Loans

6 Months Ended

Jun. 30, 2011

Loans

Loans

4.  Loans

The classifications of loans at June 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

	June 30, 2011		December 31, 2010
	Amount		Amount
Commercial and industrial	$	83,445	$	85,129
Commercial real estate:
Non-owner occupied		80,981		87,355
Owner occupied		68,994		69,338
Construction		13,337		12,501
Consumer:
Home equity installment		38,034		40,089
Home equity line of credit		30,520		29,185
Auto		11,432		10,734
Other		6,234		7,165
Residential:
Real estate		70,273		68,160
Construction		3,081		6,145
Total		406,331		415,801
Allowance for loan losses		8,144		7,898
Loans, net	$	398,187	$	407,903

Net deferred loan costs of $650,000 and $574,000 have been added to the carrying values of loans at June 30, 2011 and December 31, 2010, respectively.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets.  The approximate amount of mortgages serviced amounted to $193,127,000 as of June 30, 2011 and $188,627,000 as of December 31, 2010.

The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis.  Results of these reviews are presented to management and the Board of Directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures.

Non-accrual loans

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Commercial and industrial and commercial real estate loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged off when the loan is 90 days or more past due as to principal and interest.

Non-accrual loans, segregated by class, at June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011		December 31, 2010
Commercial and industrial	$	436,644	$	164,583
Commercial real estate:
Non-owner occupied		1,615,534		2,000,333
Owner occupied		2,655,484		2,768,036
Construction		565,502		-
Consumer:
Home equity installment		755,766		600,745
Home equity line of credit		358,396		507,660
Auto		-		14,000
Other		45,101		13,467
Residential:
Real estate		3,064,031		3,805,462
Construction		94,389		94,389
Total	$	9,590,847	$	9,968,675

Had non-accrual loans been performing in accordance with their original contractual terms, the Company would have recognized interest income of approximately $188,000 during the first six months of 2011.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date.  An aging analysis of past due loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 is as follows:

													Recorded
					Past due						Total		investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				loans		due 90 days or
June 30, 2011	past due		past due		or more *		past due		Current		receivable		more and accruing
Commercial and industrial	$	285,640	$	43,919	$	436,644	$	766,203	$	82,679,267	$	83,445,470	$	-
Commercial real estate:
Non-owner occupied		1,031,638		26,806		1,626,149		2,684,593		78,296,398		80,980,991		10,615
Owner occupied		1,233,764		356,566		2,655,484		4,245,814		64,747,759		68,993,573		-
Construction		-		-		565,502		565,502		12,771,406		13,336,908		-
Consumer:
Home equity installment		86,813		102,955		755,766		945,534		37,088,878		38,034,412		-
Home equity line of credit		38,347		192,531		358,396		589,274		29,930,825		30,520,099		-
Auto		229,974		89,632		17,924		337,530		11,094,391		11,431,921		17,924
Other		27,444		115,668		47,635		190,747		6,043,480		6,234,227		2,534
Residential:
Real estate		-		41,366		3,380,740		3,422,106		66,851,124		70,273,230		316,709
Construction		-		-		325,970		325,970		2,754,522		3,080,492		231,581
Total	$	2,933,620	$	969,443	$	10,170,210	$	14,073,273	$	392,258,050	$	406,331,323	$	579,363

* Includes $9,590,847 of non-accrual loans.

													Recorded
					Past due						Total		investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				loans		due 90 days or
December 31, 2010	past due		past due		or more *		past due		Current		receivable		more and accruing
Commercial and industrial	$	15,407	$	270,624	$	262,306	$	548,337	$	84,580,937	$	85,129,274	$	97,723
Commercial real estate:
Non-owner occupied		56,093		17,275		2,000,333		2,073,701		85,281,624		87,355,325		-
Owner occupied		402,868		20,539		2,783,586		3,206,993		66,130,947		69,337,940		15,549
Construction		-		-		-		-		12,500,834		12,500,834		-
Consumer:
Home equity installment		205,889		103,775		711,915		1,021,579		39,067,422		40,089,001		111,171
Home equity line of credit		6,552		44,634		507,660		558,846		28,626,253		29,185,099		-
Auto		235,193		92,131		15,617		342,941		10,391,426		10,734,367		1,617
Other		21,034		11,578		13,467		46,079		7,119,249		7,165,328		-
Residential:
Real estate		-		1,107,570		3,868,020		4,975,590		63,183,924		68,159,514		62,558
Construction		-		-		94,389		94,389		6,050,080		6,144,469		-
Total	$	943,036	$	1,668,126	$	10,257,293	$	12,868,455	$	402,932,696	$	415,801,151	$	288,618

* Includes $9,968,675 of non-accrual loans.

Impaired loans

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan.  Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due.  The significance of payment delays and/or shortfalls is determined on a case by case basis.  All circumstances surrounding the loan are taken into account.  Such factors include the length of the delinquency, the underlying reasons and the borrower's prior payment record.  Impairment is measured on these loans on a loan-by-loan basis.  Impaired loans include non-accrual loans and other loans deemed to be impaired based on the aforementioned factors.  At June 30, 2011, impaired loans consisted of other impaired loans totaling $2,068,000, in addition to the $9,591,000 of non-accrual loans.  Other than the non-accrual loans, there we no other impaired loans as of December 31, 2010.  Payments received on non-accrual loans are recognized on a cash basis.  Payments are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts.  Any excess is treated as a recovery of interest income.

Impaired loans, segregated by class, are detailed below, as of the period indicated:

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
	balance		allowance		allowance		investment		allowance
June 30, 2011
Commercial & industrial	$	1,075,276	$	284,335	$	274,979	$	559,314	$	59,606
Commercial real estate:
Non-owner occupied		2,031,415		299,475		1,476,725		1,776,200		210,726
Owner occupied		4,584,744		2,475,217		1,964,526		4,439,743		473,576
Construction		565,502		565,502		-		565,502		140,302
Consumer:
Home equity installment		811,128		482,651		273,115		755,766		110,667
Home equity line of credit		358,395		39,741		318,654		358,395		6,670
Other		45,101		45,101		-		45,101		22,550
Residential:
Real estate		3,085,160		1,835,768		1,228,263		3,064,031		354,484
Construction		94,389		94,389		-		94,389		15,615
Total	$	12,651,110	$	6,122,179	$	5,536,262	$	11,658,441	$	1,394,196

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
	balance		allowance		allowance		investment		allowance
December 31, 2010
Commercial & industrial	$	811,545	$	-	$	164,583	$	164,583	$	-
Commercial real estate:
Non-owner occupied		2,698,937		24,325		1,976,008		2,000,333		5,670
Owner occupied		2,768,036		2,444,999		323,037		2,768,036		522,835
Consumer:
Home equity installment		718,656		286,188		314,557		600,745		29,495
Home equity line of credit		507,660		167,891		339,769		507,660		86,963
Auto		14,000		-		14,000		14,000		-
Other		13,467		-		13,467		13,467		-
Residential:
Real estate		3,805,462		2,442,732		1,362,730		3,805,462		351,643
Construction		94,389		94,389		-		94,389		11,121
Total	$	11,432,152	$	5,460,524	$	4,508,151	$	9,968,675	$	1,007,727

Average investment in impaired loans, interest income recognized and cash basis interest income recognized from impaired loans, as of the period indicated, is as follows:

	Six months ended June 30, 2011
					Cash basis
	Average		Interest		interest
	recorded		income		income
	investment		recognized		recognized
Commercial & industrial	$	296,160	$	-	$	-
Commercial real estate:
Non-owner occupied		1,915,622		-		-
Owner occupied		3,918,845		26,309		13,987
Construction		188,501		-		-
Consumer:
Home equity installment		687,277		5,727		2,917
Home equity line of credit		451,904		1,729		731
Auto		4,667		-		-
Other		19,523		33		33
Residential:
Real estate		3,381,311		132,166		36,358
Construction		94,389		-		-
Total	$	10,958,199	$	165,964	$	54,026

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the commercial and industrial and commercial real estate portfolios.  The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio.  The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the commercial and industrial and commercial real estate portfolios.

The following is a description of each risk rating category the Company uses to classify each of its commercial and industrial and commercial real estate loans:

Pass

Loans in this category have an acceptable level of risk and are graded in range of one to five.  Secured loans generally have good collateral coverage.  Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends.  Management is considered to be good, and there is some depth existing.  Payment experience on the loans has been good with minor or no delinquency experience.  Loans with a grade of one are of the highest quality in the range.  Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak. They constitute a credit risk to the Company, but have not yet reached the point of adverse classification. Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions.  Loans in this category should not remain on the list for an inordinate period of time (no more than one year) and then the loan should be passed or classified appropriately.  Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well defined weakness which may jeopardize the ultimate collectability of the debt. The collateral pledged may be lacking in quality or quantity.  Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth. The payment history indicates chronic delinquency problems.  Management is considered to be weak.  There is a distinct possibility that the Company may sustain a loss.  All loans on non-accrual are rated substandard. Loans 90+ days past due unless otherwise fully supported should be classified substandard.  Also, borrowers that are bankrupt are substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term.  Many of the weaknesses present in a substandard loan exist.  Liquidation of collateral, if any, is likely.  Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and Residential

For these portfolios, the Company utilizes payment activity, history and recency of payment.  Therefore, the consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated.  Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans.  All loans not classified as non-performing are considered performing.

The following table presents loans, segregated by class, categorized into the appropriate credit quality indicator category as of June 30, 2011 and December 31, 2010:

Commercial credit exposure

Credit risk profile by creditworthiness category

					Commercial real estate -				Commercial real estate -				Commercial real estate -
	Commercial and industrial				non-owner occupied				owner occupied				construction
	6/30/2011		12/31/2010		6/30/2011		12/31/2010		6/30/2011		12/31/2010		6/30/2011		12/31/2010
Pass	$	79,271,331	$	82,041,657	$	73,768,500	$	81,139,543	$	60,677,580	$	61,219,553	$	12,346,424	$	9,438,537
Special mention		2,177,620		2,212,483		3,091,000		1,973,618		-		514,313		424,982		1,849,077
Substandard		1,996,519		875,134		4,121,491		4,242,164		8,315,993		7,604,074		565,502		1,213,220
Doubtful		-		-		-		-		-		-		-		-
Total	$	83,445,470	$	85,129,274	$	80,980,991	$	87,355,325	$	68,993,573	$	69,337,940	$	13,336,908	$	12,500,834
Consumer credit exposure
Credit risk profile based on payment activity
	Home equity installment				Home equity line of credit				Auto				Other
	6/30/2011		12/31/2010		6/30/2011		12/31/2010		6/30/2011		12/31/2010		6/30/2011		12/31/2010
Performing	$	37,278,646	$	39,377,086	$	30,161,703	$	28,677,439	$	11,413,997	$	10,718,750	$	6,186,592	$	7,151,861
Non-performing		755,766		711,915		358,396		507,660		17,924		15,617		47,635		13,467
Total	$	38,034,412	$	40,089,001	$	30,520,099	$	29,185,099	$	11,431,921	$	10,734,367	$	6,234,227	$	7,165,328
Mortgage lending credit exposure
Credit risk profile based on payment activity
	Residential real estate				Residential construction
	6/30/2011		12/31/2010		6/30/2011		12/31/2010
Performing	$	66,892,490	$	64,291,494	$	2,754,522	$	6,050,080
Non-performing		3,380,740		3,868,020		325,970		94,389
Total	$	70,273,230	$	68,159,514	$	3,080,492	$	6,144,469

Allowance for loan losses

Management continually evaluates the credit quality of the Company's loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis.  The allowance reflects management's best estimate of the amount of credit losses in the loan portfolio.  Management's judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

§ identification of specific impaired loans by loan category;

§ specific loans that are not impaired, but have an identified potential for loss;

§ calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

§ determination of homogenous pools by loan category and eliminating the impaired loans;

§ application of historical loss percentages (two-year average) to pools to determine the allowance allocation;

§ application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.  Qualitative factor adjustments include:

o  levels of and trends in delinquencies and non-accrual loans;

o levels of and trends in charge-offs and recoveries;

o  trends in volume and terms of loans;

o  changes in risk selection and underwriting standards;

o  changes in lending policies, procedures and practices;

o  experience, ability and depth of lending management;

o  national and local economic trends and conditions; and

o  changes in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above.  A key element of the methodology to determine the allowance is the Company's credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans.  Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company's assessment of conditions that affect the borrower's ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers' current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be.  The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The credit risk grades for the commercial and industrial and commercial real estate loan portfolios are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company's historical experience as well as what we believe to be best practices and common industry standards.    Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the commercial and industrial and commercial real estate loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

Each quarter, management performs an assessment of the allowance for loan losses.  The Company's Special Assets Committee meets quarterly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount based on current accounting guidance.  The Special Assets Committee's focus is on ensuring the pertinent facts are considered and the reserve amounts pursuant to the accounting principles are reasonable.  The assessment process includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company's Credit Administration function have assigned a criticized or classified risk rating.

The Company's policy is to charge off unsecured consumer loans when they become 90 days or more past due as to principal and interest.  In the other portfolio segments, amounts are charged off at the point in time when the Company deems the balance to be uncollectible.

Information related to the change in the allowance for loan losses and the Company's recorded investment in loans by portfolio segment as of and for the periods indicated is as follows:

As of and for the six months ended	Commercial &		Commercial				Residential
June 30, 2011:	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,367,531	$	4,238,272	$	1,249,306	$	862,654	$	180,059	$	7,897,822
Charge-offs		-		193,319		369,933		98,835		-		662,087
Recoveries		6,556		30,281		13,593		7,479		-		57,909
Provision		117,629		49,061		350,444		97,188		235,678		850,000
Ending balance	$	1,491,716	$	4,124,295	$	1,243,410	$	868,486	$	415,737	$	8,143,644
Ending balance: individually evaluated for impairment	$	59,606	$	824,605	$	139,887	$	370,098			$	1,394,196
Ending balance: collectively evaluated for impairment	$	1,432,110	$	3,299,690	$	1,103,523	$	498,388			$	6,333,711
Loans receivable:
Ending balance	$	83,445,470	$	163,311,472	$	86,220,659	$	73,353,722			$	406,331,323
Ending balance: individually evaluated for impairment	$	559,314	$	6,781,445	$	1,159,262	$	3,158,420			$	11,658,441
Ending balance: collectively evaluated for impairment	$	82,886,156	$	156,530,027	$	85,061,397	$	70,195,302			$	394,672,882

As of and for the three months ended	Commercial &			Commercial				Residential
June 30, 2011:	industrial			real estate		Consumer		real estate			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,571,348		$	4,281,446	$	1,251,007	$	869,856		$	250,321	$	8,223,978
Charge-offs		-			193,319		302,504		-			-		495,823
Recoveries		2,706			30,035		7,748		-			-		40,489
Provision		(82,338	)		6,133		287,159		(1,370	)		165,416		375,000
Ending balance	$	1,491,716		$	4,124,295	$	1,243,410	$	868,486		$	415,737	$	8,143,644

As of and for the twelve months ended	Commercial &		Commercial				Residential
December 31, 2010:	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for loan losses:
Beginning balance	$	1,406,102	$	4,313,897	$	1,252,826	$	505,259	$	95,519	$	7,573,603
Charge-offs		451,979		892,426		462,815		1,813		-		1,809,033
Recoveries		3,839		2,799		39,904		1,710		-		48,252
Provision		409,569		814,002		419,391		357,498		84,540		2,085,000
Ending balance	$	1,367,531	$	4,238,272	$	1,249,306	$	862,654	$	180,059	$	7,897,822
Ending balance: individually evaluated for impairment	$	-	$	528,505	$	116,458	$	362,764			$	1,007,727
Ending balance: collectively evaluated for impairment	$	1,367,531	$	3,709,767	$	1,132,848	$	499,890			$	6,710,036
Loans receivable:
Ending balance	$	85,129,274	$	169,194,099	$	87,173,795	$	74,303,983			$	415,801,151
Ending balance: individually evaluated for impairment	$	164,583	$	4,768,369	$	1,135,872	$	3,899,851			$	9,968,675
Ending balance: collectively evaluated for impairment	$	84,964,691	$	164,425,730	$	86,037,923	$	70,404,132			$	405,832,476

Information related to the change in the allowance for loan losses as of June 30, 2010 is a follows:

	As of and for the		As of and for the
	three months ended		six months ended
	June 30, 2010		June 30, 2010
Allowance for loan losses:
Beginning balance	$	7,751,589	$	7,573,603
Charge-offs		532,726		953,899
Recoveries		4,387		28,546
Provision		300,000		875,000
Ending balance	$	7,523,250	$	7,523,250