NOTE 6. LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower's equity. We deem a loss confirmed when a loan or a portion of a loan is classified "loss" in accordance with bank regulatory classification guidelines, which state, "Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted".

Consumer-related loans are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), which ever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans are summarized as follows:


		March 31,		December 31,		March 31,
Dollars in thousands		2013		2012		2012
Commercial	$	86,877	$	85,829	$	99,386
Commercial real estate
Owner-occupied		151,942		154,252		153,528
Non-owner occupied		288,475		276,082		275,727
Construction and development
Land and land development		76,277		79,335		88,212
Construction		5,782		3,772		2,148
Residential real estate
Non-jumbo		213,965		216,714		219,485
Jumbo		62,849		61,567		62,836
Home equity		53,765		53,263		50,884
Consumer		19,638		20,586		21,574
Other		3,191		3,701		2,540
Total loans, net of unearned fees		962,761		955,101		976,320
Less allowance for loan losses		17,020		17,933		18,523
Loans, net	$	945,741	$	937,168	$	957,797

The following table presents the contractual aging of the recorded investment in past due loans by class as of March 31, 2013 and 2012 and December 31, 2012.


						At March 31, 2013
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days			60-89 days		> 90 days		Total		Current	and Accruing
Commercial	$	148	$	44	$	1,921	$	2,113	$	84,764	$	-
Commercial real estate
Owner-occupied		1,075		310		-		1,385		150,557		-
Non-owner occupied		222		708		909		1,839		286,636		-
Construction and development
Land and land developm		65		794		10,538		11,397		64,880		-
Construction		-		-		153		153		5,629		-
Residential mortgage
Non-jumbo		4,910		1,052		2,362		8,324		205,641		-
Jumbo		-		-		12,565		12,565		50,284		-
Home equity		247		48		-		295		53,470		-
Consumer		244		34		44		322		19,316		-
Other		-		-		-		-		3,191		-
Total	$	6,911	$	2,990	$	28,492	$	38,393	$	924,368	$	-


						At December 31, 2012
											Recorded
											Investment
				Past Due							> 90 days
Dollars in thousands	30-59 days			60-89 days		> 90 days		Total		Current	and Accruing
Commercial	$	225	$	5	$	2,294	$	2,524	$	83,305	$	-
Commercial real estate
Owner-occupied		57		-		1,023		1,080		153,172		-
Non-owner occupied		182		193		908		1,283		274,799		-
Construction and development
Land and land developm		-		-		11,795		11,795		67,540		-
Construction		-		-		153		153		3,619		-
Residential mortgage
Non-jumbo		3,344		2,616		2,797		8,757		207,957		-
Jumbo		-		-		12,564		12,565		49,002		-
Home equity		337		448		179		964		52,299		-
Consumer		255		79		48		382		20,204		-
Other		-		-		-		-		3,701		-
Total	$	4,400	$	3,341	$	31,761	$	39,503	$	915,598	$	-


						At March 31, 2012
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days			60-89 days		> 90 days		Total		Current	and Accruing
Commercial	$	893	$	37	$	2,234	$	3,164	$	96,222	$	-
Commercial real estate
Owner-occupied		1,007		412		955		2,374		151,154		-
Non-owner occupied		1,411		-		1,928		3,339		272,388		-
Construction and development
Land and land developm		375		1,960		13,906		16,241		71,971		-
Construction		-		-		887		887		1,261		-
Residential mortgage
Non-jumbo		2,679		2,409		2,863		7,951		211,534		-
Jumbo		1,337		-		12,621		13,958		48,878		-
Home equity		-		335		55		390		50,494		-
Consumer		156		103		26		285		21,289		-
Other		-		-		-		-		2,540		-
Total	$	7,858	$	5,256	$	35,475	$	48,589	$	927,731	$	-

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2013, December 31, 2012, and March 31, 2012.


Dollars in thousands		3/31/2013		12/31/2012		3/31/2012
Commercial	$	4,763	$	5,002	$	2,477
Commercial real estate
Owner-occupied		495		1,524		1,989
N on-owner occupied		1,030		1,032		2,293
Construction and dev elopment
Land & land dev elopment		12,923		13,487		21,287
C onstruction		153		154		887
Residential mortgage
N on-jumbo		4,001		3,518		4,583
Jumbo		12,565		12,564		12,621
H ome equity		303		440		550
Consumer		72		55		81
Total	$	36,305	$	37,776	$	46,768

Impaired loans: Impaired loans include the following:

§ Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.0 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.

§ Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt restructuring, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The table below sets forth information about our impaired loans.


Method Used to Measure Impairment of Impaired Loans
Dollars in thousands
							Method used to
Loan Category	03/31/2012		12/31/2012			03/31/2012	measure impairment
Commerical	$	10,322	$	10,776	$	2,998	Fair value of collateral
		164		165		-	Discounted cash flow
Commerical real estate
Owner-occupied		13,334		14,028		11,263	Fair value of collateral
		2,673		2,686		2,724	Discounted cash flow
Non-owner occupied		6,858		9,468		10,375	Fair value of collateral
Construction and development
Land & land development		27,395		29,307		35,746	Fair value of collateral
		656		656		656	Discounted cash flow
Construction		-		-		735	Fair value of collateral
Residential mortgage
Non-jumbo		5,190		5,626		4,692	Fair value of collateral
		829		692		1,252	Discounted cash flow
Jumbo		21,450		21,543		19,899	Fair value of collateral
Home equity		213		219		353	Fair value of collateral
Consumer		62		66		329	Fair value of collateral
Total	$	89,146	$	95,232	$	91,022

The following tables present loans individually evaluated for impairment at March 31, 2013, December 31, 2012 and March 31, 2012.


					March 31, 2013
								Average		Interest Income
		Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands		Investment		Principal Balance		Allowance		Balance		while impaired

Without a related allowance
Commercia l	$	9,442	$	9,446	$	-	$	9,446	$	439
Commercia l real esta te
Owner-occupied		9,882		9,886		-		9,886		455
Non-owner occupied		5,430		5,432		-		5,432		271
Construction and development
Land & la nd development		15,623		15,622		-		14,883		575
Cons truction		-		-		-		-		-
Residentia l real esta te
Non-jumbo		3,523		3,531		-		3,531		153
Jumbo		7,264		7,265		-		7,265		360
Home equity		185		186		-		186		11
Cons umer		35		35		-		35		1
Total without a related allowance	$	51,384	$	51,403	$	-	$	50,664	$	2,265

With a related allowance
Commercia l	$	1,031	$	1,040	$	403	$	1,040	$	8
Commercia l real esta te
Owner-occupied		6,121		6,121		437		6,120		282
Non-owner occupied		1,426		1,426		152		1,427		29
Construction and development
Land & la nd development		12,429		12,429		1,421		12,429		157
Cons truction		-		-		-		-		-
Residentia l real esta te
Non-jumbo		2,487		2,488		303		2,487		87
Jumbo		14,180		14,185		3,707		14,185		94
Home equity		28		27		28		28		-
Cons umer		26		27		14		26		2
Total with a related allowance	$	37,728	$	37,743	$	6,465	$	37,742	$	659

Total
Commercial	$	61,384	$	61,402	$	2,413	$	60,663	$	2,216
Residential real estate		27,667		27,682		4,038		27,682		705
Consumer		61		62		14		61		3
Total	$	89,112	$	89,146	$	6,465	$	88,406	$	2,924


				December 31, 2012
								Average		Interest Income
		Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands		Investment		Principal Balance Allowance		Allowance		Balance		while impaired

Without a related allowance
Commercia l	$	10,518	$	10,537	$	-	$	3,131	$	134
Commercia l real esta te
Owner-occupied		9,992		9,996		-		8,528		368
Non-owner occupied		6,143		6,145		-		6,056		304
Construction and development
Land & la nd development		11,596		11,596		-		11,093		367
Cons truction		-		-		-		-		-
Residentia l real esta te
Non-jumbo		3,497		3,505		-		3,040		125
Jumbo		7,347		7,349		-		5,399		272
Home equity		191		191		-		191		11
Cons umer		38		38		-		32		1
Total without a related allowance	$	49,322	$	49,357	$	-	$	37,470	$	1,582

With a related allowance
Commercia l	$	404	$	404	$	85	$	515	$	6
Commercia l real esta te
Owner-occupied		6,719		6,718		461		4,442		187
Non-owner occupied		3,321		3,323		286		3,341		115
Construction and development
Land & la nd development		18,367		18,367		2,611		17,633		344
Cons truction		-		-		-		-		-
Residentia l real esta te
Non-jumbo		2,812		2,813		394		2,378		77
Jumbo		14,189		14,194		3,216		13,585		59
Home equity		28		28		28		29		-
Cons umer		28		28		16		2		-
Total with a related allowance	$	45,868	$	45,875	$	7,097	$	41,925	$	788

Total
Commercial	$	67,060	$	67,086	$	3,443	$	54,739	$	1,825
Residential real estate		28,064		28,080		3,638		24,622		544
Consumer		66		66		16		34		1
Total	$	95,190	$	95,232	$	7,097	$	79,395	$	2,370


					March 31, 2012
								Average		Interest Income
		Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands		Investment		Principal Balance		Allowance		Balance		while impaired

Without a related allowance
Commercial	$	2,307	$	2,306	$	-	$	1,697	$	30
Commercial real estate
Owner-occupied		11,036		11,045		-		9,004		335
Non-owner occupied		6,307		6,308		-		6,046		305
Construction a nd development
Land & land development		18,732		18,732		-		10,920		334
Construction		-		-		-		-		-
Res idential real estate
Non-jumbo		3,876		3,886		-		3,139		99
Jumbo		15,661		15,662		-		14,621		200
Home equity		191		191				191		11
Cons umer		293		293		-		11		1
Total without a related allowance	$	58,403	$	58,423	$	-	$	45,629	$	1,315

With a related allowance
Commercial	$	692	$	692	$	203	$	692	$	4
Commercial real estate
Owner-occupied		2,941		2,942		140		2,942		141
Non-owner occupied		4,065		4,067		439		3,366		116
Construction a nd development
Land & land development		17,667		17,670		3,070		16,148		65
Construction		735		735		419		-		-
Res idential real estate
Non-jumbo		2,056		2,058		574		892		34
Jumbo		4,227		4,237		753		2,243		1
Home equity		162		162		111		162		-
Cons umer		36		36		1		-		-
Total with a related allowance	$	32,581	$	32,599	$	5,710	$	26,445	$	361

Total
Commercial	$	64,482	$	64,497	$	4,271	$	50,815	$	1,330
Residential real es tate		26,173		26,196		1,438		21,248		345
Cons umer		329		329		1		11		1
Total	$	90,984	$	91,022	$	5,710	$	72,074	$	1,676

A modification of a loan is considered a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to qualify as a TDR until a consistent payment history or a significant change in the borrower's financial condition and loan terms has occurred. Included in impaired loans are TDRs of $52.5 million and $56.7 million at March 31, 2013 and December 31, 2012, respectively, with no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three months ended March 31, 2013 and 2012. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.


	For the Three Months Ended					For the Three Months Ended
			March 31, 2013					March 31, 2012
			Pre-modification		Post-modification			Pre-modification		Post-modification
	Number of		Recorded		Recorded	Number of		Recorded		Recorded
dollars in thousands	Modifications		Investment		Investment	Modifications		Investment		Investment
Commercial	-	$	-	$	-	2	$	1,031	$	1,039
Commercial real estate
Owner-occupied	-		-		-	-		-		-
Non-owner occupied	-		-		-	1		336		350
Construction and development
Land & land development	1		49		50	-		-		-
Construction	-		-		-	-		-		-
Residential real estate
Non-jumbo	-		-		-	1		60		62
Jumbo	-		-		-	-		-		-
Home equity	-		-		-	-		-		-
Consumer	-		-		-	1		38		38
Total	1	$	49	$	50	5	$	1,465	$	1,489

The following table presents defaults during the stated period of TDRs that were restructured during the past twelve months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.


	For the Three Months Ended
	March 31, 2013
	Number		Recorded
	of		Investment
dollars in thousands	Defaults	at Default Date
Commercial	-	$	-
Commercial real estate
Owner-occupied	-		-
Non-owner occupied	-		-
Construction and development
Land & land development	2		1,676
Construction	-		-
Residential real estate
Non-jumbo	2		292
Jumbo	1		130
Home equity	-		-
Consumer	3		28
Total	8	$	2,126

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $2 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower's ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon the internal risk ratings defined above.

Loan Risk Profile by Internal Risk Rating


		Construction and Development														Commercial Real Estate
		Land and land
		development				Construction				Commercial				Owner Occupied				Non-Owner Occupied
Dollars in thousands		3/31/2013	12/31/2012			3/31/2013		12/31/2012		3/31/2013		12/31/2012		3/31/2013		12/31/2012		3/31/2013		12/31/2012
Pass	$	42,192	$	43,572	$	5,629	$	3,619	$	74,790	$	73,425	$	137,001	$	139,176	$	276,878	$	262,132
OLEM (Special Mention)		7,294		7,349		-		-		1,418		1,260		5,945		1,034		10,143		11,477
Substandard		26,791		28,414		153		153		10,669		11,144		8,996		14,042		1,454		2,473
Doubtful		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	76,277	$	79,335	$	5,782	$	3,772	$	86,877	$	85,829	$	151,942	$	154,252	$	288,475	$	276,082

The following table presents the recorded investment in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.


				Performing						Nonperforming
Dollars in thousands		3/31/2013		12/31/2012		3/31/2012		3/31/2013		12/31/2012		3/31/2012
Residential real estate
Non-jumbo	$	209,964	$	213,196	$	214,902	$	4,001	$	3,518	$	4,583
Jumbo		50,284		49,003		50,215		12,565		12,564		12,621
Home Equity		53,462		52,823		50,334		303		440		550
Consumer		19,566		20,531		21,493		72		55		81
Other		3,191		3,701		2,540		-		-		-
Total	$	336,467	$	339,254	$	339,484	$	16,941	$	16,577	$	17,835

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.