3.	Loans and Allowance for Loan Losses

The following tables present the Corporation's loan portfolio by category of loans as of June 30, 2011, and December 31, 2010, and the summary of the allowance for loan losses for the six months ended June 30, 2011, and June 30, 2010.

LOAN PORTFOLIO

(DOLLARS IN THOUSANDS)

	June 30,		December 31,
	2011		2010
	$		$
Commercial real estate
Commercial mortgages		98,101		96,256
Agriculture mortgages		68,756		60,513
Construction		11,853		14,781
Total commercial real estate		178,710		171,550

Consumer real estate (a)
1-4 family residential mortgages		137,614		137,361
Home equity loans		16,950		17,719
Home equity lines of credit		13,305		12,490
Total consumer real estate		167,869		167,570

Commercial and industrial
Commercial and industrial		26,601		28,434
Tax-free loans		20,956		23,028
Agriculture loans		10,564		11,756
Total commercial and industrial		58,121		63,218

Consumer		4,409		13,045

Gross loans prior to deferred fees		409,109		415,383
Less:
Deferred loan fees, net		107		149
Allowance for loan losses		7,801		7,132
Total net loans		401,201		408,102

(a)	Real estate loans serviced for Fannie Mae, which are not included in the Consolidated Balance Sheets, totaled $9,483,000 and $10,101,000 as of June 30, 2011, and December 31, 2010, respectively.

ALLOWANCE FOR LOAN LOSSES SUMMARY

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2011			2010
	$			$
Balance at January 1		7,132			5,912
Amounts charged off		(436	)		(467	)
Recoveries of amounts previously charged off		205			68
Balance before current year provision		6,901			5,513
Provision charged to operating expense		900			900
Balance at June 30		7,801			6,413

The Corporation grades commercial credits differently than consumer credits. The following tables represent all of the Corporation's commercial credit exposures by internally assigned grades as of June 30, 2011, and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations under the loan agreements as scheduled or at all. The Corporation's internal commercial credit risk grading system is based on experiences with similarly graded loans.

The Corporation's internally assigned grades for commercial credits are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE

(DOLLARS IN THOUSANDS)

June 30, 2011	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		73,020		63,307		7,856		22,173		20,956		9,729		197,041
Special Mention		7,544		1,604		881		1,271		-		477		11,777
Substandard		17,537		3,845		3,116		3,157		-		358		28,013
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		98,101		68,756		11,853		26,601		20,956		10,564		236,831

December 31, 2010	Commercial Mortgages		Agriculture Mortgages		Construction		Commercial and Industrial		Tax-free Loans		Agriculture Loans		Total
	$		$		$		$		$		$		$
Grade:
Pass		72,541		53,757		11,377		20,286		23,028		10,932		191,921
Special Mention		8,657		5,667		126		2,403		-		589		17,442
Substandard		15,058		1,089		3,278		5,745		-		235		25,405
Doubtful		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-

Total		96,256		60,513		14,781		28,434		23,028		11,756		234,768

For consumer loans, the Corporation evaluates credit quality based on whether the loan is considered performing or non-performing. The following tables present the balances of consumer loans by classes of the loan portfolio based on payment performance as of June 30, 2011, and December 31, 2010:

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BY PAYMENT PERFORMANCE

(DOLLARS IN THOUSANDS)

June 30, 2011	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		137,239		16,950		13,305		4,409		171,903
Non-performing		375		-		-		-		375

Total		137,614		16,950		13,305		4,409		172,278

December 31, 2010	1-4 Family Residential Mortgages		Home Equity Loans		Home Equity Lines of Credit		Consumer		Total
Payment performance:	$		$		$		$		$

Performing		137,268		17,661		12,490		13,044		180,463
Non-performing		93		58		-		1		152

Total		137,361		17,719		12,490		13,045		180,615

The following tables present an age analysis of the Corporation's past due loans, segregated by loan portfolio class, as of June 30, 2011, and December 31, 2010:

AGING OF LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
June 30, 2011	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		152		-		-		152		97,949		98,101		-
Agriculture mortgages		94		-		-		94		68,662		68,756		-
Construction		-		-		-		-		11,853		11,853		-
Consumer real estate
1-4 family residential mortgages		708		37		375		1,120		136,494		137,614		375
Home equity loans		115		34		-		149		16,801		16,950		-
Home equity lines of credit		-		-		-		-		13,305		13,305		-
Commercial and industrial
Commercial and industrial		179		-		-		179		26,422		26,601		-
Tax-free loans		-		-		-		-		20,956		20,956		-
Agriculture loans		-		-		-		-		10,564		10,564		-
Consumer		10		4		-		14		4,395		4,409		-
Total		1,258		75		375		1,708		407,401		409,109		375

													Loans
					Greater								Receivable >
	30-59 Days		60-89 Days		than 90		Total Past				Total Loans		90 Days and
December 31, 2010	Past Due		Past Due		Days		Due		Current		Receivable		Accruing
	$		$		$		$		$		$		$
Commercial real estate
Commercial mortgages		305		81		1,502		1,888		94,368		96,256		-
Agriculture mortgages		-		-		-		-		60,513		60,513		-
Construction		-		-		224		224		14,557		14,781		-
Consumer real estate
1-4 family residential mortgages		1,201		113		93		1,407		135,954		137,361		93
Home equity loans		133		82		58		273		17,446		17,719		58
Home equity lines of credit		-		-		-		-		12,490		12,490		-
Commercial and industrial
Commercial and industrial		23		1		-		24		28,410		28,434		-
Tax-free loans		-		-		-		-		23,028		23,028		-
Agriculture loans		-		-		-		-		11,756		11,756		-
Consumer		27		5		1		33		13,012		13,045		1
Total		1,689		282		1,878		3,849		411,534		415,383		152

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2011, and December 31, 2010:

NONACCRUAL LOANS BY LOAN CLASS

(DOLLARS IN THOUSANDS)

	June 30,		December 31,
	2011		2010
	$		$

Commercial real estate
Commercial mortgages		1,373		3,280
Agriculture mortgages		-		-
Construction		-		224
Consumer real estate
1-4 family residential mortgages		148		-
Home equity loans		127		-
Home equity lines of credit		-		-
Commercial and industrial
Commercial and industrial		317		377
Tax-free loans		-		-
Agriculture loans		-		-
Consumer		-		-
Total		1,965		3,881

As of June 30, 2011, and December 31, 2010, all of the Corporation's loans on nonaccrual status were also considered impaired. Information with respect to impaired loans for the six months ended June 30, 2011, and June 30, 2010, is as follows:

IMPAIRED LOANS

(DOLLARS IN THOUSANDS)

	June 30,		June 30,
	2011		2010
	$		$
Impaired loans
Average recorded balance of impaired loans		4,304		7,326
Interest income recognized on impaired loans		107		25

Interest income on loans would have increased by approximately $35,000 for the six months ended June 30, 2011, and $205,000 for the six months ended June 30, 2010, had these loans performed in accordance with their original terms.

The following tables summarize information in regards to impaired loans by loan portfolio class as of June 30, 2011, and December 31, 2010:

IMPAIRED LOAN ANALYSIS

BALANCES AS OF JUNE 30, 2011

(DOLLARS IN THOUSANDS)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial real estate
Commercial mortgages		504		684		-		883		16
Agriculture mortgages		1,671		1,671		-		1,666		60
Construction		-		67		-		94		1
Total commercial real estate		2,175		2,422		-		2,643		77

Commercial and industrial
Commercial and industrial		96		96		-		125		-
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		96		96		-		125		-

Total with no related allowance		2,271		2,518		-		2,768		77

With an allowance recorded:
Commercial real estate
Commercial mortgages		1,221		1,474		200		1,311		-
Agriculture mortgages		-		-		-		-		-
Construction		-		-		-		-		-
Total commercial real estate		1,221		1,474		200		1,311		-

Commercial and industrial
Commercial and industrial		243		243		72		225		30
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		243		243		72		225		30

Total with a related allowance		1,464		1,717		272		1,536		30

Total by loan class:
Commercial real estate
Commercial mortgages		1,725		2,158		200		2,194		16
Agriculture mortgages		1,671		1,671		-		1,666		60
Construction		-		67		-		94		1
Total commercial real estate		3,396		3,896		200		3,954		77

Commercial and industrial
Commercial and industrial		339		339		72		350		30
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		339		339		72		350		30

Total		3,735		4,235		272		4,304		107

IMPAIRED LOAN ANALYSIS

BALANCES AS OF DECEMBER 31, 2010

(DOLLARS IN THOUSANDS)

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

With no related allowance recorded:
Commercial real estate
Commercial mortgages		1,846		2,026		-		2,507		-
Agriculture mortgages		1,675		1,675		-		1,570		101
Construction		-		-		-		-		-
Total commercial real estate		3,521		3,701		-		4,077		101

Commercial and industrial
Commercial and industrial		299		299		-		521		21
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		299		299		-		521		21

Total with no related allowance		3,820		4,000		-		4,598		122

With an allowance recorded:
Commercial real estate
Commercial mortgages		1,434		1,590		117		1,553		-
Agriculture mortgages		-		-		-		-		-
Construction		224		831		106		233		-
Total commercial real estate		1,658		2,421		223		1,786		-

Commercial and industrial
Commercial and industrial		78		78		8		88		-
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		78		78		8		88		-

Total with a related allowance		1,736		2,499		231		1,874		-

Total by loan class:
Commercial real estate
Commercial mortgages		3,280		3,616		117		4,060		-
Agriculture mortgages		1,675		1,675		-		1,570		101
Construction		224		831		106		233		-
Total commercial real estate		5,179		6,122		223		5,863		101

Commercial and industrial
Commercial and industrial		377		377		8		609		21
Tax-free loans		-		-		-		-		-
Agriculture loans		-		-		-		-		-
Total commercial and industrial		377		377		8		609		21

Total		5,556		6,499		231		6,472		122

The following table details activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2011:

ALLOWANCE FOR CREDIT LOSSES AND RECORDED INVESTMENT IN LOANS RECEIVABLE

(DOLLARS IN THOUSANDS)

	Commercial Real Estate			Consumer Real Estate			Commercial and Industrial			Consumer			Unallocated			Total
	$			$			$			$			$			$

Allowance for credit losses:
Beginning balance		2,605			1,254			2,816			75			382			7,132

Charge-offs		(97	)		(14	)		(315	)		(10	)		-			(436	)
Recoveries		-			-			200			5			-			205
Provision		694			32			231			(11	)		(46	)		900

Ending balance		3,202			1,272			2,932			59			336			7,801

Ending balance: individually
evaluated for impairment		200			-			72			-			-			272
Ending balance: collectively
evaluated for impairment		3,002			1,272			2,860			59			336			7,529

Loans receivable:
Ending balance		178,710			167,869			58,121			4,409						409,109
Ending balance: individually
evaluated for impairment		3,396			-			339			-						3,735
Ending balance: collectively
evaluated for impairment		175,314			167,869			57,782			4,409						405,374