NOTE 6. LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower's equity. We deem a loss confirmed when a loan or a portion of a loan is classified "loss" in accordance with bank regulatory classification guidelines, which state, "Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assts is not warranted".

Consumer-related loans are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans, net of unearned fees, are summarized as follows:

	September 30,		December 31,		September 30,
Dollars in thousands	2011		2010		2010
Commercial	$	90,422	$	97,059	$	95,713
Commercial real estate
Owner-occupied		171,192		187,098		193,109
Non-owner occupied		253,538		235,337		236,260
Construction and development
Land and land development		94,023		99,085		112,185
Construction		9,445		13,691		10,201
Residential real estate
Non-jumbo		224,499		239,290		243,987
Jumbo		62,255		61,340		64,264
Home equity		51,025		50,987		51,152
Consumer		22,988		24,145		24,945
Other		2,911		4,511		5,222
Total loans, net of unearned fees		982,298		1,012,543		1,037,038
Less allowance for loan losses		17,949		17,224		18,869
Loans, net	$	964,349	$	995,319	$	1,018,169

The following table presents the contractual aging of the recorded investment in past due loans by class as of September 30, 2011 and 2010 and December 31, 2010.

	At September 30, 2011
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	194	$	178	$	2,606	$	2,978	$	87,444	$	-
Commercial real estate
Owner-occupied		510		-		1,403		1,913		169,279		-
Non-owner occupied		1,926		667		1,308		3,901		249,637		-
Construction and development
Land and land development		814		438		4,635		5,887		88,136		-
Construction		-		-		152		152		9,293		-
Residential mortgage
Non-jumbo		3,973		835		3,493		8,301		216,198		-
Jumbo		-		-		1,345		1,345		60,910		-
Home equity		28		132		120		280		50,745		-
Consumer		178		141		77		396		22,592		-
Other		-		-		-		-		2,911		-
Total	$	7,623	$	2,391	$	15,139	$	25,153	$	957,145	$	-

	At December 31, 2010
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	388	$	307	$	1,286	$	1,981	$	95,078	$	-
Commercial real estate
Owner-occupied		364		-		1,348		1,712		185,386		-
Non-owner occupied		3,697		590		310		4,597		230,740		-
Construction and development
Land and land development		3,023		131		9,732		12,886		86,199		-
Construction		-		2		317		319		13,372		-
Residential mortgage
Non-jumbo		3,557		2,412		3,953		9,922		229,368		-
Jumbo		2,997		10,383		2,549		15,929		45,411		1,442
Home equity		501		270		51		822		50,165		-
Consumer		420		147		107		674		23,471		-
Other		9		10		-		19		4,492		-

Total	$	14,956	$	14,252	$	19,653	$	48,861	$	963,682	$	1,442

	At September 30, 2010
											Recorded
											Investment
	Past Due										> 90 days
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		and Accruing
Commercial	$	589	$	264	$	587	$	1,440	$	94,273	$	11
Commercial real estate
Owner-occupied		423		209		2,455		3,087		190,022		-
Non-owner occupied		1,131		177		2,025		3,333		232,926		-
Construction and development
Land and land development		197		1,423		8,541		10,161		102,024		-
Construction		93		-		572		665		9,535		-
Residential mortgage
Non-jumbo		2,860		1,859		4,741		9,460		234,528		771
Jumbo		-		2,996		2,863		5,859		58,405		1,572
Home equity		-		20		91		111		51,042		45
Consumer		563		134		69		766		24,179		15
Other		-		-		-		-		5,222		-

Total	$	5,856	$	7,082	$	21,944	$	34,882	$	1,002,156	$	2,414

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at September 30, 2011, December 31, 2010 and September 30, 2010.

	September 30,		December 31,		September 30,
Dollars in thousands	2011		2010		2010
Commercial	$	3,473	$	1,318	$	880
Commercial real estate
Owner-occupied		3,451		2,372		4,652
Non-owner occupied		4,948		314		2,025
Construction and development
Land & land development		17,354		9,732		13,985
Construction		152		317		462
Residential mortgage
Non-jumbo		3,949		4,918		4,820
Jumbo		2,273		1,106		-
Home equity		595		51		45
Consumer		87		141		29
Other		-		-		-
Total	$	36,282	$	20,269	$	26,898

The increase in nonaccrual loans in 2011 includes a single residential construction and development loan totaling $8.3 million.

Impaired loans: Impaired loans include the following:

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2,000,000, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.

§	Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt restructuring, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The tables below set forth information about our impaired loans.

Method Used to Measure Impairment of Impaired Loans
Dollars in thousands
Loan Category	September 30, 2011		December 31, 2010		September 30, 2010		Method used to measure impairment
Commercial	$	3,043	$	630	$	1,306	Fair value of collateral
Commerical real estate
Owner-occupied		10,613		8,866		11,296	Fair value of collateral
		2,591		2,623		-	Discounted cash flow
Non-owner occupied		11,397		4,922		4,858	Fair value of collateral
		1,791		530		-	Discounted cash flow
Construction and development
Land & land development		26,360		16,515		15,014	Fair value of collateral
		1,525		-		-	Discounted cash flow
Construction		-		-		-	Fair value of collateral
Residential mortgage
Non-jumbo		5,157		4,533		4,043	Fair value of collateral
		1,179		753		272	Discounted cash flow
Jumbo		14,894		17,296		18,717	Fair value of collateral
Home equity		409		213		48	Fair value of collateral
Consumer		-		-		-	Fair value of collateral
Total	$	78,959	$	56,881	$	55,554

The following tables present loans individually evaluated for impairment at September 30, 2011, December 31, 2010 and September 30, 2010.

	September 30, 2011
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired

Without a related allowance
Commercial	$	2,739	$	2,741	$	-	$	1,060	$	12
Commercial real estate
Owner-occupied		9,932		9,948		-		7,298		160
Non-owner occupied		8,958		8,961		-		3,489		104
Construction and development
Land & land development		18,266		18,266		-		15,915		257
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,976		3,983		-		4,502		123
Jumbo		12,621		12,621		-		12,618		687
Home equity		195		194		-		173		8
Total without a related allowance	$	56,687	$	56,714	$	-	$	45,055	$	1,351

With a related allowance
Commercial	$	302	$	302	$	103	$	73	$	-
Commercial real estate
Owner-occupied		3,255		3,256		465		3,703		107
Non-owner occupied		4,227		4,227		493		3,073		65
Construction and development
Land & land development		9,619		9,619		1,933		3,774		77
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,351		2,353		823		1,621		39
Jumbo		2,270		2,273		513		1,666		-
Home equity		215		215		166		95		2
Consumer		-		-		-		-		-
Total with a related allowance	$	22,239	$	22,245	$	4,496	$	14,005	$	290

Total
Commercial	$	57,298	$	57,320	$	2,994	$	38,385	$	782
Consumer		-		-		-		-		-
Residential real estate		21,628		21,639		1,502		20,675		859
Total	$	78,926	$	78,959	$	4,496	$	59,060	$	1,641

	December 31, 2010
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired

Without a related allowance
Commercial	$	629	$	630	$	-	$	232	$	9
Commercial real estate
Owner-occupied		7,538		7,556		-		9,052		440
Non-owner occupied		3,314		3,321		-		12,852		734
Construction and development
Land & land development		9,213		9,214		-		12,852		468
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,161		2,696		-		2,074		76
Jumbo		14,822		14,822		-		7,887		547
Home equity		165		165		-		-		-
Total without a related allowance	$	37,842	$	38,404	$	-	$	44,949	$	2,274

With a related allowance
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate
Owner-occupied		3,933		3,933		265		670		-
Non-owner occupied		2,130		2,130		267		1,953		88
Construction and development
Land & land development		7,301		7,301		2,575		3,183		7
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,589		2,591		843		1,242		22
Jumbo		2,474		2,474		877		1,343		31
Home equity		48		48		48		12		1
Total with a related allowance	$	18,475	$	18,477	$	4,875	$	8,403	$	149

Total
Commercial	$	34,058	$	34,085	$	3,107	$	40,794	$	1,746
Residential real estate		22,259		22,796		1,768		12,558		677
Total	$	56,317	$	56,881	$	4,875	$	53,352	$	2,423

	September 30, 2010
							Average		Interest Income
	Recorded		Unpaid		Related		Impaired		Recognized
Dollars in thousands	Investment		Principal Balance		Allowance		Balance		while impaired

Without a related allowance
Commercial	$	157	$	157	$	-	$	192	$	3
Commercial real estate
Owner-occupied		11,269		11,296		-		8,690		286
Non-owner occupied		693		694		-		411		20
Construction and development
Land & land development		5,426		5,426		-		4,258		15
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		1,024		1,024		-		227		11
Jumbo		15,459		15,450		-		5,551		284
Home equity		-		-		-		-		-
Consumer		-		-		-		-		-
Total without a related allowance	$	34,028	$	34,047	$	-	$	19,329	$	619

With a related allowance
Commercial	$	1,148	$	1,149	$	363	$	753	$	-
Commercial real estate
Owner-occupied		-		-		-		-		-
Non-owner occupied		4,164		4,164		415		2,703		80
Construction and development
Land & land development		9,589		9,589		5,338		8,238		14
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,771		2,776		1,080		1,811		24
Jumbo		3,780		3,781		974		1,373		38
Home equity		48		48		48		-		-
Total with a related allowance	$	21,500	$	21,507	$	8,218	$	14,878	$	156

Total
Commercial	$	32,446	$	32,475	$	6,116	$	25,245	$	418
Consumer		-		-		-		-		-
Residential		23,082		23,079		2,102		8,962		357
Total	$	55,528	$	55,554	$	8,218	$	34,207	$	775

A modification of a loan is considered a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to qualify as a TDR until a consistent payment history or change in the borrower's financial condition has been evidenced, generally no less than twelve months. Included in impaired loans are TDRs of $44,785,000 and $31,712,000 at September 30, 2011 and December 31, 2010, respectively, with no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three months and nine months ended September 30, 2011. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2011						September 30, 2011
			Pre-modification		Post-modification				Pre-modification		Post-modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
dollars in thousands	Modifications		Investment		Investment		Modifications		Investment		Investment
Commercial		-	$	-	$	-		1	$	63	$	63
Commercial real estate
Owner-occupied		1		522		522		4		2,463		2,463
Non-owner occupied		-		-		-		5		7,248		7,248
Construction and development
Land & land development		-		-		-		5		3,715		3,683
Construction		-		-		-		-		-		-
Residential real estate
Non-jumbo		2		579		579		6		1,743		1,648
Jumbo		-		-		-		-		-		-
Home equity		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total		3	$	1,101	$	1,101		21	$	15,232	$	15,105

The following table presents defaults during the stated period of TDRs that were restructured during 2011. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2011				September 30, 2011
	Number		Recorded		Number		Recorded
	of		Investment		of		Investment
dollars in thousands	Defaults		at Default Date		Defaults		at Default Date
Commercial		-	$	-		-	$	-
Commercial real estate
Owner-occupied		2		955		3		2,418
Non-owner occupied		2		3,064		3		3,594
Construction and development
Land & land development		1		836		4		2,682
Construction		-		-		-		-
Residential real estate
Non-jumbo		-		-		-		-
Jumbo		-		-		-		-
Home equity		-		-		-		-
Consumer		-		-		-		-
Total		5	$	4,855		10	$	8,694

We categorize 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. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure exceeding $2 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower's ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon the internal risk ratings defined above.

Loan Risk Profile by Internal Risk Rating

	Construction and Development								Commercial				Commercial Real Estate
	Land and land development				Construction								Owner Occupied				Non-Owner Occupied
Dollars in thousands	9/30/2011		12/31/2010		9/30/2011		12/31/2010		9/30/2011		12/31/2010		9/30/2011		12/31/2010		9/30/2011		12/31/2010
Pass	$	48,747	$	63,061	$	9,445	$	13,321	$	81,658	$	89,129	$	150,823	$	167,048	$	231,231	$	218,555
OLEM (Special Mention)		18,812		19,509		-		249		5,045		6,481		5,453		4,417		11,792		14,154
Substandard		26,464		15,796		-		121		3,719		1,449		14,916		15,633		10,515		2,628
Doubtful		-		719		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	94,023	$	99,085	$	9,445	$	13,691	$	90,422	$	97,059	$	171,192	$	187,098	$	253,538	$	235,337

The following table presents the recorded investment in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.

	Performing				Nonperforming
Dollars in thousands	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
Residential real estate
Non-jumbo	$	220,550	$	233,857	$	3,949	$	5,433
Jumbo		59,982		59,307		2,273		2,033
Home Equity		50,430		50,936		595		51
Consumer		22,901		24,003		87		142
Other		2,911		4,511		-		-
Total	$	356,774	$	372,614	$	6,904	$	7,659

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.