Note 4 - Loans

Segments

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

(in thousands)	September 30, 2013		December 31, 2012

Commercial	$	124,504	$	126,192
Commercial real estate:
Construction and land development		43,386		48,812
Commercial real estate		361,968		355,433
Residential real estate:
Residential		173,695		161,033
Home equity		89,154		91,313
Consumer		6,289		5,922
Total loans	$	798,996	$	788,705

Acquired Loans

Interest income, including accretion, on loans acquired from MidCarolina for the nine months ended September 30, 2013 was approximately $13.7 million. This included $5.6 million in accretion income of which $976,000 was related to loan pay-offs and renewals and $410,000 related to recoveries of loans charged off prior to the merger. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at September 30, 2013 and December 31, 2012 are as follows:

(in thousands)	September 30, 2013		December 31, 2012
Outstanding principal balance	$	152,673	$	219,569
Carrying amount		141,883		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, at September 30, 2013 and December 31, 2012 are as follows:

(in thousands)	September 30, 2013		December 31, 2012
Outstanding principal balance	$	22,291	$	26,349
Carrying amount		16,953		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 nine months ended September 30, 2013. The accretion reflected below includes $976,000 related to loan payoffs.

(in thousands)	Accretable Discount
Balance at December 31, 2012	$	2,165
Accretion		(1,713	)
Reclassification from nonaccretable difference		1,391
Balance at September 30, 2013	$	1,843

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at September 30, 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	$	-	$	-	$	-	$	15	$	15	$	124,489	$	124,504
Commercial real estate:
Construction and land development		265		-		-		916		1,181		42,205		43,386
Commercial real estate		-		-		-		1,712		1,712		360,256		361,968
Residential:
Residential		375		255		-		1,623		2,253		171,442		173,695
Home equity		107		-		-		373		480		88,674		89,154
Consumer		9		1		-		8		18		6,271		6,289
Total	$	756	$	256	$	-	$	4,647	$	5,659	$	793,337	$	798,996

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 loans acquired with deteriorated credit quality, at September 30, 2013.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate:
Construction and land development		980		997		-		1,070		27
Commercial real estate		328		328		-		326		12
Residential:
Residential		462		757		-		471		8
Home equity		10		10		-		10		-
Consumer		-		-		-		-		-
	$	1,780	$	2,092	$	-	$	1,877	$	47
With a related allowance recorded:
Commercial		9		9		7		10		1
Commercial real estate:
Construction and land development		524		546		81		576		-
Commercial real estate		944		944		316		959		-
Residential
Residential		88		88		14		89		-
Home equity		-		-		-		-		-
Consumer		19		19		19		20		1
	$	1,584	$	1,606	$	437	$	1,654	$	2
Total:
Commercial	$	9	$	9	$	7	$	10	$	1
Commercial real estate:
Construction and land development		1,504		1,543		81		1,646		27
Commercial real estate		1,272		1,272		316		1,285		12
Residential:
Residential		550		845		14		560		8
Home equity		10		10		-		10		-
Consumer		19		19		19		20		1
	$	3,364	$	3,698	$	437	$	3,531	$	49

The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, 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

There were no loans modified as a troubled debt restructuring ("TDR") for the three or nine months ended September 30, 2013. The following table shows the detail of loans modified as TDRs during the three and nine months ended September 30, 2012 included in the impaired loan balances.

Loans Modified as a TDR for the

Three Months Ended September 30, 2012

(dollars in thousands)

Number of

Contracts

Pre-Modification

Outstanding Recorded

Investment

Post-Modification

Outstanding Recorded

Investment

Commercial

–

Commercial real estate:

Construction and land development

–

Home Equity

–

Commercial real estate

229

Consumer

Total

251

250

	Loans Modified as a TDR for the Nine Months Ended September 30, 2012
(dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial		1	$	11	$	11
Commercial real estate:
Construction and land development		7		2,188		1,283
Home Equity		–		–		–
Commercial real estate		1		22		21
Consumer		–		–		–
Total		11	$	2,454	$	1,548

None of the loans modified as a TDR within the previous twelve months have subsequently defaulted during the three or nine month periods ending September 30, 2013 and 2012.

Risk Grades

The following table shows the Company's commercial loan portfolio broken down by internal risk grading as of September 30, 2013.

(in thousands)

Commercial and Consumer Credit Exposure

Credit Risk Profile by Internally Assigned Grade

	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Residential		Home Equity

Pass	$	122,952	$	37,189	$	349,125	$	159,504	$	86,491
Special Mention		1,480		1,346		7,566		10,098		1,685
Substandard		72		4,851		5,277		4,093		978
Doubtful		-		-		-		-		-
Total	$	124,504	$	43,386	$	361,968	$	173,695	$	89,154

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer

Performing		$	6,277
Nonperforming			12
Total		$	6,289

The following table shows the Company's commercial 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		Commercial Real Estate Construction		Commercial Real Estate Other		Residential		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	$	5,856
Nonperforming		66
Total	$	5,922

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 distinct 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.