made. Rate modifications include TDRs made with below market interest rates that also include modifications of loan structures.

	Year Ended December 31,
	2013						2012						2011
	Type of Modification				ALLL		Type of Modification				ALLL		Type of Modification				ALLL
(dollars in thousands)	Rate		Structure		Impact		Rate		Structure		Impact		Rate		Structure		Impact
Commercial	$	-	$	-	$	-	$	-	$	10	$	8	$	-	$	-	$	-
Commercial real estate		-		1,190		137		-		1,403		-		-		369		-
Residential Real Estate		-		-		-		-		11		-		-		287		-
Consumer		-		-		-		-		21		22		-		-		-
Total	$	-	$	1,190	$	137	$	-	$	1,445	$	30	$	-	$	656	$	-

Risk Ratings

The following table shows the Company's loan portfolio broken down by internal risk grading as of December 31, 2013.

(in thousands)

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Commercial		Construction and Land Developement		Commercial Real Estate		Residential Real Estate		Home Equity

Pass	$	121,033	$	35,563	$	351,801	$	158,478	$	85,163
Special Mention		1,500		1,005		6,795		8,242		1,650
Substandard		20		5,254		6,020		5,197		984
Doubtful		-		-		-		-		-
Total	$	122,553	$	41,822	$	364,616	$	171,917	$	87,797

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer

Performing		$	5,966
Nonperforming			-
Total		$	5,966

Loans classified in the Pass category typically are fundamentally sound and risk factors are reasonable and acceptable.

Loans classified in the Special Mention category typically have been criticized internally, by loan review or the loan officer, or by external regulators under the current credit policy regarding risk grades.

Loans classified in the Substandard category typically have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are typically characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Loans classified in the Doubtful category typically have all the weaknesses inherent in loans classified as substandard, plus the added characteristic the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur that may salvage the debt.

Consumer loans are classified as performing or nonperforming. A loan is nonperforming when payments of interest and principal are past due 90 days or more, or payments are less than 90 days past due, but there are other good reasons to doubt that payment will be made in full.

The following table shows the Company's loan portfolio broken down by internal risk grading as of December 31, 2012.

(in thousands)

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Commercial		Construction and Land Development		Commercial Real Estate		Residential Real Estate		Home Equity

Pass	$	125,072	$	39,417	$	340,094	$	146,875	$	89,066
Special Mention		922		2,287		10,321		10,731		1,060
Substandard		198		7,108		5,018		3,427		1,187
Doubtful		-		-		-		-		-
Total	$	126,192	$	48,812	$	355,433	$	161,033	$	91,313

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer

Performing		$	5,919
Nonperforming			3
Total		$	5,922