LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2011

Receivables [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

     The following is a summary of loans at June 30, 2011 and December 31, 2010 by major classification:

	June 30,	December 31,
	2011	2010
Real estate loans – mortgage	$ 351,879	$  362,998
- construction	56,840	63,080
Agricultural loans	4,922	3,282
Commercial and industrial loans	56,187	61,127
Loans to individuals for household,
family and other consumer expenditures	42,606	43,350
All other loans, including overdrafts and
deferred loan costs	452	349
Gross loans	$ 512,886	$  534,186
Less allowance for loan losses	(12,143)	(11,627)
Net loans	$ 500,743	$  522,559

     Changes in the allowance for loan losses for the quarters and six month periods ended June 30, 2011 and 2010, and the year ended December 31, 2010 are summarized as follows:

	Quarter Ended		Year Ended	Six-Months Ended
	June 30,		December 31,	June 30,
	2011	2010	2010	2011	2010
Balance, beginning of period	$ 11,803	$  10,310	$  9,142	$  11,627	$  9,142
Charge-offs:
Commercial, financial, and agricultural	411	1,298	3,273	691	1,995
Real Estate - construction and mortgage	2,251	1,289	7,444	4,213	3,151
Loans to individuals	274	178	899	510	509
Total charge-offs	$  2,936	$  2,765	$11,616	$  5,414	$  5,655
Recoveries:
Commercial, financial, and agricultural	$       30	$       84	$     259	$       92	$     184
Real Estate - construction and mortgage	121	4	73	527	15
Loans to individuals	60	67	372	134	251
Total recoveries	$     211	$     155	$     704	$     753	$     450
Net charge-offs	$  2,725	$  2,610	$10,912	$  4,661	$  5,205
Additions charged to operations	$  3,065	$  3,806	$13,397	$  5,177	$  7,569
Balance, end of period	$12,143	$11,506	$11,627	$12,143	$11,506
Ratio of net charge-offs during the period	.52%	.46%	1.90%	.89%	.91%
to average loans outstanding during the    period

The entire balance of the allowance for loan losses is available to absorb future loan losses.

     At June 30, 2011, December 31, 2010, and June 30, 2010 loans on which no interest was being accrued totaled $25,592, $25,704, and $20,874, respectively.  All loans on which no interest was being accrued as well as other loans identified by management as having weaknesses which result in a determination of an inability on the part of the borrower to make full and timely payment of principal and interest are classified as impaired.  Impaired loans at June 30, 2011, December 31, 2010, and June 30, 2010 were $27,994, $29,074, and $24,815, respectively.  The portion of the allowance for loan losses specifically allocated to impaired loans at June 30, 2011, December 31, 2010, and June 30, 2010 was $877, $709, and $2,000, respectively.  The Company had $7,147 of foreclosed real estate at June 30, 2011, $5,476 at December 31, 2010, and $3,226 at June 30, 2010.  Loans 90 days past due and still accruing interest totaled $838, $1,042, and $913 at June 30, 2011, December 31, 2010, and June 30, 2010, respectively.

     At June 30, 2011, December 31, 2010, and June 30, 2010 classified assets, the majority consisting of classified loans, were $66,677, $76,642, and $78,956, respectively.  At June 30, 2011,  December 31, 2010, and June 30, 2010 classified assets represented 67.62%, 78.24%, and 81.80% of total capital (the sum of Tier 1 Capital and the Allowance for Loan Losses), respectively.

    As of June 30, 2011 and December 31, 2010 loans individually evaluated and considered impaired under ASC 310-10 “Receivables” were as follows (tabular amounts in thousands):

	June 30,         2011	December 31,          2010
Total loans considered impaired	$27,994	$ 29,074
Loans considered impaired for which there is a related      allowance for loan loss:
Outstanding loan balance	12,195	8,620
Related allowance established	877	709
Loans considered impaired and previously written      down to fair value	15,779	20,454
Loans considered impaired and which are classified as      troubled debt restructurings.	20	20
Average investment in impaired loans	28,508	25,241
Interest income recognized on impaired loans during the      period of impairment.	211	636

The following tables summarize (in thousands of dollars) commercial and consumer credit exposure by internally assigned grade, collateral, and purpose as indicators of credit quality existing in the Company’s loan portfolios as of June 30, 2011 and December 31, 2010.  The Company utilizes four “Pass” grade categories and the regulatorily defined “Other Assets Especially Mentioned,” “Substandard,” and “Doubtful” grade categories to monitor credit risk existing in its loan portfolios on an on-going basis.  The four pass grades are defined as: Pass-1, loans that have minimal credit risk and are of excellent quality; Pass-2, loans with satisfactory credit risk; Pass-3, loans with reasonable credit risk, however a degree of watchfulness is warranted; and Pass-4, loans which demonstrate some weakness and a higher degree of watchfulness is warranted. “Other Assets Especially Mentioned (OAEM)” loans have weaknesses and warrant management’s close attention.  “Substandard” loans have a high degree of credit risk and credit factors that indicate potential further deterioration, which could result in a protracted workout or possible loss.  “Doubtful” loans have a high degree of potential loss, in whole or in part.

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
For the Quarter Ended June 30, 2011

	Commercial               Other		Commercial Real Estate Construction		Commercial Real Estate- Other
PASS 1		$    5,102		$        38		$          37
PASS 2		16,388		9,772		50,685
PASS 3		13,992		10,304		34,712
PASS 4		14,351		16,884		35,147
OAEM		6,356		9,203		12,630
Substandard		4,920		10,639		16,963
	Total	$  61,109		$ 56,840		$150,174

Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
For the Quarter Ended June 30, 2011

	Consumer Real Estate-Residential
PASS 1	$         771
PASS 2	69,314
PASS 3	47,932
PASS 4	48,151
OAEM	9,770
Substandard	25,767
Total	$  201,705

The Company had no loans classified as doubtful at June 30, 2011.  The Company does not make loans defined as “sub-prime” loans.

Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
For the Year Ended December 31, 2010

	Commercial               Other		Commercial Real Estate Construction	Commercial Real Estate- Other
PASS 1		$     7,524	$        39	$           -
PASS 2		12,980	8,590	55,930
PASS 3		15,859	11,168	31,521
PASS 4		16,611	18,377	30,054
OAEM		6,007	9,283	14,105
Substandard		5,428	15,623	20,611
	Total	$   64,409	$ 63,080	$152,221

Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
For the Year Ended December 31, 2010

	Consumer Real Estate-Residential
PASS 1	$         761
PASS 2	74,462
PASS 3	48,216
PASS 4	46,158
OAEM	12,687
Substandard	28,538
Total	$  210,822

The Company had no loans classified as doubtful at December 31, 2010.  The Company does not make loans defined as “sub-prime” loans.

The following table summarizes the Company’s consumer credit card and all other consumer loans based on performance at June 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	June 30, 2011			December 31, 2010
	Consumer	Consumer		Consumer	Consumer
	Credit Card	Other		Credit Card	Other
Performing	$  3,084	$39,974	Performing	$  3,225	$40,429
Non-Performing	-	-	Non-Performing	-	-
Total	$  3,084	$39,974	Total	$  3,225	$40,429

The Company had no consumer credit card or other consumer loans classified as “Non-Performing” at June 30, 2011 or December 31, 2010.

The following tables outline the changes in the allowance for loan losses by collateral type and purpose, the allowances for loans individually and collectively evaluated for impairment, and the amount of loans individually and collectively evaluated for impairment at June 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Six-Months Ended June 30, 2011

		Commercial
	Commercial	Real Estate	Consumer	Residential	Unallocated	Total
Allowance for loan losses:
Beginning balance	$          2,776	$         4,266	$       1,361	$       3,114	$            110	$       11,627
Charge-offs	(691)	(2,072)	(510)	(2,141)	-	(5,414)
Recoveries	92	444	134	83	-	753
Provisions	76	2,489	314	2,408	(110)	5,177
Ending balance	$          2,253	$         5,127	$       1,299	$       3,464	$               -	$      12,143
Ending balances:
Individually evaluated
for impairment	$               65	$            407	$             -	$         405	$                -	$           877
Collectively evaluated
for impairment	$          2,188	$         4,720	$       1,299	$      3,059	$                -	$      11,266
Loans receivable:
Ending balance - total	$        61,109	$      207,014	$     43,058	$  201,705	$                -	$    512,886
Ending balances:
Individually evaluated
for impairment	$          1,137	$        16,921	$              -	$     9,936	$                -	$     27,994
Collectively evaluated
for impairment	$        59,972	$      190,093	$     43,058	$ 191,769	$                -	$   484,892

Allowance for Loan Losses and Recorded Investment in Loans Receivable
For the Year Ended December 31, 2010

		Commercial
	Commercial	Real Estate	Consumer	Residential	Unallocated	Total
Allowance for loan losses:
Beginning balance	$          3,309	$          2,246	$     1,228	$       2,344	$             15	$       9,142
Charge-offs	(3,273)	(4,639)	(899)	(2,805)	-	(11,616)
Recoveries	259	14	372	59	-	704
Provisions	2,481	6,645	660	3,516	95	13,397
Ending balance	$          2,776	$          4,266	$     1,361	$       3,114	$           110	$     11,627
Ending balances:
Individually evaluated
for impairment	$                -	$            506	$            -	$         203	$               -	$         709
Collectively evaluated
for impairment	$        2,776	$         3,760	$      1,361	$      2,911	$           110	$    10,918
Loans receivable:
Ending balance - total	$      64,409	$      215,301	$   43,654	$  210,822	$               -	$  534,186
Ending balances:
Individually evaluated
for impairment	$           315	$        19,977	$            -	$      8,782	$               -	$    29,074
Collectively evaluated
for impairment	$      64,094	$      195,324	$   43,654	$ 202,040	$               -	$  505,112

The following tables outline the performance status of the Company’s loan portfolio by collateral type and purpose at June 30, 2011 and December 31, 2010 (tabular amounts in thousands).

							Greater
			Greater				Than
			Than				90 Days
June 30, 2011	30-59 Days	60-89 Days	90 Days	Total		Total Loans	Past Due
	Past Due	Past Due	Past Due	Past Due	Current	Receivable	Accruing
Commercial	$     1,039	$        431	$       174	$     1,644	$   59,465	$        61,109	$            3
Commercial real estate:
Commercial real estate-       construction	1,128	828	5,314	7,270	49,570	56,840	20
Commercial real estate-        other	849	333	4,447	5,629	144,545	150,174	-
Consumer:
Consumer-residential	3,765	1,629	7,275	12,669	189,036	201,705	644
Consumer-credit cards	36	36	16	88	2,996	3,084	16
Consumer-other	880	332	304	1,516	38,458	39,974	155
Total	$    7,697	$    3,589	$  17,530	$   28,816	$ 484,070	$      512,886	$        838

							Greater
			Greater				Than
			Than				90 Days
December 31, 2010	30-59 Days	60-89 Days	90 Days	Total		Total Loans	Past Due
	Past Due	Past Due	Past Due	Past Due	Current	Receivable	Accruing
Commercial	$        877	$        564	$            -	$     1,441	$   62,968	$        64,409	$             -
Commercial real estate:
Commercial real estate-       construction	1,838	853	7,630	10,321	52,759	63,080	12
Commercial real estate-        other	1,146	591	5,856	7,593	144,628	152,221	161
Consumer:
Consumer-residential	3,297	4,237	5,487	13,021	197,801	210,822	695
Consumer-credit cards	36	44	26	106	3,119	3,225	27
Consumer-other	829	373	147	1,349	39,080	40,429	147
Total	$    8,023	$    6,662	$  19,146	$  33,831	$ 500,355	$      534,186	$     1,042

In addition to those loans placed in a nonaccrual status, there are certain loans in the portfolio which are not yet 90 days past due but about which management has concerns regarding the ability of the borrower to comply with present loan repayment terms.  Such loans nonaccrual loans are classified as impaired.  Problem loan identification includes a review of individual loans, the borrower’s and guarantor’s financial capacity and position, loss potential, and present economic conditions.  A specific allocation is provided for impaired loans not yet placed in nonaccrual status and not yet written down to fair value in management’s determination of the allowance for loan losses.  The following table outlines Company’s loans classified as impaired by collateral type and purpose at June 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Impaired Loans
For the Six-Months Ended June 30, 2011

		Unpaid		Average	Interest
	Recorded	Principal	Related	Recorded	Income
	Investment	Balance	Allowance	Investment	Recognized
With no related allowance recorded:
Commercial real estate-construction	$     5,709	$     7,341	$            -	$    6,444	$           4
Commercial real estate-other	6,135	6,158	-	7,520	66
Commercial and industrial	931	931	-	534	13
Consumer-residential	3,024	3,046	-	4,722	56
With an allowance recorded:
Commercial real estate-construction	$     2,160	$     3,192	$       235	$     2,922	$         13
Commercial real estate-other	2,916	3,164	172	1,226	-
Commercial and industrial	207	207	65	35	-
Consumer-residential	6,912	8,797	405	5,105	59
Total:
Commercial real estate-construction	$     7,869	$   10,533	$       235	$     9,366	$          17
Commercial real estate-other	9,051	9,322	172	8,746	66
Commercial and industrial	1,138	1,138	65	569	13
Consumer-residential	9,936	11,843	405	9,827	115
	$   27,994	$   32,836	$       877	$   28,508	$        211

Impaired Loans
For the Year Ended December 31, 2010

		Unpaid		Average	Interest
	Recorded	Principal	Related	Recorded	Income
	Investment	Balance	Allowance	Investment	Recognized
With no related allowance recorded:
Commercial real estate-construction	$     6,563	$     7,977	$            -	$     8,210	$          27
Commercial real estate-other	7,952	7,975	-	4,495	294
Commercial and industrial	315	315	-	314	13
Consumer-residential	4,455	4,743	-	4,648	211
With an allowance recorded:
Commercial real estate-construction	$     4,138	$     6,175	$       419	$     3,799	$          32
Commercial real estate-other	1,324	1,705	87	729	23
Commercial and industrial	-	-	-	-	-
Consumer-residential	4,327	4,947	203	3,046	36
Total:
Commercial real estate-construction	$   10,701	$   14,152	$       419	$   12,009	$          59
Commercial real estate-other	9,276	9,680	87	5,224	317
Commercial and industrial	315	315	-	314	13
Consumer-residential	8,782	9,690	203	7,694	247
	$   29,074	$   33,837	$       709	$   25,241	$        636

-18-

The following table outlines the Company’s loans on nonaccrual status by collateral type and purpose at June 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Loans on Nonaccrual Status

	June 30,	December 31,
	2011	2010
Commercial	$      987	$      315
Commercial real estate:
Commercial real estate construction	6,638	9,711
Commercial real estate – other	9,152	9,250
Consumer:
Consumer-credit card	-	-
Consumer-other	148	-
Residential:
Residential	8,667	6,428
Total	$ 25,592	$ 25,704

     The total amount of interest earned on nonaccrual loans was $114 and $408 for the six-month periods ended June 30, 2011 and 2010, respectively. The gross interest income which would have been recorded under the original terms of the nonaccrual loans amounted to $1,018 and $1,847 for the six-month periods ended June 30, 2011 and 2010, respectively. Foregone interest on nonaccrual loans totaled $904 and $1,439 for the six-month periods ended June 30, 2011 and 2010, respectively. The Company writes down any confirmed losses associated with nonaccrual loans at the time such loans are placed in a nonaccrual status. Accrued and unpaid current period interest income on nonaccrual loans is reversed to current period income at the time a loan is placed in nonaccrual status. Accrued and unpaid prior period interest income on nonaccrual loans is charged to the Allowance for Loan Losses at the time the loan is placed in nonaccrual status. Any payments received on loans placed in nonaccrual status are applied first to principal. The Company recognized $46 of interest on a cash basis on one loan relationship consisting of four nonaccrual loans totaling $1,951 during the six-month period ended June 30, 2011. The Company did not recognize interest income on nonaccrual loans on a cash basis during any of 2010.

     At June 30, 2011 and December 31, 2010 the amount of loans ninety days or more past due and still accruing interest totaled $838 and $1,042, respectively.  Loans ninety days or more past due and still accruing interest consist primarily of consumer loans which are placed in nonaccrual status at one hundred twenty days or more past due.

     At June 30, 2011 and December 31, 2010 classified assets, the majority consisting of classified loans, were $66,667 and $76,642, respectively.  At June 30, 2011 and December 31, 2010 classified assets represented 67.62% and 78.24% of total capital (the sum of Tier 1 Capital and the Allowance for Loan Losses), respectively.

     The Company had no loans classified as troubled debt restructurings at June 30, 2011 and December 31, 2010. The Company does anticipate that a portion of its loans classified as impaired will be re-classified as troubled debt restructurings under ASU 2011-02 issued by the FASB in April 2011. The Company is evaluating the re-classifications for the third quarter of 2011.