Note 3 – Loans

Major classifications of loans were as follows:

	March 31, 2014		December 31, 2013

Commercial	$	98,321	$	94,736

Real estate - commercial	579,297		560,233

Real estate - construction	32,016		29,351

Real estate - residential	375,781		390,201

Consumer	2,837		2,760

Overdraft	301		628

Lease financing receivables	9,227		10,069

Other	13,019		12,793

	1,110,799		1,100,771

Net deferred loan fees and cost	438		485

	$	1,111,237	$	1,101,256

It is the policy of the Company to review each prospective credit in order to determine whether an adequate level of security or collateral was obtained prior to making a loan. The type of collateral, when required, will vary from liquid assets to real estate. The Company’s access to collateral, in the event of borrower default, is assured through adherence to state lending laws, the Company’s lending standards and credit monitoring procedures. The Bank generally makes loans solely within its market area. There are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector although the real estate related categories listed above represent 88.8% and 89.0% of the portfolio at March 31, 2014, and December 31, 2013, respectively.

Aged analysis of past due loans by class of loans were as follows:

															Recorded
															Investment
March 31, 2014															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	254	$	-	$	-	$	254	$	107,270	$	24	$	107,548	$	-
Real estate - commercial
Owner occupied general purpose	-		-		-		-		124,778		3,624		128,402		-
Owner occupied special purpose	247		-		472		719		163,871		7,018		171,608		472
Non-owner occupied general purpose	400		-		-		400		129,574		7,692		137,666		-
Non-owner occupied special purpose	-		-		-		-		83,172		642		83,814		-
Retail properties	-		-		-		-		38,373		3,071		41,444		-
Farm	-		-		-		-		16,363		-		16,363		-
Real estate - construction
Homebuilder	-		-		-		-		3,434		102		3,536		-
Land	-		-		-		-		4,403		209		4,612		-
Commercial speculative	-		-		-		-		13,385		1,913		15,298		-
All other	73		-		-		73		7,833		664		8,570		-
Real estate - residential
Investor	1,586		96		223		1,905		134,766		3,653		140,324		223
Owner occupied	2,676		-		430		3,106		105,744		5,336		114,186		430
Revolving and junior liens	325		75		-		400		118,145		2,726		121,271		-
Consumer	-		-		-		-		2,837		-		2,837		-
All other1	-		-		-		-		13,758		-		13,758		-
	$	5,561	$	171	$	1,125	$	6,857	$	1,067,706	$	36,674	$	1,111,237	$	1,125

															Recorded
															Investment
December 31, 2013															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	-	$	-	$	-	$	104,778	$	27	$	104,805	$	-
Real estate - commercial
Owner occupied general purpose	290		526		-		816		117,938		3,180		121,934		-
Owner occupied special purpose	511		-		-		511		164,277		7,671		172,459		-
Non-owner occupied general purpose	218		-		-		218		132,331		5,708		138,257		-
Non-owner occupied special purpose	-		-		-		-		73,325		661		73,986		-
Retail properties	-		-		-		-		34,034		3,144		37,178		-
Farm	-		-		-		-		16,419		-		16,419		-
Real estate - construction
Homebuilder	-		-		-		-		3,515		168		3,683		-
Land	-		-		-		-		4,436		209		4,645		-
Commercial speculative	-		-		-		-		11,235		1,913		13,148		-
All other	32		-		-		32		7,404		439		7,875		-
Real estate - residential
Investor	581		171		-		752		140,926		6,615		148,293		-
Owner occupied	4,414		308		87		4,809		106,184		5,967		116,960		87
Revolving and junior liens	650		76		-		726		121,013		3,209		124,948		-
Consumer	5		-		-		5		2,755		-		2,760		-
All other1	-		-		-		-		13,906		-		13,906		-
	$	6,701	$	1,081	$	87	$	7,869	$	1,054,476	$	38,911	$	1,101,256	$	87

1. The “All other” class includes overdrafts and net deferred loan fees and costs.

Credit Quality Indicators:

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison against industry averages, historical payment experience, and current economic trends. Each loan and loan relationship is examined for additional review, if needed. This analysis covers loans with outstanding loans or commitments greater than $50,000 and excludes homogeneous loans such as home equity line of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

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 characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit Quality Indicators by class of loans were as follows:

March 31, 2014			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	99,815	$	7,278	$	455	$	-	$	107,548
Real estate - commercial
Owner occupied general purpose	117,120		6,215		5,067		-		128,402
Owner occupied special purpose	163,134		1,231		7,243		-		171,608
Non-owner occupied general purpose	123,330		3,556		10,780		-		137,666
Non-owner occupied special purpose	73,389		9,783		642		-		83,814
Retail Properties	34,568		2,975		3,901		-		41,444
Farm	16,363		-		-		-		16,363
Real estate - construction
Homebuilder	3,434		-		102		-		3,536
Land	4,403		-		209		-		4,612
Commercial speculative	9,843		-		5,455		-		15,298
All other	7,876		30		664		-		8,570
Real estate - residential
Investor	131,509		1,141		7,674		-		140,324
Owner occupied	107,339		-		6,847		-		114,186
Revolving and junior liens	117,238		388		3,645		-		121,271
Consumer	2,837		-		-		-		2,837
All other	13,758		-		-		-		13,758
Total	$	1,025,956	$	32,597	$	52,684	$	-	$	1,111,237

December 31, 2013			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	96,371	$	7,953	$	481	$	-	$	104,805
Real estate - commercial
Owner occupied general purpose	105,683		9,048		7,203		-		121,934
Owner occupied special purpose	162,586		1,968		7,905		-		172,459
Non-owner occupied general purpose	122,844		1,826		13,587		-		138,257
Non-owner occupied special purpose	59,674		9,840		4,472		-		73,986
Retail Properties	30,059		2,989		4,130		-		37,178
Farm	16,419		-		-		-		16,419
Real estate - construction
Homebuilder	1,745		1,770		168		-		3,683
Land	4,436		-		209		-		4,645
Commercial speculative	7,674		3,561		1,913		-		13,148
All other	7,109		32		734		-		7,875
Real estate - residential
Investor	135,136		3,407		9,750		-		148,293
Owner occupied	109,261		-		7,699		-		116,960
Revolving and junior liens	120,589		388		3,971		-		124,948
Consumer	2,759		-		1		-		2,760
All other	13,906		-		-		-		13,906
Total	$	996,251	$	42,782	$	62,223	$	-	$	1,101,256

1 The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Impaired loans by class of loan were as follows:

							Quarter Ended
	As of March 31, 2014						March 31, 2014

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	24	$	32	$	-	$	26	$	-
Commercial real estate
Owner occupied general purpose	2,592		3,144		-		2,567		1
Owner occupied special purpose	4,869		6,147		-		4,120		-
Non-owner occupied general purpose	8,345		9,821		-		6,886		15
Non-owner occupied special purpose	642		909		-		652		-
Retail properties	3,071		3,738		-		3,107		-
Farm	-		-		-		-		-
Construction
Homebuilder	1,893		2,395		-		1,955		28
Land	209		310		-		209		-
Commercial speculative	1,913		2,550		-		1,325		-
All other	295		326		-		150		-
Residential
Investor	3,362		5,007		-		4,673		1
Owner occupied	10,000		11,429		-		9,589		47
Revolving and junior liens	2,288		3,286		-		2,030		1
Consumer	-		-				-		-
Total impaired loans with no recorded allowance	39,503		49,094		-		37,289		93
With an allowance recorded
Commercial	-		-		-		-		-
Commercial real estate
Owner occupied general purpose	1,122		1,152		462		926		-
Owner occupied special purpose	2,149		2,342		211		3,225		-
Non-owner occupied general purpose	-		-		-		469		-
Non-owner occupied special purpose	-		-		-		-		-
Retail properties	-		-		-		-		-
Farm	-		-		-		-		-
Construction
Homebuilder	-		-		-		84		-
Land	-		-		-		-		-
Commercial speculative	-		-		-		588		-
All other	369		400		194		402		-
Residential
Investor	344		419		130		514		-
Owner occupied	214		276		30		890		2
Revolving and junior liens	497		560		220		997		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	4,695		5,149		1,247		8,095		2
Total impaired loans	$	44,198	$	54,243	$	1,247	$	45,384	$	95

Impaired loans by class of loans were as follows:

							Quarter Ended
	As of December 31, 2013						March 31, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial	$	27	$	34	$	-	$	169	$	-
Commercial real estate
Owner occupied general purpose	2,543		3,006		-		4,333		1
Owner occupied special purpose	3,371		4,117		-		5,855		-
Non-owner occupied general purpose	5,428		6,709		-		12,797		44
Non-owner occupied special purpose	661		919		-		472		-
Retail properties	3,144		3,811		-		7,031		-
Farm	-		-		-		2,467		-
Construction
Homebuilder	2,016		2,016		-		3,876		31
Land	209		308		-		127		-
Commercial speculative	738		742		-		2,126		-
All other	4		35		-		66		-
Residential
Investor	5,984		8,338		-		6,437		-
Owner occupied	9,179		10,451		-		9,425		57
Revolving and junior liens	1,771		2,313		-		1,300		1
Consumer	-		-				11		-
Total impaired loans with no recorded allowance	35,075		42,799		-		56,492		134
With an allowance recorded
Commercial	-		-		-		317		-
Commercial real estate
Owner occupied general purpose	730		792		264		956		-
Owner occupied special purpose	4,300		4,702		759		5,090		-
Non-owner occupied general purpose	939		1,030		129		2,649		-
Non-owner occupied special purpose	-		-		-		501		-
Retail properties	-		-		-		2,658		-
Farm	-		-		-		-		-
Construction
Homebuilder	168		604		76		13		-
Land	-		-		-		127		-
Commercial speculative	1,175		1,808		17		3,844		-
All other	436		468		262		516		-
Residential
Investor	684		913		160		2,779		-
Owner occupied	1,565		1,831		170		4,927		6
Revolving and junior liens	1,498		1,848		558		2,448		-
Consumer	-		-		-		-		-
Total impaired loans with a recorded allowance	11,495		13,996		2,395		26,825		6
Total impaired loans	$	46,570	$	56,795	$	2,395	$	83,317	$	140

Troubled debt restructurings (“TDR”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include a reduction in interest rates, extension of term, deferral of principal, and other modifications. The Bank does participate in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”), which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments.

The specific allocation of the allowance for loan losses on TDRs is determined either by discounting the modified cash flows at the original effective rate of the loan before modification or is based on the underlying collateral value less costs to sell if repayment of the loan is collateral-dependent. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e. specific reserve) as a component of the allowance for loan losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for loan losses also includes an allowance based on a loss migration analysis for each loan category for loans that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

TDRs that were modified during the period are summarized as follows:

	TDR Modifications
	Three months ending March 31, 2014

	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other1	2		$	1,320	$	1,191
Real estate - residential
Owner occupied
HAMP2	1		102		76
Deferral3	1			237		127
		4	$	1,659	$	1,394

	TDR Modifications
	Three months ending March 31, 2013

	# of		Pre-modification		Post-modification
	contracts		recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
Deferral3	1		$	137	$	137
		1	$	137	$	137

1 Other: Change of terms from bankruptcy court

2 HAMP: Home Affordable Modification Program

3 Deferral: Refers to the deferral of principal

TDRs are classified as being in default when they fail to be in compliance with the modified terms. The following table presents TDRs that defaulted during the periods shown and were restructured within the 12 month period prior to default. There was no TDR default activity for the three months ending March 31, 2014.

	TDR Default Activity			TDR Default Activity
	Three Months ending 3/31/14			Three Months ending 3/31/13
Troubled debt restructurings that Subsequently Defaulted	# of contracts	Pre-modification outstanding recorded investment		# of contracts	Pre-modification outstanding recorded investment
Real estate - residential
Investor	-	$	-	1	$	155
	-	$	-	1	$	155