1.	Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio as of December 31, 2012 and December 31, 2011:



			Acquisition		Commercial
	Commercial		and		and		Residential
(in thousands)	Real Estate		Development		Industrial		Mortgage		Consumer		Total
December 31, 2012
Total loans	$	298,851	$	128,391	$	69,013	$	346,919	$	31,655	$	874,829
Individually evaluated for impairment	$	15,941	$	24,112	$	3,449	$	4,304	$	36	$	47,842
Collectively evaluated for impairment	$	282,910	$	104,279	$	65,564	$	342,615	$	31,619	$	826,987

December 31, 2011
Total loans	$	336,234	$	142,871	$	78,697	$	347,220	$	33,672	$	938,694
Individually evaluated for impairment	$	16,942	$	25,699	$	13,048	$	6,116	$	21	$	61,826
Collectively evaluated for impairment	$	319,292	$	117,172	$	65,649	$	341,104	$	33,651	$	876,868

The segments of the Bank’s loan portfolio are disaggregated to a level that allows management to monitor risk and performance. The CRE loan segment is then segregated into two classes. Non-owner occupied CRE loans, which include loans secured by non-owner occupied, nonfarm, non-residential properties, generally have a greater risk profile than all other CRE loans, which include loans secured by farmland, multifamily structures and owner-occupied commercial structures. The A&D loan segment is segregated into two classes. One-to-four family residential construction loans are generally made to individuals for the acquisition of and/or construction on a lot or lots on which a residential dwelling is to be built. All other A&D loans are generally made to developers or investors for the purpose of acquiring, developing and constructing residential or commercial structures. These loans have a higher risk profile because the ultimate buyer, once development is completed, is generally not known at the time of the A&D loan. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment is segregated into two classes: (i) amortizing term loans, which are primarily first liens; and (ii) home equity lines of credit, which are generally second liens. The consumer loan segment consists primarily of installment loans (direct and indirect) and overdraft lines of credit connected with customer deposit accounts.

During the second quarter of 2011, the Bank sold $32.5 million of the indirect auto portfolio that was included in the consumer loan class.

In the ordinary course of business, executive officers and directors of the Corporation, including their families and companies in which certain directors are principal owners, were loan customers of the Bank. Pursuant to the Bank’s lending policies, such loans were made on the same terms, including collateral, as those prevailing at the time for comparable transactions with persons who are not related to the Corporation and do not involve more than the normal risk of collectability. Changes in the dollar amount of loans outstanding to officers, directors and their associates were as follows for the year ended December 31:



(in thousands)		2012
Balance at January 1	$	11,741
Loans or advances		5,233
Repayments		(5,243)
Balance at December 31	$	11,731

Management uses a 10-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Only the portion of a specific allocation of the allowance for loan losses that management believes is associated with a pending event that could trigger loss in the short term is classified in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category. It is possible for a loan to be classified as Substandard in the internal risk rating system, but not considered impaired under GAAP, due to the broader reach of “well-defined weaknesses” in the application of the Substandard definition.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in the commercial segments at origination and on an ongoing basis. The Credit Quality Department performs an annual review of all commercial relationships $500,000 or greater. Confirmation of the appropriate risk grade is included as part of the review process on an ongoing basis. The Bank has an experienced Credit Quality and Loan Review Department that continually reviews and assesses loans within the portfolio. In addition, the Bank engages an external consultant to conduct loan reviews on at least an annual basis. Generally, the external consultant reviews commercial relationships greater than $750,000 and/or criticized relationships greater than $500,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of December 31, 2012 and 2011:


			Special
(in thousands)	Pass		Mention		Substandard		Doubtful		Total
December 31, 2012
Commercial real estate
Non owner-occupied	$	126,230	$	6,464	$	18,840	$	0	$	151,534
All other CRE		110,365		9,072		27,880		0		147,317
Acquisition and development
1-4 family residential construction		9,284		1,101		5,967		0		16,352
All other A&D		79,136		1,073		31,830		0		112,039
Commercial and industrial		60,234		2,029		6,750		0		69,013
Residential mortgage
Residential mortgage - term		255,993		751		11,885		0		268,629
Residential mortgage – home equity		75,935		195		2,160		0		78,290
Consumer		31,376		22		257		0		31,655
Total	$	748,553	$	20,707	$	105,569	$	0	$	874,829

December 31, 2011
Commercial real estate
Non owner-occupied	$	119,574	$	4,222	$	32,212	$	0	$	156,008
All other CRE		123,713		18,307		38,206		0		180,226
Acquisition and development
1-4 family residential construction		11,512		0		5,572		0		17,084
All other A&D		81,268		935		43,584		0		125,787
Commercial and industrial		62,152		697		15,848		0		78,697
Residential mortgage
Residential mortgage - term		250,701		1,817		15,408		0		267,926
Residential mortgage – home equity		75,517		34		3,743		0		79,294
Consumer		33,147		34		491		0		33,672
Total	$	757,584	$	26,046	$	155,064	$	0	$	938,694

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. A loan is considered to be past due when a payment has not been received for 30 days past its contractual due date. For all loan segments, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans as of December 31, 2012 and December 31, 2011:



									Total Past
			30-59 Days		60-89 Days		90 Days+		Due and still
(in thousands)	Current		Past Due		Past Due		Past Due		accruing		Non-Accrual		Total Loans
December 31, 2012
Commercial real estate
Non owner-occupied	$	146,796	$	321	$	64	$	0	$	385	$	4,353	$	151,534
All other CRE		143,108		2,368		0		0		2,368		1,841		147,317
Acquisition and development
1-4 family residential construction		16,280		61		0		0		61		11		16,352
All other A&D		100,232		619		221		200		1,040		10,767		112,039
Commercial and industrial		68,228		580		29		0		609		176		69,013
Residential mortgage
Residential mortgage - term		251,673		7,446		5,244		1,639		14,329		2,627		268,629
Residential mortgage – home equity		77,224		583		130		249		962		104		78,290
Consumer		30,434		800		327		58		1,185		36		31,655
Total	$	833,975	$	12,778	$	6,015	$	2,146	$	20,939	$	19,915	$	874,829
December 31, 2011
Commercial real estate
Non owner-occupied	$	146,150	$	359	$	209	$	0	$	568	$	9,290	$	156,008
All other CRE		173,342		558		5,547		0		6,105		779		180,226
Acquisition and development
1-4 family residential construction		17,009		0		75		0		75		0		17,084
All other A&D		109,351		840		530		128		1,498		14,938		125,787
Commercial and industrial		69,119		182		32		0		214		9,364		78,697
Residential mortgage
Residential mortgage - term		249,719		10,106		3,753		1,386		15,245		2,962		267,926
Residential mortgage – home equity		77,486		476		375		123		974		834		79,294
Consumer		31,478		1,560		471		142		2,173		21		33,672
Total	$	873,654	$	14,081	$	10,992	$	1,779	$	26,852	$	38,188	$	938,694

Non-accrual loans which have been subject to a partial charge-off totaled $6.7 million as of December 31, 2012, compared to $13.4 million as of December 31, 2011.

The ALL is maintained to absorb losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The Bank’s methodology for determining the ALL is based on the requirements of ASC Section 310-10-35, Receivables-Overall-Subsequent Measurement, for loans individually evaluated for impairment and ASC Subtopic 450-20, Contingencies-Loss Contingencies, for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Bank’s ALL.

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2012 and December 31, 2011.



			Acquisition		Commercial
	Commercial		and		and		Residential
(in thousands)	Real Estate		Development		Industrial		Mortgage		Consumer		Total
December 31, 2012
Total ALL	$	5,206	$	5,029	$	906	$	4,507	$	399	$	16,047
Individually evaluated for impairment	$	126	$	1,506	$	0	$	0	$	0	$	1,632
Collectively evaluated for impairment	$	5,080	$	3,523	$	906	$	4,507	$	399	$	14,415

December 31, 2011
Total ALL	$	6,218	$	7,190	$	2,190	$	3,430	$	452	$	19,480
Individually evaluated for impairment	$	92	$	2,718	$	1,139	$	2	$	0	$	3,951
Collectively evaluated for impairment	$	6,126	$	4,472	$	1,051	$	3,428	$	452	$	15,529

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $500,000 or is part of a relationship that is greater than $750,000 and (i) is either in nonaccrual status, or (ii) is risk-rated Substandard and is greater than 60 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Bank does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of larger relationship that is impaired; otherwise loans in these segments are considered impaired when they are classified as non-accrual.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the loan’s observable market price; or (iii) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis, with management utilizing the fair value of collateral method for 95% of the analyses. If the fair value of the collateral less selling costs method is utilized for collateral securing loans in the commercial segments, then an updated external appraisal is ordered on the collateral supporting the loan if the loan balance is greater than $500,000 and the existing appraisal is greater than 18 months old. If an appraisal is less than 12 months old (the age at which the internal appraisal grid begins) and if management believes that general market conditions in that geographic market have changed considerably, the property has deteriorated or perhaps lost an income stream, or a recent appraisal for a similar property indicates a significant change, then management may adjust the fair value indicated by the existing appraisal until a new appraisal is obtained. If the most recent appraisal is greater than 12 months old or if an updated appraisal has not been received and reviewed in time for the determination of estimated fair value at quarter (or year) end, then the estimated fair value of the collateral is determined by adjusting the existing appraisal by the appropriate percentage from an internally prepared appraisal discount grid. This grid considers the age of a third party appraisal and the geographic region where the collateral is located in order to discount an appraisal that is greater than 12 months old. The discount rates in the appraisal discount grid are updated at least annually to reflect the most current knowledge that management has available, including the results of current appraisals. If there is a delay in receiving an updated appraisal or if the appraisal is found to be deficient in our internal appraisal review process and re-ordered, the Bank continues to use a discount factor from the appraisal discount grid based on the collateral location and current appraisal age in order to determine the estimated fair value. A specific allocation of the ALL is recorded if there is any deficiency in collateral value determined by comparing the estimated fair value to the recorded investment of the loan. When updated appraisals are received and reviewed, adjustments are made to the specific allocation as needed.

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of December 31, 2012 and December 31, 2011:



						Impaired
						Loans with No
		Impaired Loans with				Specific
		Specific Allowance				Allowance		Total Impaired Loans
										Unpaid
		Recorded		Related		Recorded		Recorded		Principal
(in thousands)		Investment		Allowances		Investment		Investment		Balance
December 31, 2012
Commercial real estate
Non owner-occupied	$	0	$	0	$	5,309	$	5,309	$	7,929
All other CRE		1,019		126		9,613		10,632		10,785
Acquisition and development
1-4 family residential construction		2,052		471		10		2,062		2,062
All other A&D		5,410		1,035		16,640		22,050		26,232
Commercial and industrial		0		0		3,449		3,449		3,449
Residential mortgage
Residential mortgage - term		0		0		3,755		3,755		4,086
Residential mortgage – home equity		0		0		549		549		549
Consumer		0		0		36		36		36
Total impaired loans	$	8,481	$	1,632	$	39,361	$	47,842	$	55,128

December 31, 2011
Commercial real estate
Non owner-occupied	$	448	$	92	$	9,129	$	9,577	$	14,765
All other CRE		0		0		7,365		7,365		7,390
Acquisition and development
1-4 family residential construction		2,489		859		0		2,489		2,577
All other A&D		7,850		1,859		15,360		23,210		27,712
Commercial and industrial		9,043		1,139		4,005		13,048		13,137
Residential mortgage
Residential mortgage - term		218		2		4,816		5,034		5,488
Residential mortgage – home equity		0		0		1,082		1,082		1,177
Consumer		0		0		21		21		33
Total impaired loans	$	20,048	$	3,951	$	41,778	$	61,826	$	72,279

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling 12 quarters, while Commercial pools currently utilize a rolling eight quarters.

“Pass” rated credits are segregated from “Criticized” credits for the application of qualitative factors. The un-criticized (“pass”) pools for commercial and residential real estate are further segmented based upon the geographic location of the underlying collateral. There are seven geographic regions utilized – six that represent the Bank’s lending footprint and a seventh for all out-of-market credits. Different economic environments and resultant credit risks exist in each region that are acknowledged in the assignment of qualitative factors. Loans in the criticized pools, which possess certain qualities or characteristics that may lead to collection and loss issues, are closely monitored by management and subject to additional qualitative factors.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: (i) national and local economic trends and conditions; (ii) levels of and trends in delinquency rates and non-accrual loans; (iii) trends in volumes and terms of loans; (iv) effects of changes in lending policies; (v) experience, ability, and depth of lending staff; (vi) value of underlying collateral; and (vii) concentrations of credit from a loan type, industry and/or geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged-off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and interest on the loan have been collected, even if a subsequent appraisal supports a higher value. Loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.

Activity in the ALL is presented for the years ended December 31, 2012 and December 31, 2011:



			Acquisition		Commercial
	Commercial		and		and		Residential
(in thousands)	Real Estate		Development		Industrial		Mortgage		Consumer		Total
ALL balance at January 1, 2012	$	6,218	$	7,190	$	2,190	$	3,430	$	452	$	19,480
Charge-offs		(2,289)		(809)		(9,402)		(1,314)		(650)		(14,464)
Recoveries		156		420		464		177		424		1,641
Provision		1,121		(1,772)		7,654		2,214		173		9,390
ALL balance at December 31, 2012	$	5,206	$	5,029	$	906	$	4,507	$	399	$	16,047

ALL balance at January 1, 2011	$	8,658	$	6,345	$	1,345	$	4,211	$	1,579	$	22,138
Charge-offs		(6,886)		(3,055)		(840)		(1,664)		(893)		(13,338)
Recoveries		95		322		57		550		499		1,523
Provision		4,351		3,578		1,628		333		(733)		9,157
ALL balance at December 31,2011	$	6,218	$	7,190	$	2,190	$	3,430	$	452	$	19,480

The ALL is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.

The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:



	December 31, 2012						December 31, 2011

			Interest		Interest				Interest		Interest
			income		income				income		income
			recognized		recognized				recognized		recognized
	Average		on an		on a cash		Average		on an		on a cash
(in thousands)	investment		accrual basis		basis		investment		accrual basis		basis
Commercial real estate
Non owner-occupied	$	7,237	$	34	$	0	$	12,643	$	44	$	91
All other CRE		9,385		318		49		6,781		269		52
Acquisition and development
1-4 family residential construction		2,248		87		0		2,834		94		0
All other A&D		24,018		481		0		25,860		547		81
Commercial and industrial		5,747		150		0		11,960		155		0
Residential mortgage
Residential mortgage - term		4,755		117		38		6,415		144		16
Residential mortgage – home equity		828		17		7		724		14		4
Consumer		46		0		0		53		0		0
Total	$	54,264	$	1,204	$	94	$	67,270	$	1,267	$	244

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a TDR when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties). The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. The Corporation’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. Accordingly, the accrual of interest is discontinued when principal or interest is delinquent for 90 days or more unless the loan is well-secured and in the process of collection. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status. A loan may be removed from being reported as aTDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months.

The volume and type of TDR activity is considered in the assessment of the local economic trend qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

There were 27 loans totaling $17.7 million and 23 loans totaling $18.0 million that were classified as TDRs at December 31, 2012 and December 31, 2011, respectively. The following table presents the volume and recorded investment at the time of modification of TDRs by class and type of modification that occurred during the periods indicated:



	Temporary Rate						Modification of Payment
	Modification			Extension of Maturity			and Other Terms
	Number of	Recorded		Number of	Recorded		Number of	Recorded
	Contracts	Investment		Contracts	Investment		Contracts	Investment
(in thousands)			(1)		(1)
For the year ended December 31, 2012
Commercial real estate
Non owner-occupied	0	$	0	0	$	0	0	$	0
All other CRE	1		3,110	0		0	4		2,634
Acquisition and development
1-4 family residential construction	0		0	0		0	1		2,125
All other A&D	0		0	1		134	1		1,889
Commercial and industrial	0		0	0		0	1		247
Residential mortgage
Residential mortgage – term	2		584	2		765	1		284
Residential mortgage – home equity	0		0	0		0	0		0
Consumer	0		0	0		0	0		0
Total (2)	3	$	3,694	3	$	899	8	$	7,179

For the year ended December 31, 2011
Commercial real estate
Non owner-occupied	0	$	0	3	$	809	0	$	0
All other CRE	1		3,233	0		0	0		0
Acquisition and development
1-4 family residential construction	0		0	0		0	1		2,491
All other A&D	0		0	8		8,508	2		328
Commercial and industrial	0		0	0		0	0		0
Residential mortgage
Residential mortgage – term	2		234	2		513	0		0
Residential mortgage – home equity	0		0	0		0	0		0
Consumer	0		0	0		0	0		0
Total (2)	3	$	3,467	13	$	9,830	3	$	2,819

Notes:

(1) The post-modification recorded investment balances were the same as the pre-modification recorded investment balances, as there were no charge-offs as a result of any of the restructurings.

(2) Includes 8 existing TDRs totaling $6.7 million that were restructured in 2011 and 5 existing TDRs totaling $7.5 million that were restructured in 2012 with new terms providing a concession.

If a loan was considered to be impaired prior to modification as a TDR, then there is no impact on the ALL as a result of the modification because the loan was already being evaluated individually for impairment. If a loan was not impaired prior to modification as a TDR, then there could be an impact on the ALL as a result of the modification because of the movement of the loan from the pools of loans being evaluated collectively for impairment to being evaluated individually for impairment. There was a $55,000 reduction to the ALL relating to eight loans totaling $3.7 million modified as TDRs in 2012, resulting from the movement of these loans being evaluated collectively for impairment to being evaluated individually for impairment. There was a $220,000 reduction to the ALL relating to four loans totaling $5.5 million modified as TDRs in 2011, resulting from the movement of these loans being evaluated collectively for impairment to being evaluated individually for impairment. The volume, type and performance of TDR activity are considered in the assessment of the local economic trends qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

There were no TDRs considered to be in payment default in 2012. In 2011, two other A&D TDRs, totaling $2.3 million, that were modified in 2011 were transferred to non-accrual status subsequent to their modification and were considered to be in payment default.

At December 31, 2012 and 2011, additional funds of up to $2.1 million and $1.6 million, respectively, were committed to be advanced in connection with TDRs.