Note 4 - Loans

Segments

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

(in thousands)	March 31, 2014		December 31, 2013

Commercial	$	119,042	$	122,553
Commercial real estate:
Construction and land development		40,458		41,822
Commercial real estate		358,362		364,616
Residential real estate:
Residential		170,517		171,917
Home equity		89,081		87,797
Consumer		5,909		5,966
Total loans	$	783,369	$	794,671

Acquired Loans

Interest income, including accretion, on loans acquired from MidCarolina Financial Corporation ("MidCarolina") in connection with the Company's acquisition of MidCarolina for the three months ended March 31, 2014 was approximately $3.4 million. This included $1.1 million in accretion income of which $88,000 was related to loan payoffs 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 March 31, 2014 and December 31, 2013 are as follows:

(in thousands)	March 31, 2014		December 31, 2013
Outstanding principal balance	$	110,702	$	134,099
Carrying amount		102,133		124,828

The outstanding principal balance and related carrying amount of acquired impaired loans, for which the Company applies Accounting Standards Codification ("ASC") 310-30 (formerly Statement of Position ("SOP") 03-3), to account for interest earned, at March 31, 2014 and December 31, 2013 are as follows:

(in thousands)	March 31, 2014		December 31, 2013
Outstanding principal balance	$	19,958	$	21,014
Carrying amount		15,909		16,644

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 three months ended March 31, 2014. The accretion reflected below includes $88,000 related to loan payoffs.

(in thousands)	Accretable Discount
Balance at December 31, 2013	$	2,046
Accretion		(440	)
Reclassification from nonaccretable difference		236
Balance at March 31, 2014	$	1,842

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at March 31, 2014.


(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	$	69	$	-	$	-	$	9	$	78	$	118,964	$	119,042
Commercial real estate:
Construction and land development		-		-		-		909		909		39,549		40,458
Commercial real estate		-		312		-		3,296		3,608		354,754		358,362
Residential:
Residential		201		147		-		931		1,279		169,238		170,517
Home equity		109		432		-		409		950		88,131		89,081
Consumer		3		-		-		3		6		5,903		5,909
Total	$	382	$	891	$	-	$	5,557	$	6,830	$	776,539	$	783,369

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 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	$	27	$	-	$	-	$	11	$	38	$	122,515	$	122,553
Commercial real estate:
Construction and land development		-		51		-		877		928		40,894		41,822
Commercial real estate		667		-		-		2,879		3,546		361,070		364,616
Residential:
Residential		642		202		-		880		1,724		170,193		171,917
Home equity		109		18		-		424		551		87,246		87,797
Consumer		21		1		-		-		22		5,944		5,966
Total	$	1,466	$	272	$	-	$	5,071	$	6,809	$	787,862	$	794,671

Impaired Loans

The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at March 31, 2014.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	16	$	16	$	-	$	14	$	-
Commercial real estate:
Construction and land development		63		63		-		64		-
Commercial real estate		1,942		1,955		-		2,063		1
Residential:
Residential		932		936		-		956		-
Home equity		409		409		-		413		-
Consumer		3		3		-		3		-
	$	3,365	$	3,382	$	-	$	3,513	$	1
With a related allowance recorded:
Commercial		-		-		-		-		-
Commercial real estate:
Construction and land development		1,453		1,496		88		1,456		8
Commercial real estate		2,231		2,239		483		2,246		2
Residential
Residential		4		-		-		-		-
Home equity		-		-		-		-		-
Consumer		17		17		3		18		-
	$	3,705	$	3,752	$	574	$	3,720	$	10
Total:
Commercial	$	16	$	16	$	-	$	14	$	-
Commercial real estate:
Construction and land development		1,516		1,559		88		1,520		8
Commercial real estate		4,173		4,194		483		4,309		3
Residential:
Residential		936		936		-		956		-
Home equity		409		409		-		413		-
Consumer		20		20		3		21		-
	$	7,070	$	7,134	$	574	$	7,233	$	11

The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at December 31, 2013.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	19	$	19	$	-	$	20	$	1
Commercial real estate:
Construction and land development		18		18		-		261		4
Commercial real estate		936		936		-		950		13
Residential:
Residential		880		888		-		1,200		11
Home equity		424		424		-		433		-
Consumer		-		-		-		-		-
	$	2,277	$	2,285	$	-	$	2,864	$	29
With a related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate:
Construction and land development		1,468		1,507		68		1,551		33
Commercial real estate		2,266		2,264		488		1,198		7
Residential:
Residential		1,198		-		-		-		-
Home equity		-		-		-		-		-
Consumer		18		18		3		19		1
	$	3,752	$	3,789	$	559	$	2,768	$	41
Total:
Commercial	$	19	$	19	$	-	$	20	$	1
Commercial real estate:
Construction and land development		1,486		1,525		68		1,812		37
Commercial real estate		3,202		3,200		488		2,148		20
Residential:
Residential		880		888		-		1,200		11
Home equity		424		424		-		433		-
Consumer		18		18		3		19		1
	$	6,029	$	6,074	$	559	$	5,632	$	70

There were no loans modified as a troubled debt restructuring ("TDR") for the three months ended March 31, 2014 and 2013.

None of the loans modified as a TDR within the previous twelve months have subsequently defaulted during the three month periods ending March 31, 2014 and 2013.

Risk Grades

The following table shows the Company's loan portfolio broken down by internal risk grading as of March 31, 2014.

(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	$	117,576	$	33,911	$	347,780	$	158,722	$	86,519
Special Mention		1,450		887		5,345		8,265		1,788
Substandard		16		5,660		5,237		3,530		774
Doubtful		-		-		-		-		-
Total	$	119,042	$	40,458	$	358,362	$	170,517	$	89,081

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer

Performing		$	5,906
Nonperforming			3
Total		$	5,909

The following table shows the Company's loan portfolio broken down by internal risk grading as of December 31, 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	$	121,033	$	35,563	$	351,801	$	158,478	$	85,163
Special Mention		1,500		1,005		6,795		8,242		1,650
Substandard		20		5,254		6,020		5,197		984
Doubtful		-		-		-		-		-
Total	$	122,553	$	41,822	$	364,616	$	171,917	$	87,797

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

	Consumer

Performing	$	5,966
Nonperforming		-
Total	$	5,966

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 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 that 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.