Note E –Loans

The following summarizes the Company’s major classifications for loans:


( In thousands)	March 31, 2013		December 31, 2012

Residential real estate	$	1,149,411	$	1,031,435
Home equity – junior liens		138,333		143,110
Commercial and industrial		149,677		108,739
Commercial real estate		1,001,453		821,970
Consumer		55,274		36,564
DDA overdrafts		2,875		4,551
Gross loans		2,497,023		2,146,369
Allowance for loan losses		(19,721)		(18,809)
Net loans	$	2,477,302	$	2,127,560

Construction loans of $16.9 million and $15.4 million are included within residential real estate loans at March 31, 2013 and December 31, 2012, respectively. Construction loans of $26.2 million and $15.4 million are included within commercial real estate loans at March 31, 2013 and December 31, 2012, respectively. The Company’s commercial and residential real estate construction loans are primarily secured by real estate within the Company’s principal markets. These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of the loan portfolio, including construction loans. Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.

The information in the following tables related to the Community Financial Corporation (“Community”) acquisition are estimated amounts, based on management’s assumptions. Once the purchase price allocation is finalized, actual results could be significantly different from those assumed below.

The following table details the loans acquired in conjunction with the Virginia Savings Bancorp, Inc. (“VSB”) and the Community acquisitions.


	VSB		Community		Total
As of March 31, 2013:
Outstanding loan balance	$	61,012	$	347,330	$	408,342

Credit-impaired loans:
Carrying value		5,886		42,200		48,086
Contractual principal and interest		8,789		74,365		83,154

As of December 31, 2012:
Outstanding loan balance	$	65,219	$	-	$	65,219

Credit-impaired loans:
Carrying value		7,018		-		7,018
Contractual principal and interest		10,759		-		10,759

Changes in the accretable yield and carrying amount for purchased credit-impaired loans for the three months ended March 31, 2013 is as follows:


	VSB				Community				Total
			Carrying Amount				Carrying Amount				Carrying Amount
	Accretable Yield		of Loans		Accretable Yield		of Loans		Accretable Yield		of Loans
Balance at the beginning of the period	$	1,823	$	7,018	$	-	$	-	$	1,823	$	7,018
Additions		-		16		6,721		45,550		6,721		45,566
Accretion		(358)		358		(55)		55		(413)		413
Net reclassifications to accretable
from non-accretable		-		-		-		-		-		-
Payments received, net		-		(1,506)		-		(3,405)		-		(4,911)
Disposals		(64)		-		-		-		(64)		-
Balance at the end of period	$	1,401	$	5,886	$	6,666	$	42,200	$	8,067	$	48,086

A reconciliation of the contractual required principal and interest balance to the basis of purchased credit-impaired loans as of March 31, 2013 is as follows:


	VSB		Community		Total
Contractual required principal and interest	$	8,789	$	74,365	$	83,154
Nonaccretable difference		(1,502)		(25,499)		(27,001)
Expected cash flows		7,287		48,866		56,153
Accretable yield		(1,401)		(6,666)		(8,067)
Basis in acquired loans	$	5,886	$	42,200	$	48,086

Increases in expected cash flow subsequent to the acquisition are recognized prospectively through adjustment of yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for purchased credit-impaired loans.