LOANS

Loans are summarized as follows:

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

Commercial Real Estate (CRE):
Other-CRE other than Land
Development and Building Lots	$	274,863	$	287,283
Land Development		23,736		28,310
Building Lots		1,875		2,151
Residential mortgage		102,281		110,025
Consumer and home equity		54,449		57,888
Commercial		17,030		19,931
Indirect consumer		13,087		16,211
Real estate construction		3,354		3,141
		490,675		524,940
Less:
Net deferred loan origination fees		(89)		(105)
Allowance for loan losses		(15,947)		(17,265)
		(16,036)		(17,370)

Net Loans	$	474,639	$	507,570

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarter and six months ending June 30, 2013 and 2012:

Three Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	914	$	13,800	$	66	$	371	$	438	$	223	$	15,812
Provision for loan losses		(10)		225		4		-		(14)		7		212
Charge-offs		-		(61)		-		-		(51)		(41)		(153)
Recoveries		4		20		-		4		23		25		76
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Six Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Provision for loan losses		(272)		(395)		10		(130)		23		(61)		(825)
Charge-offs		(94)		(452)		-		-		(98)		(57)		(701)
Recoveries		38		76		-		4		29		61		208
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Three Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,723	$	13,628	$	103	$	882	$	643	$	350	$	17,329
Provision for loan losses		(255)		1,189		(14)		(34)		23		6		915
Allowance associated with probable branch divestitures		(25)		(581)		-		(14)		(62)		-		(682)
Charge-offs		-		(2,191)		-		(31)		(102)		(55)		(2,379)
Recoveries		40		35		-		-		23		19		117
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

Six Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,422	$	13,727	$	103	$	922	$	610	$	397	$	17,181
Provision for loan losses		222		1,687		(14)		(52)		98		(14)		1,927
Allowance associated with probable branch divestitures		(25)		(581)		-		(6)		(57)		-		(669)
Charge-offs		(187)		(2,804)		-		(62)		(176)		(99)		(3,328)
Recoveries		51		51		-		1		50		36		189
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

We did not implement any changes to our allowance related accounting policies or methodology during the current period.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and 2012 and December 31, 2012:

June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	6,851	$	-	$	31	$	81	$	-	$	7,147
Collectively evaluated for impairment		724		7,133		70		344		315		214		8,800

Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Loans:
Loans individually evaluated for impairment	$	1,213	$	35,284	$	447	$	3,418	$	664	$	-	$	41,026
Loans collectively evaluated for impairment		15,817		265,190		2,907		98,863		53,785		13,087		449,649

Total ending loans balance	$	17,030	$	300,474	$	3,354	$	102,281	$	54,449	$	13,087	$	490,675

December 31, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	252	$	7,593	$	-	$	86	$	51	$	-	$	7,982
Collectively evaluated for impairment		984		7,162		60		415		391		271		9,283

Total ending allowance balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265

Loans:
Loans individually evaluated for impairment	$	1,071	$	43,065	$	448	$	213	$	188	$	-	$	44,985
Loans collectively evaluated for impairment		18,860		274,679		2,693		109,812		57,700		16,211		479,955

Total ending loans balance	$	19,931	$	317,744	$	3,141	$	110,025	$	57,888	$	16,211	$	524,940

June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	332	$	4,609		-	$	383	$	126	$	6	$	5,456
Collectively evaluated for impairment		1,151		7,471		89		420		399		314		9,844
Loans held for sale		-		-		-		-		-		-		-

Total ending allowance balance	$	1,483	$	12,080		89	$	803	$	525	$	320	$	15,300

Loans:
Loans individually evaluated for impairment	$	1,396	$	56,493	$	-	$	1,098	$	302	$	38	$	59,327
Loans collectively evaluated for impairment		23,469		325,322		3,950		142,175		63,895		19,462		578,273
Loans held for sale		(2,520)		(58,767)		-		(29,232)		(10,806)		-		(101,325)

Total ending loans balance	$	22,345	$	323,048	$	3,950	$	114,041	$	53,391	$	19,500	$	536,275

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2013 and 2012 and December 31, 2012. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits. The recorded investment and average recorded investment in loans exclude accrued interest receivable and loan origination fees.

							Three Months Ended						Six Months Ended
							June 30, 2013						June 30, 2013
June 30, 2013	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial	$	1,234	$	1,028	$	-	$	850	$	6	$	6	$	763	$	10	$	10
Commercial Real Estate:
Land Development		2,336		2,311		-		2,716		33		33		3,435		84		84
Building Lots		477		212		-		212		-		-		212		-		-
Other		10,502		9,433		-		9,336		99		99		11,575		239		239
Real Estate Construction		540		447		-		449		-		-		448		-		-
Residential Mortgage		2,941		2,941		-		1,691		6		6		3,162		53		53
Consumer and Home Equity		395		395		-		210		1		1		407		7		7
Indirect Consumer		-		-		-		-		-		-		-		-		-

With an allowance recorded:
Commercial		185		185		184		189		1		1		287		4		4
Commercial Real Estate:
Land Development		2,930		2,930		961		2,802		35		35		2,759		67		67
Building Lots		-		-		-		-		-		-		-		-		-
Other		22,609		20,398		5,890		20,350		215		215		19,984		412		412
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		477		477		31		399		2		2		337		6		6
Consumer and Home Equity		269		269		81		312		1		1		271		5		5
Indirect Consumer		-		-		-		-		-		-		-		-		-

Total	$	44,895	$	41,026	$	7,147	$	39,516	$	399	$	399	$	43,640	$	887	$	887

December 31, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial	$	588	$	588	$	-	$	1,070	$	39	$	39
Commercial Real Estate:
Land Development		5,595		4,873		-		5,728		237		237
Building Lots		477		212		-		810		14		14
Other		21,673		16,052		-		24,961		961		961
Real Estate Construction		448		448		-		90		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-

With an allowance recorded:
Commercial		483		483		252		564		21		21
Commercial Real Estate:
Land Development		2,674		2,674		899		2,436		101		101
Building Lots		-		-		-		191		3		3
Other		19,254		19,254		6,694		20,075		772		772
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		213		213		86		1,191		24		24
Consumer and Home Equity		188		188		51		260		6		6
Indirect Consumer		-		-		-		54		1		1

Total	$	51,593	$	44,985	$	7,982	$	57,430	$	2,179	$	2,179

							Three Months Ended						Six Months Ended
							June 30, 2012						June 30, 2012
June 30, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial	$	1,111	$	991	$	-	$	944	$	8	$	8	$	1,347	$	27	$	27
Commercial Real Estate:
Land Development		11,532		5,771		-		5,176		46		46		5,825		108		108
Building Lots		1,061		1,030		-		924		6		6		1,051		8		8
Other		32,183		28,726		-		30,254		280		280		30,948		586		586
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-		-		-		-

With an allowance recorded:
Commercial		407		405		332		477		4		4		676		13		13
Commercial Real Estate:
Land Development		786		740		190		2,303		21		21		2,519		46		46
Building Lots		-		-		-		238		2		2		318		3		3
Other		20,226		20,226		4,419		15,576		144		144		16,101		305		305
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		1,219		1,098		383		1,485		13		13		1,550		23		23
Consumer and Home Equity		324		302		126		332		3		3		285		3		3
Indirect Consumer		38		38		6		46		-		-		71		-		-

Total	$	68,887	$	59,327	$	5,456	$	57,755	$	527	$	527	$	60,691	$	1,122	$	1,122

The following tables present the recorded investment in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31, 2012.

					Loans Past Due
June 30, 2013					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured

Commercial	$	-	$	199	$	-	$	481
Commercial Real Estate:
Land Development		-		2,733		-		302
Building Lots		-		-		-		212
Other		8,530		22,153		-		6,056
Real Estate Construction		-		-		-		447
Residential Mortgage		109		192		-		1,383
Consumer and Home Equity		-		99		-		314
Indirect Consumer		-		-		-		20

Total	$	8,639	$	25,376	$	-	$	9,215

					Loans Past Due
December 31, 2012					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured

Commercial	$	31	$	221	$	-	$	562
Commercial Real Estate:
Land Development		675		3,053		-		695
Building Lots		-		170		-		212
Other		9,047		19,080		-		8,908
Real Estate Construction		-		-		-		448
Residential Mortgage		-		303		-		827
Consumer and Home Equity		-		24		-		37
Indirect Consumer		-		-		-		13

Total	$	9,753	$	22,851	$	-	$	11,702

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012 by class of loans:

June 30, 2013	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total

Commercial	$	73	$	-	$	481	$	554	$	16,476	$	17,030
Commercial Real Estate:
Land Development		-		-		302		302		23,434		23,736
Building Lots		-		-		212		212		1,663		1,875
Other		179		150		14,586		14,915		259,948		274,863
Real Estate Construction		-		-		447		447		2,907		3,354
Residential Mortgage		367		615		1,492		2,474		99,807		102,281
Consumer and Home Equity		131		11		314		456		53,993		54,449
Indirect Consumer		223		28		20		271		12,816		13,087

Total	$	973	$	804	$	17,854	$	19,631	$	471,044	$	490,675

December 31, 2012	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total

Commercial	$	-	$	95	$	562	$	657	$	19,274	$	19,931
Commercial Real Estate:
Land Development		361		-		1,228		1,589		26,721		28,310
Building Lots		-		-		212		212		1,939		2,151
Other		1,264		1,239		13,001		15,504		271,779		287,283
Real Estate Construction		-		-		448		448		2,693		3,141
Residential Mortgage		3,588		995		827		5,410		104,615		110,025
Consumer and Home Equity		351		255		45		651		57,237		57,888
Indirect Consumer		246		130		13		389		15,822		16,211

Total	$	5,810	$	2,714	$	16,336	$	24,860	$	500,080	$	524,940

Troubled Debt Restructurings (TDR):

We have allocated $2.7 million and $3.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.

During the quarter and six month periods ending June 30, 2013, and June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension of the maturity date were for periods ranging from three to six months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the periods ending June 30, 2013 and 2012:

	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment

Troubled Debt Restructurings:
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial Real Estate:
Land Development		-		-		-		1		2,853		2,853
Building Lots		-		-		-		2		613		613
Other		2		1,392		1,392		3		1,088		1,088
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		1		53		53		-		-		-
Indirect Consumer		-		-		-		-		-		-

Total		3	$	1,445	$	1,445		6	$	4,554	$	4,554

	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment

Troubled Debt Restructurings:
Commercial		-	$	-	$	-		1	$	1,094	$	1,094
Commercial Real Estate:
Land Development		-		-		-		3		4,251		4,110
Building Lots		-		-		-		2		613		613
Other		5		3,534		3,534		5		1,139		1,139
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		2		76		76		-		-		-
Indirect Consumer		-		-		-		-		-		-

Total		7	$	3,610	$	3,610		11	$	7,097	$	6,956

The troubled debt restructurings described above resulted in a reversal of provision for loan losses allocated to troubled debt restructurings of $11,000 and $164,000 for the three and six months ended June 30, 2013. The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $67,000 and $256,000 for the three and six months ended June 30, 2012. Typically, these loans had allocated allowance prior to their formal modification. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 3, 2012. There were no charge-offs recorded on the troubled debt restructurings described above for the 2013 periods.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment

Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		1		533
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-

Total		-	$	-		2	$	10,601

	Six Months Ended				Six Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment

Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		2		3,386
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-

Total		-	$	-		3	$	13,454

For disclosure purposes, a loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $309,000 for the three and six months ended June 30, 2012. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 30, 2012.

Credit Quality Indicators:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Criticized: Loans classified as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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.

Loss: Loans classified as loss are considered non-collectible and their continuance as bankable assets is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

As of June 30, 2013and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

June 30, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total

Commercial	$	-	$	15,606	$	211	$	1,213	$	-	$	-	$	17,030
Commercial Real Estate:
Land Development		-		15,973		2,522		5,241		-		-		23,736
Building Lots		-		1,194		469		212		-		-		1,875
Other		-		221,281		23,710		29,872		-		-		274,863
Real Estate Construction		-		2,907		-		447		-		-		3,354
Residential Mortgage		98,016		-		848		3,417		-		-		102,281
Consumer and Home Equity		53,593		-		59		797		-		-		54,449
Indirect Consumer		12,957		-		73		57		-		-		13,087

Total	$	164,566	$	256,961	$	27,892	$	41,256	$	-	$	-	$	490,675

December 31, 2012
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total

Commercial	$	-	$	16,736	$	2,000	$	1,195	$	-	$	-	$	19,931
Commercial Real Estate:
Land Development		-		17,744		3,059		7,507		-		-		28,310
Building Lots		-		1,447		492		212		-		-		2,151
Other		-		233,261		18,297		35,725		-		-		287,283
Real Estate Construction		-		2,693		-		448		-		-		3,141
Residential Mortgage		105,148		-		442		4,435		-		-		110,025
Consumer and Home Equity		56,593		-		569		726		-		-		57,888
Indirect Consumer		16,129		-		10		72		-		-		16,211

Total	$	177,870	$	271,881	$	24,869	$	50,320	$	-	$	-	$	524,940

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer

Performing	$	100,789	$	54,135	$	13,067
Restructured on non-accrual		109		-		-
Non-accrual		1,383		314		20

Total	$	102,281	$	54,449	$	13,087

December 31, 2012	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer

Performing	$	109,198	$	57,851	$	16,198
Restructured on non-accrual		-		-		-
Non-accrual		827		37		13

Total	$	110,025	$	57,888	$	16,211