9. Loans and Allowance for Loan Losses

The composition of the loan portfolio is summarized as follows:

	September 30, 2011		December 31, 2010
Commercial, financial and agricultural	$	147,815,433	$	114,697,440
Commercial mortgages		250,030,218		133,070,484
Residential mortgages		194,260,610		173,467,806
Indirect consumer loans		96,093,955		98,940,854
Consumer loans		100,258,360		93,507,785

	$	788,458,576	$	613,684,369

Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific problem loans (including evaluations of the underlying collateral). Historical loss experience is adjusted by management based on their judgment as to the current impact of qualitative factors including changes in the composition and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay. Management believes that the allowance for loan losses is adequate to absorb probable incurred losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Management, after considering current information and events regarding a borrower's ability to repay its obligations, classifies a loan as impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance for loan losses covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio class. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial, financial and agricultural; commercial mortgages; residential mortgages; and consumer loans.

Risk Characteristics

Commercial, financial and agricultural loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, inferring higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties and/or the businesses occupying the properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company's commercial real estate loans and on the value of such properties.

Residential mortgage loans are generally made on the basis of the borrower's ability to make repayment from his or her employment and other income, but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers and the nature of the loan collateral.

The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit many of the same risk characteristics as residential mortgages. Indirect and other consumer loans may entail greater credit risk than residential mortgage and home equity loans, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

No allowance for loan losses was recorded as of September 30, 2011 for loans acquired as part of the FOFC merger. These loans were recorded at fair value at the time of the acquisition.

Activity in the allowance for loan losses by portfolio segment was as follows:

	Nine Months Ended September 30, 2011
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	2,118,299		$	2,575,058		$	1,301,780		$	2,727,022		$	775,972		$	9,498,131
Charge Offs:		(593,995	)		(3,764	)		(39,312	)		(542,621	)		-			(1,179,692	)
Recoveries:		314,797			33,304			30,324			146,726			-			525,151
Net charge offs		(279,198	)		29,540			(8,988	)		(395,895	)		-			(654,541	)
Provision		1,444,245			(69,375	)		(61,068	)		(184,348	)		(296,121	)		833,333
Ending balance	$	3,283,346		$	2,535,223		$	1,231,724		$	2,146,779		$	479,851		$	9,676,923

	Three Months Ended September 30, 2011
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	3,081,433		$	2,612,655		$	1,246,880		$	2,297,459		$	517,245		$	9,755,672
Charge Offs:		(590,992	)		-			(39,312	)		(201,966	)		-			(832,270	)
Recoveries:		109,391			7,201			-			53,596			-			170,188
Net charge offs		(481,601	)		7,201			(39,312	)		(148,370	)		-			(662,082	)
Provision		683,514			(84,633	)		24,156			(2,310	)		(37,394	)		583,333
Ending balance	$	3,283,346		$	2,535,223		$	1,231,724		$	2,146,779		$	479,851		$	9,676,923

	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Beginning balance:	$	10,447,291		$	9,967,223
Charge offs:		(1,298,599	)		(1,883,840	)
Recoveries:		136,369			451,678
Net charge offs		(1,162,230	)		(1,432,162	)
Provision		375,000			1,125,000
Ending balance	$	9,660,061		$	9,660,061

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of September 30, 2011 and December 31, 2010. The recorded investment excludes loans acquired in the FOFC merger.

	September 30, 2011
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,302,878	$	283,865	$	-	$	-	$	-	$	1,586,743
Collectively evaluated for impairment		1,980,468		2,251,358		1,231,724		2,146,779		479,851		8,090,180
Total ending allowance balance	$	3,283,346	$	2,535,223	$	1,231,724	$	2,146,779	$	479,851	$	9,676,923

	December 31, 2010
Allowance for loan losses		Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	23,524	$	216,234	$	-	$	-	$	-	$	239,758
Collectively evaluated for impairment			2,094,775		2,358,824		1,301,780		2,727,022		775,972		9,258,373
Total ending allowance balance		$	2,118,299	$	2,575,058	$	1,301,780	$	2,727,022	$	775,972	$	9,498,131

	September 30, 2011
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	4,975,639	$	4,399,423	$	182,117	$	-	$	9,557,179
Loans collectively evaluated for impairment		114,832,632		153,065,673		173,346,567		190,465,243	$	631,710,115
Total ending loans balance	$	119,808,271	$	157,465,096	$	173,528,684	$	190,465,243	$	641,267,294

	December 31, 2010
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	3,215,761	$	4,450,882	$	408,392	$	-	$	8,075,035
Loans collectively evaluated for impairment		111,778,238		128,963,664		173,465,831		193,098,341		607,306,074
Total ending loans balance	$	114,993,999	$	133,414,546	$	173,874,223	$	193,098,341	$	615,381,109

The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2011 and December 31, 2010, the average recorded investment and interest income recognized by class of loans as of the three and nine month periods ending September 30, 2011:

	September 30, 2011						Nine Months Ended September 30, 2011						Three Months Ended September 30, 2011
	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Recorded Investment			Average Recorded Investment			Interest Income Recognized		Average Recorded Investment	Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	2,968,386	$	-	$	2,971,036		$	3,100,655	$	25,049	$	3,032,483	$	6,290
Commercial mortgages:
Construction		10,739		-		10,739			24,490		-		20,602		-
Other		3,310,502		-		3,307,483			3,447,948		-		3,397,079		-
Residential mortgages		181,705		-		182,117			307,997		-		257,799		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		2,004,588		1,302,878		2,004,603			1,953,474		82,548		2,918,444		82,548
Commercial mortgages:
Construction		11,261		11,261		11,261			27,351		-		15,557		-
Other		1,072,472		272,604		1,069,940			821,994		17,070		823,995		17,070
Total	$	9,559,653	$	1,586,743	$	9,557,179		$	9,683,909	$	124,667	$	10,465,959	$	105,908

	December 31, 2010
	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Recorded Investment		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	4,334,095	$	-	$	3,192,227	$	1,876,603	$	73,657
Commercial mortgages:
Construction		32,266		-		32,266		8,067		-
Other		4,148,423		-		3,549,686		3,374,678		63,061
Residential mortgages		407,105		-		408,392		309,537		21,324
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		23,524		23,524		23,534		1,393,995		386
Agricultural		-		-		-		6,211		453
Commercial mortgages:
Construction		50,939		43,514		50,939		215,901		-
Other		838,277		172,720		817,991		1,378,687		969
Residential mortgages		-		-		-		215,299		6,470
Total	$	9,834,629	$	239,758	$	8,075,035	$	8,778,978	$	166,320

The following table presents the recorded investment in non accrual and loans past due over 90 days still on accrual by class of loans. This table includes loans acquired in the FOFC merger, except those loans with evidence of credit deterioration at the time of the merger.

	September 30, 2011				December 31, 2010
	Non-Accrual		Loans Past Due Over 90 Days Still Accruing		Non-Accrual		Loans Past Due Over 90 Days Still Accruing
Commercial, financial and agricultural:
Commercial & industrial	$	5,251,391	$	3,643	$	2,938,174	$	-
Commercial mortgages		-		-		-		-
Construction		22,000		7,059,479		83,204		-
Other		6,030,548		-		4,230,701		-
Residential mortgages		2,357,889		-		2,558,534		-
Consumer loans
Credit cards		-		5,512		-		11,174
Home equity lines & loans		526,052		-		545,039		-
Indirect consumer loans		16,196		-		180,632		-
Other direct consumer loans		159,244		-		61,601		-
Total	$	14,363,320	$	7,068,634	$	10,597,886	$	11,174

The following tables present the aging of the recorded investment in loans past due (including non-accrual loans) by class of loans as of September 30, 2011 and December 31, 2010 and by loans originated by the Corporation (referred to as “Legacy” loans) and loans acquired in the FOFC merger (referred to as “Acquired” loans) which are further discussed in Note 5:

	September 30, 2011
Legacy Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	139,590	$	7,743	$	2,918,608	$	3,065,941	$	-	$	116,236,537	$	119,302,478
Agricultural		-		-		-		-		-		505,792		505,792
Commercial mortgages:
Construction		-		-		-		-		-		7,525,126		7,525,126
Other		88,266		-		3,103,796		3,192,062		-		146,747,908		149,939,970
Residential mortgages		1,547,675		455,525		938,554		2,941,754		-		170,586,931		173,528,685
Consumer loans:
Credit cards		3,558		2,767		5,511		11,836		-		1,857,860		1,869,696
Home equity lines & loans		140,297		-		260,318		400,615		-		77,462,639		77,863,254
Indirect consumer loans		342,674		90,812		141,792		575,278		-		95,813,548		96,388,826
Other direct consumer loans		64,409		7,980		2,835		75,224		-		14,268,243		14,343,467
Total	$	2,326,469	$	564,827	$	7,371,414	$	10,262,710	$	-	$	631,004,584	$	641,267,294

	September 30, 2011
Acquired Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	230,548	$	984,202	$	198,877	$	1,413,627	$	1,591,772	$	26,996,570	$	30,001,969
Agricultural		-		-		-		-		-		-		-
Commercial mortgages:
Construction		18,884		423,882		7,059,479		7,502,245		2,305,549		2,907,182		12,714,976
Other		154,383		197,441		1,653,124		2,004,948		11,248,658		65,645,166		78,898,772
Residential mortgages		474,152		65,364		85,181		624,697		222,580		20,547,566		21,394,843
Consumer loans:
Credit cards		-		-		-		-		-		-		-
Home equity lines & loans		-		-		-		-		-		6,199,175		6,199,175
Indirect consumer loans		-		-		-		-		-		-		-
Other direct consumer loans		-		-		-		-		-		139,238		139,238
Total	$	877,967	$	1,670,889	$	8,996,661	$	11,545,517	$	15,368,559	$	122,434,897	$	149,348,973

	December 31, 2010
Legacy Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, financial and agricultural
Commercial & industrial	$	33,434	$	17,351	$	2,914,640	$	2,965,425	$	111,202,073	$	114,167,498
Agricultural		-		-		-		-		826,501		826,501
Commercial mortgages
Construction		-		-		63,102		63,102		9,029,450		9,092,552
Other		116,432		-		2,913,525		3,029,957		121,292,041		124,321,998
Residential mortgages		1,851,412		277,276		1,404,067		3,532,755		170,341,467		173,874,222
Consumer loans
Credit cards		4,889		16,635		11,174		32,698		1,989,199		2,021,897
Home equity lines & loans		550,134		79,910		321,116		951,160		76,052,290		77,003,450
Indirect consumer loans		465,818		154,969		146,221		767,008		98,571,142		99,338,150
Other direct consumer loans		51,125		12,502		41,964		105,591		14,629,253		14,734,844
Total	$	3,073,244	$	558,643	$	7,815,809	$	11,447,696	$	603,933,416	$	615,381,112

Troubled Debt Restructurings:

The Corporation has not allocated any specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011 or December 31, 2010. The Corporation has not committed to lend any additional amounts as of September 30, 2011 or December 31, 2010 to customers with outstanding loans that are classified as trouble debt restructurings.

During the three and nine months ended September 30, 2011, no loans were modified as troubled debt restructurings by the Corporation. Additionally, there were no payment defaults on any loans previously modified as troubled debt restructurings within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Corporation categorizes 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. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes new consumer, mortgage and home equity loans and lines with outstanding balances greater than $50 thousand, $250 thousand and $100 thousand, respectively, along with a sample of existing loans and non-homogeneous loans, such as commercial and commercial real estate loans. The loans meeting these criteria are reviewed at least annually. The Corporation uses the following definitions for risk rating:

Special Mention – Loans classified as special mention 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 the institution's credit position as some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the analysis's performed as of September 30, 2011 and December 31, 2010, the risk category of the recorded investment of loans by class of loans is as follows:

	September 30, 2011
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	98,332,680	$	12,549,673	$	4,865,665	$	3,554,460
Agricultural		-		505,792		-		-		-
Commercial mortgages:
Construction		-		6,492,114		211,583		481,927		339,502
Other		-		134,922,194		6,805,611		7,660,502		551,663
Residential mortgages		171,275,866		-		-		2,252,819		-
Consumer loans:
Credit cards		1,869,696		-		-		-		-
Home equity lines & loans		77,337,201		-		-		526,053		-
Indirect consumer loans		96,223,075		-		-		165,751		-
Other direct consumer loans		14,327,271		-		-		16,196		-
Total	$	361,033,109	$	240,252,780	$	19,566,867	$	15,968,913	$	4,445,625

Acquired Loans:
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	27,771,057	$	617,784	$	21,356	$	-
Agricultural		-		-		-		-		-
Commercial mortgages:
Construction		-		5,360,446		3,858,838		1,190,143		-
Other		-		65,659,894		636,087		1,354,133		-
Residential mortgages		21,087,082		-		-		85,181		-
Consumer loans:
Credit cards		-		-		-		-		-
Home equity lines & loans		6,199,175		-		-		-		-
Indirect consumer loans		-		-		-		-		-
Other direct consumer loans		139,238		-		-		-		-
Total	$	27,425,495	$	98,791,397	$	5,112,709	$	2,650,813	$	-

	December 31, 2010
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	90,887,538	$	16,946,891	$	4,770,276	$	1,562,794
Agricultural		-		824,882		1,619		-		-
Commercial mortgages:
Construction		-		7,497,488		672,136		922,928		-
Other		-		108,732,393		7,245,641		8,343,964		-
Residential mortgages		171,024,544		-		-		2,849,678		-
Consumer loans:
Credit cards		2,021,896		-		-		-		-
Home equity lines & loans		76,458,414		-		-		545,037		-
Indirect consumer loans		99,155,306		-		-		77,883		-
Other direct consumer loans		14,656,690		-		-		182,844		-
Total	$	363,317,120	$	207,942,301	$	24,866,287	$	17,692,610	$	1,562,794

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of September 30, 2011 and December 31, 2010:

	September 30, 2011
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	171,255,977	$	1,864,184	$	77,337,202	$	96,229,582	$	14,327,271
Non-Performing		2,272,707		5,512		526,052		159,244		16,196
		173,528,684		1,869,696		77,863,254		96,388,826		14,343,467

Acquired Loans:
Performing	$	21,309,662	$	-	$	6,199,175	$	-	$	139,238
Non-Performing		85,181		-		-		-		-
Total	$	21,394,843	$	-	$	6,199,175	$	-	$	139,238

	December 31, 2010
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	171,070,881	$	2,010,723	$	76,458,413	$	99,157,518	$	14,673,243
Non-Performing		2,803,342		11,174		545,037		186,632		61,601
Total	$	173,874,223	$	2,021,897	$	77,003,450	$	99,338,150	$	14,734,844