LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2011

Loans and Allowance For Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	September 30,	December 31,
	2011	2010
Real estate loans – mortgage	$ 341,531	$  362,998
- construction	53,960	63,080
Agricultural loans	4,751	3,282
Commercial and industrial loans	51,506	61,127
Loans to individuals for household,
family and other consumer expenditures	41,882	43,350
All other loans, including overdrafts and
deferred loan costs	384	349
Gross loans	$ 494,014	$  534,186
Less allowance for loan losses	(12,126)	(11,627)
Net loans	$ 481,888	$  522,559

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

	Quarter Ended		Year Ended	Nine-Months Ended
	September 30,		December 31,	September 30,
	2011	2010	2010	2011	2010
Balance, beginning of period	$ 12,143	$  11,506	$  9,142	$  11,627	$  9,142
Charge-offs:
Commercial, financial, and agricultural	340	746	3,273	1,031	2,741
Real Estate - construction and mortgage	2,375	2,551	7,444	6,588	5,702
Loans to individuals	198	251	899	708	760
Total charge-offs	$  2,913	$  3,548	$11,616	$  8,327	$  9,203
Recoveries:
Commercial, financial, and agricultural	$     144	$       22	$     259	$     236	$     206
Real Estate - construction and mortgage	392	5	73	919	20
Loans to individuals	64	67	372	198	318
Total recoveries	$     600	$       94	$     704	$  1,353	$     544
Net charge-offs	$  2,313	$  3,454	$10,912	$  6,974	$  8,659
Additions charged to operations	$  2,296	$  4,379	$13,397	$  7,473	$11,948
Balance, end of period	$12,126	$12,431	$11,627	$12,126	$12,431
Ratio of net charge-offs during the period	.46%	.62%	1.90%	1.35%	1.53%
to average loans outstanding during the    period

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

     At September 30, 2011, December 31, 2010, and September 30, 2010 loans on which no interest was being accrued totaled $22,787, $25,704, and $25,143, 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 September 30, 2011, December 31, 2010, and September 30, 2010 were $24,186, $29,074, and $26,046, respectively.  The portion of the allowance for loan losses specifically allocated to impaired loans at September 30, 2011, December 31, 2010, and September 30, 2010 was $855, $709, and $798, respectively.  The Company had $8,525 of foreclosed real estate at September 30, 2011, $5,476 at December 31, 2010, and $5,297 at September 30, 2010.  Loans 90 days past due and still accruing interest totaled $839, $1,042, and $468 at September 30, 2011, December 31, 2010, and September 30, 2010, respectively.

     At September 30, 2011, December 31, 2010, and September 30, 2010 classified assets, the majority consisting of classified loans, were $64,170, $76,642, and $85,876, respectively.  At September 30, 2011,  December 31, 2010, and September 30, 2010 classified assets represented 64.86%, 78.24%, and 88.27% of total capital (the sum of Tier 1 Capital and the Allowance for Loan Losses), respectively.

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

	September 30,            2011	December 31,          2010
Total loans considered impaired	$24,186	$ 29,074
Loans considered impaired for which there is a related      allowance for loan loss:
Outstanding loan balance	11,079	8,620
Related allowance established	855	709
Loans considered impaired and previously written      down to fair value	13,107	20,454
Loans considered impaired and which are classified as      troubled debt restructurings.	3,482	20
Average investment in impaired loans	27,656	25,241
Interest income recognized on impaired loans during the      period of impairment.	240	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 September 30, 2011 and December 31, 2010.  The Company utilizes four “Pass” grade categories and the regulatory 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 September 30, 2011

	Commercial               Other		Commercial Real Estate Construction		Commercial Real Estate- Other
PASS 1		$    4,620		$          37		$          65
PASS 2		14,828		10,430		47,878
PASS 3		13,107		12,896		38,421
PASS 4		13,848		15,544		34,867
OAEM		4,968		5,059		8,743
Substandard		4,886		9,994		16,379
	Total	$  56,257		$   53,960		$146,353

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

	Consumer Real Estate-Residential
PASS 1	$         684
PASS 2	67,683
PASS 3	41,992
PASS 4	52,395
OAEM	9,210
Substandard	23,214
Total	$  195,178

The Company had no loans classified as doubtful at September 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 September 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	September 30, 2011			December 31, 2010
	Consumer	Consumer		Consumer	Consumer
	Credit Card	Other		Credit Card	Other
Performing	$  3,068	$39,198	Performing	$  3,225	$40,429
Non-Performing	-	-	Non-Performing	-	-
Total	$  3,068	$39,198	Total	$  3,225	$40,429

The Company had no consumer credit card or other consumer loans classified as “Non-Performing” at September 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 September 30, 2011 and December 31, 2010 (tabular amounts in thousands).

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

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	(1,031)	(2,921)	(708)	(3,667)	-	(8,327)
Recoveries	236	831	198	88	-	1,353
Provisions	340	2,563	260	4,420	(110)	7,473
Ending balance	$          2,321	$         4,739	$       1,111	$       3,955	$               -	$      12,126
Ending balances:
Individually evaluated
for impairment	$                  -	$            438	$             -	$         417	$                -	$           855
Collectively evaluated
for impairment	$          2,321	$         4,301	$       1,111	$      3,538	$                -	$      11,271
Loans receivable:
Ending balance - total	$        56,257	$      200,314	$     42,266	$  195,177	$                -	$    494,014
Ending balances:
Individually evaluated
for impairment	$          1,065	$        14,454	$              -	$     8,667	$                -	$     24,186
Collectively evaluated
for impairment	$        55,192	$      185,860	$     42,266	$ 186,510	$                -	$   469,828

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 September 30, 2011 and December 31, 2010 (tabular amounts in thousands).

							Greater
			Greater				Than
			Than				90 Days
September 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	$     1,927	$        516	$       546	$     2,989	$   53,268	$        56,257	$          66
Commercial real estate:
Commercial real estate-       construction	1,048	363	5,183	6,594	47,366	53,960	117
Commercial real estate-        other	1,563	460	4,804	6,827	139,526	146,353	-
Consumer:
Consumer-residential	1,733	2,861	5,853	10,447	184,731	195,178	486
Consumer-credit cards	57	22	24	103	2,965	3,068	24
Consumer-other	1,150	355	283	1,788	37,410	39,198	146
Total	$    7,478	$     4,577	$  16,693	$   28,748	$ 465,266	$      494,014	$        839

							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, together with 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 the Company’s loans classified as impaired by collateral type and purpose at September 30, 2011 and December 31, 2010 (tabular amounts in thousands).

Impaired Loans
For the Nine-Months Ended September 30, 2011

		Unpaid		Average	Interest
	Recorded	Principal	Related	Recorded	Income
	Investment	Balance	Allowance	Investment	Recognized
With no related allowance recorded:
Commercial real estate-construction	$     2,878	$     3,284	$            -	$    5,554	$          17
Commercial real estate-other	6,530	6,553	-	7,080	52
Commercial and industrial	1,065	1,096	-	712	14
Consumer-residential	2,634	2,694	-	4,003	78
With an allowance recorded:
Commercial real estate-construction	$     3,254	$     5,371	$       312	$     2,940	$          10
Commercial real estate-other	1,791	2,182	126	1,752	-
Commercial and industrial	-	-	-	23	-
Consumer-residential	6,034	7,660	417	5,592	69
Total:
Commercial real estate-construction	$     6,132	$   8,655	$       312	$     8,704	$          27
Commercial real estate-other	8,321	8,735	126	8,622	52
Commercial and industrial	1,065	1,096	-	735	14
Consumer-residential	8,668	10,354	417	9,595	147
	$   24,186	$   28,840	$       855	$   27,656	$        240

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

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

Loans on Nonaccrual Status

	September 30,	December 31,
	2011	2010
Commercial	$      928	$      315
Commercial real estate:
Commercial real estate construction	6,024	9,711
Commercial real estate – other	8,000	9,250
Consumer:
Consumer-credit card	-	-
Consumer-other	137	-
Residential:
Residential	7,698	6,428
Total	$ 22,787	$ 25,704

     The total amount of interest earned on nonaccrual loans was $168 for the nine-month period ended September 30, 2011 and $408 for the year ended December 31, 2010.  The gross interest income which would have been recorded under the original terms of the nonaccrual loans amounted to $1,319 and $1,847 for the nine-month period ended September 30, 2011 and the year ended December 31, 2010, respectively.  Foregone interest on nonaccrual loans totaled $1,151 and $1,439 for the nine-month period ended September 30, 2011 and the year ended December 31, 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 $52 of interest on a cash basis on one loan relationship consisting of four nonaccrual loans totaling $1,949 during the nine-month period ended September 30, 2011.  The Company did not recognize interest income on nonaccrual loans on a cash basis during any of 2010.

     At September 30, 2011 and December 31, 2010 the amount of loans ninety days or more past due and still accruing interest totaled $839 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 September 30, 2011 and December 31, 2010 classified assets, the majority consisting of classified loans, were $64,170 and $76,642, respectively.  At September 30, 2011 and December 31, 2010 classified assets represented 64.86% and 78.24% of total capital (the sum of Tier 1 Capital and the Allowance for Loan Losses), respectively.

Troubled Debt Restructurings Footnote

As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance.  The Company identified six loans with a recorded investment of $3,564 which met the definition of a TDR under the amended guidance.  All of these loans were classified as impaired prior to restructuring.  The allowance for loan losses associated with these loans was previously, and will continue to be, determined under the impairment measurement guidance in ASC 310-10-35.

Troubled debt restructurings that were made during the three and nine-month periods ended September 30, 2011 are illustrated in the tables below.

	For the three months ended                                                      September 30, 2011
		Pre-Modification	Post-Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded
	Contracts	Investment	Investment
Troubled Debt Restructurings
Commercial	-	$                -	$                -
Commercial real estate-construction	-	-	-
Commercial real estate - other	-	-	-
Consumer - residential	2	577	577

During the three months ended September 30, 2011, two loans were modified and considered to be troubled debt restructurings.  Both loans were granted an extended term and no interest rate concessions were made.

	For the nine months ended                                                     September 30, 2011
		Pre-Modification	Post-Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded
	Contracts	Investment	Investment
Troubled Debt Restructurings
Commercial	1	$           247	$           247
Commercial real estate-construction	2	1,824	1,824
Commercial real estate - other	-	-	-
Consumer - residential	3	1,493	1,493

During the nine months ended September 30, 2011, the Bank modified six loans that were considered to be troubled debt restructurings.  The Company extended the terms for six of these loans and did not give any interest rate concessions.   

Troubled debt restructurings are considered defaulted when they become ninety or more days past due.  Troubled debt restructuring which have defaulted during the three and nine-month periods ended September 30, 2011 are presented in the tables below:

	Three months ended                                     September 30, 2011
	Number of            Contracts	Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
During the Period:
Commercial	-	$           -
Commercial real estate-construction	-	-
Commercial real estate - other	1	1,520
Consumer - residential	-	-

	Nine months ended                                    September 30, 2011
	Number of            Contracts	Recorded Investment
Troubled Debt Restructurings
That Subsequently Defaulted
During the Period:
Commercial	-	$           -
Commercial real estate-construction	1	13
Commercial real estate - other	1	1,520
Consumer - residential	-	-

During the nine months ended September 30, 2011, two loans that had previously been restructured, were in default, one of which went into default during the third quarter.