Note 4 - Loans

Segments

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

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

Commercial	$	130,721	$	126,192
Commercial real estate:
Construction and land development		44,029		48,812
Commercial real estate		354,323		355,433
Residential real estate:
Residential		168,965		161,033
Home equity		89,688		91,313
Consumer		6,319		5,922
Total loans	$	794,045	$	788,705

Acquired Loans

Interest income, including accretion, on loans acquired from MidCarolina for the six months ended June 30, 2013 was approximately $9.5 million. This included $3.9 million in accretion income of which $976,000 was related to loan pay-offs and renewals. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at June 30, 2013 and December 31, 2012 are as follows:

	June 30,		December 31,
(in thousands)	2013		2012
Oustanding principal balance	$	173,073	$	219,569
Carrying amount		160,672		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 June 30, 2013 and December 31, 2012 are as follows:

	June 30,		December 31,
(in thousands)	2013		2012
Oustanding principal balance	$	23,672	$	26,349
Carrying amount		17,999		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 six months ended June 30, 2013. The accretion reflected below includes $976,000 related to loan payoffs.

	Accretable
(in thousands)	Discount
Balance at December 31, 2012	$	2,165
Accretion		(1,222	)
Reclassification from nonaccretable difference		1,026
Balance at June 30, 2013	$	1,969

Past Due Loans

The following table shows an analysis by portfolio segment of the Company's past due loans at June 30, 2013.

At June 30, 2013
					90 Days +
					Past Due		Non-		Total
	30- 59 Days		60-89 Days		and Still		Accrual		Past				Total
(in thousands)	Past Due		Past Due		Accruing		Loans		Due		Current		Loans

Commercial	$	78	$	-	$	-	$	19	$	97	$	130,624	$	130,721
Commercial real estate:
Construction and land development		-		6		-		1,056		1,062		42,967		44,029
Commercial real estate		-		13		-		2,561		2,574		351,749		354,323
Residential:
Residential		215		291		-		1,804		2,310		166,655		168,965
Home equity		103		36		-		379		518		89,170		89,688
Consumer		11		-		-		9		20		6,299		6,319

Total	$	407	$	346	$	-	$	5,828	$	6,581	$	787,464	$	794,045

The following table shows an analysis by portfolio segment of the Company's past due loans at December 31, 2012.

					90 Days +
					Past Due		Non-		Total
	30- 59 Days		60-89 Days		and Still		Accrual		Past				Total
(in thousands)	Past Due		Past Due		Accruing		Loans		Due		Current		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 June 30, 2013.

			Unpaid				Average		Interest
(in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate:
Construction and land development		825		837		-		939		-
Commercial real estate		333		334		-		327		7
Residential:
Residential		261		539		-		265		-
Home equity		10		10		-		11		-
Consumer		-		-		-		-		-
	$	1,429	$	1,720	$	-	$	1,542	$	7
With a related allowance recorded:
Commercial		10		10		7		10		-
Commercial real estate:
Construction and land development		890		929		82		988		-
Commercial real estate		959		959		331		959		-
Residential
Residential		90		90		15		90		-
Home equity		-		-		-		-		-
Consumer		19		19		19		20		-
	$	1,968	$	2,007	$	454	$	2,067	$	-
Total:
Commercial	$	10	$	10	$	7	$	10	$	-
Commercial real estate:
Construction and land development		1,715		1,766		82		1,927		-
Commercial real estate		1,292		1,293		331		1,286		7
Residential:
Residential		351		629		15		355		-
Home equity		10		10		-		11		-
Consumer		19		19		19		20		-
	$	3,397	$	3,727	$	454	$	3,609	$	7

The following table presents the Company's impaired loan balances by portfolio segment, excluding loans acquired with deteriorated credit quality, at December 31, 2012.

			Unpaid				Average		Interest
(in thousands)	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		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:
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
Consumer		-		-		-		-		-
	$	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:
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 six months ended June 30, 2013. The following table shows the detail of loans modified as TDRs during the three and six months ended June 30, 2012 included in the impaired loan balances.

	Loans Modified as a TDR for the
	Three Months Ended June 30, 2012
			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Oustanding Recorded
(dollars in thousands)	Contracts		Investment		Investment
Commercial		1	$	11	$	11
Commercial real estate:
Construction and land development		2		1,411		1,411
Home Equity		-		-		-
Commercial real estate		1		4		4
Consumer		-		-		-
Total		4	$	1,426	$	1,426


	Loans Modified as a TDR for the
	Six Months Ended June 30, 2012
			Pre-Modification		Post-Modification
	Number of		Outstanding Recorded		Oustanding Recorded
(dollars in thousands)	Contracts		Investment		Investment
Commercial		1	$	11	$	11
Commercial real estate:
Construction and land development		7		2,188		2,081
Home Equity		-		-		-
Commercial real estate		1		4		4
Consumer		-		-		-
Total		9	$	2,203	$	2,096

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

Risk Grades

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

(in thousands)
Commercial and Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade

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

Pass	$	129,226	$	35,940	$	341,474	$	155,507	$	86,850
Special Mention		1,414		1,635		6,349		10,192		1,777
Substandard		81		6,454		6,500		3,266		1,061
Doubtful		-		-		-		-		-
Total	$	130,721	$	44,029	$	354,323	$	168,965	$	89,688


Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Consumer

Performing	$	6,307
Nonperforming		12
Total	$	6,319

The following table shows the Company's commercial loan portfolio broken down by internal risk grading as of December 31, 2012.

			Commercial		Commercial
			Real Estate		Real Estate				Home
	Commercial		Construction		Other		Residential		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.