Note 5 – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

Changes in the allowance for loan losses and the reserve for unfunded lending commitments as of the indicated dates and periods are presented below:

The reserve for unfunded loan commitments is included in other liabilities.

(in thousands)	Six Months Ended June 30, 2013			Year Ended December 31, 2012			Six Months Ended June 30, 2012

Allowance for Loan Losses
Balance, beginning of period	$	12,118		$	10,529		$	10,529
Provision for loan losses		294			2,133			1,466
Charge-offs		(467	)		(2,086	)		(1,068	)
Recoveries		731			1,542			1,172
Balance, end of period	$	12,676		$	12,118		$	12,099

Reserve for Unfunded Lending Commitments
Balance, beginning of period	$	201		$	200		$	200
Provision for loan losses		2			1			6
Charge-offs		-			-			-
Balance, end of period	$	203		$	201		$	206

The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at June 30, 2013.

				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Total
(in thousands)

Allowance for Loan Losses
Balance as of December 31, 2012	$	1,450		$	6,822		$	3,638		$	208		$	12,118
Charge-offs		(109	)		(23	)		(230	)		(105	)		(467	)
Recoveries		241			268			145			77			731
Provision for loan losses		35			166			88			5			294
Balance as of June 30, 2013	$	1,617		$	7,233		$	3,641		$	185		$	12,676

Balance as of June 30, 2013

Allowance for Loan Losses
Individually evaluated for impairment	$	7		$	413		$	15		$	19		$	454
Collectively evaluated for impairment		1,610			6,506			3,577			166			11,859
Loans acquired with deteriorated credit quality		-			314			49			-			363
Total	$	1,617		$	7,233		$	3,641		$	185		$	12,676

Loans
Individually evaluated for impairment	$	10		$	3,007		$	361		$	19		$	3,397
Collectively evaluated for impairment		130,431			383,541			251,511			6,300			771,783
Loans acquired with deteriorated credit quality		280			11,804			6,781			-			18,865
Total	$	130,721		$	398,352		$	258,653		$	6,319		$	794,045

The following table presents the Company's allowance for loan losses by portfolio segment and the related loan balance total by segment at December 31, 2012.

				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Total
(in thousands)

Allowance for Loan Losses
Balance as of December 31, 2011	$	1,236		$	5,719		$	3,412		$	162		$	10,529
Charge-offs		(748	)		(572	)		(694	)		(72	)		(2,086	)
Recoveries		707			475			279			81			1,542
Provision		255			1,200			641			37			2,133
Balance as of December 31, 2012	$	1,450		$	6,822		$	3,638		$	208		$	12,118

Balance as of December 31, 2012:

Allowance for Loan Losses
Individually evaluated for impairment	$	107		$	-		$	-		$	21		$	128
Collectively evaluated for impairment		1,343			6,376			3,609			187			11,515
Loans acquired with deteriorated credit quality		-			446			29			-			475
Total	$	1,450		$	6,822		$	3,638		$	208		$	12,118

Loans
Individually evaluated for impairment	$	149		$	2,607		$	270		$	21		$	3,047
Collectively evaluated for impairment		125,707			388,495			245,373			5,901			765,476
Loans acquired with deteriorated credit quality		336			13,143			6,703			-			20,182
Total	$	126,192		$	404,245		$	252,346		$	5,922		$	788,705

The allowance for loan losses is allocated to loan segments based upon historical loss factors, risk grades on individual loans, portfolio analyses of smaller balance, homogenous loans, and qualitative factors. Qualitative factors include trends in delinquencies, nonaccrual loans, and loss rates; trends in volume and terms of loans, effects of changes in risk selection, underwriting standards, and lending policies; experience of lending officers and other lending staff; national, regional, and local economic trends and conditions; legal, regulatory and collateral factors; and concentrations of credit. A large percentage of the Bank's North Carolina loan portfolio is commercial real estate, with relatively short maturities, with balloon payments, and relatively long amortization periods. This structure results in more rapid accretion of the acquisition related credit mark than amortization of loan principal. While this is not a proximate cause in and of itself for additional provision, it does result in an increased volume of loans that must be evaluated for potential loss as they are renewed on current market terms and conditions and become part of the regular portfolio. Since the MidCarolina merger, approximately $88 million of the acquired loan portfolio has renewed under such terms and is considered as part of the regular loan loss allowance analysis.