NOTE 5 – ALLOWANCE FOR LOAN LOSSES

The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $7,343adequate to cover loan losses inherent in the loan portfolio. The following table presents by portfolio segment, the allowance for loan losses as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
				Construction &		Commercial						Residential
	Commercial			Development		Real Estate			Consumer			Real Estate		Total
Allowance for loan losses:
Beginning balance	$	634		$	223	$	5,719		$	194		$	971	$	7,741
Charge-offs		(262	)		-		(747	)		(118	)		-		(1,127	)
Recoveries		-			-		-			23			6		29
Provision		237			105		140			107			111		700
Ending Balance	$	609		$	328	$	5,112		$	206		$	1,088	$	7,343

Ending allowance balance:
Loans individually evaluated for impairment	$	-		$	-	$	1,312		$	-		$	-	$	1,312

Loans collectively evaluated for impairment		609			328		3,800			206			1,088		6,031
Total Balance	$	609		$	328	$	5,112		$	206		$	1,088	$	7,343

Ending loan balance:
Loans individually evaluated for impairment	$	-		$	-	$	12,466		$	-		$	-	$	12,466

Loans collectively evaluated for impairment		52,603			13,027		250,197			10,662			94,006		420,495
Total	$	52,603		$	13,027	$	262,663		$	10,662		$	94,006	$	432,961

	December 31, 2010
				Construction &		Commercial					Residential
	Commercial			Development		Real Estate		Consumer			Real Estate			Total
Allowance for loan losses:
Beginning balance	$	626		$	-	$	4,548	$	171		$	908		$	6,253
Charge-offs		(35	)		-		-		(144	)		(138	)		(317	)
Recoveries		10			-		-		45			-			55
Provision		33			223		1,171		122			201			1,750
Ending Balance	$	634		$	223	$	5,719	$	194		$	971		$	7,741

Ending allowance balance:
Loans individually evaluated for impairment	$	-		$	-	$	1,774	$	-		$	-		$	1,774

Loans collectively evaluated for impairment		634			223		3,945		194			971		$	5,967
Total Balance	$	634		$	223	$	5,719	$	194		$	971		$	7,741

Ending loan balance:
Loans individually evaluated for impairment	$	-		$	-	$	15,529	$	-		$	-		$	15,529

Loans collectively evaluated for impairment		51,784			12,472		242,912		10,772			91,600			409,540
Total	$	51,784		$	12,472	$	258,441	$	10,772		$	91,600		$	425,069

Changes in the allowance for loan losses are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance, beginning of period	$	7,115		$	6,467		$	7,741		$	6,253
Provision charged to operations		275			330			700			580
Recoveries credited to allowance		14			23			29			37
Losses charged to allowance		(61	)		(185	)		(1,127	)		(235	)

Balance, end of period	$	7,343		$	6,635		$	7,343		$	6,635

Credit Quality Information

The following tables represent credit exposures by 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 of the loan agreements as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans.

The Company's internally assigned grades 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 are characterized by the distinct possibility that the Bank 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 uncollectable, or of such value that continuance as an asset is not warranted.

Loans are graded by either independent loan review or internal review. Internally reviewed loans were assigned a risk weighting by the loan officer and approved by the loan committee, but have not undergone a formal loan review by an independent party. These loans are typically smaller dollar balances that have not experienced delinquency issues. Balances include gross loan value before unearned income and excluding overdrafts as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
			Construction &		Commercial				Residential
	Commercial		Development		Real Estate		Consumer		Real Estate		Total
Loans Independently Reviewed:
Pass	$	14,870	$	2,344	$	120,729	$	71	$	7,245	$	145,259
Special Mention		481		138		9,336		32		537		10,524
Substandard		2,627		3,267		34,400		9		2,673		42,976
Doubtful		-		-		-		-		-		-
Loss		-		-		-		4		-		4
Ending Balance	$	17,978	$	5,749	$	164,465	$	116	$	10,455	$	198,763

Loans Internally Reviewed:
Pass	$	34,556	$	7,288	$	95,575	$	10,520	$	87,084	$	235,023
Special Mention		-		-		-		35		171		206
Substandard		-		-		191		-		-		191
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Ending Balance	$	34,556	$	7,288	$	95,766	$	10,555	$	87,255	$	235,420

	December 31, 2010
			Construction &		Commercial				Residential
	Commercial		Development		Real Estate		Consumer		Real Estate		Total
Loans Independently Reviewed:
Pass	$	17,454	$	3,034	$	128,114	$	54	$	6,457	$	155,113
Special Mention		307		-		10,806		31		333		11,477
Substandard		2,370		1,774		35,715		8		2,057		41,924
Doubtful		-		-		-		1		-		1
Loss		-		-		-		-		-		-
Ending Balance	$	20,131	$	4,808	$	174,635	$	94	$	8,847	$	208,515

Loans Internally Reviewed:
Pass	$	31,496	$	7,693	$	84,709	$	10,634	$	82,798	$	217,330
Special Mention		-		-		-		45		176		221
Substandard		-		-		-		13		-		13
Doubtful		-		-		-		-		-		-
Loss		-		-		-		-		-		-
Ending Balance	$	31,496	$	7,693	$	84,709	$	10,692	$	82,974	$	217,564

Age Analysis of Past Due Loans by Class

The following is a table which includes an aging analysis of the recorded investment of past due loans as of June 30, 2011 and December 31, 2010 including loans which are in nonaccrual status (in thousands):

(In thousands)
	June 30, 2011
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days		Total Past				Total		90 Days and
	Past Due		Past Due		Or Greater		Due		Current		Loans		Accruing

Commercial	$	99	$	31	$	228	$	358	$	52,245	$	52,603	$	226
Construction & development		-		760		414		1,174		11,853		13,027		414
Commercial real estate		990		1,814		4,805		7,609		255,054		262,663		3,184
Consumer		139		44		12		195		10,467		10,662		8
Residential real estate		309		322		791		1,422		92,584		94,006		746
Total	$	1,537	$	2,971	$	6,250	$	10,758	$	422,203	$	432,961	$	4,578

	December 31, 2010
													Recorded
													Investment >
	30-59 Days		60-89 Days		90 Days		Total Past				Total		90 Days and
	Past Due		Past Due		Or Greater		Due		Current		Loans		Accruing

Commercial	$	487	$	139	$	580	$	1,206	$	50,578	$	51,784	$	580
Construction & development		-		-		-		-		12,472		12,472		-
Commercial real estate		55		2,712		16,044		18,811		239,630		258,441		952
Consumer		128		30		59		217		10,555		10,772		44
Residential real estate		221		241		547		1,009		90,591		91,600		512
Total	$	891	$	3,122	$	17,230	$	21,243	$	403,826	$	425,069	$	2,088

Impaired Loans

Management considers commercial loans and commercial real estate loans which are 90 days or more past due as impaired, and if warranted, includes the entire customer relationship in that status. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	7,860	$	7,860	$	-	$	7,633	$	107

With an allowance recorded:
Commercial real estate		4,606		4,606		1,312		4,499		-
Total:
Commercial real estate	$	12,466	$	12,466	$	1,312	$	12,132	$	107

	December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial real estate	$	5,775	$	5,775	$	-	$	444	$	-

With an allowance recorded:
Commercial real estate		9,754		9,754		1,774		9,822		-
Total:
Commercial real estate	$	15,529	$	15,529	$	1,774	$	10,266	$	-

Nonaccrual Loans

Loans are considered nonaccrual upon reach 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. Loans that are well secured and in the process of collection may not be placed on nonaccrual status based on management’s review of the specific loan. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

In the following table are loans, presented by class, on nonaccrual status as of June 30, 2011 and December 31, 2010 (in thousands):

	June 30, 2011		December 31, 2010

Commercial	$	2	$	-
Commercial real estate		12,598		15,626
Consumer		8		15
Residential real estate		45		35
Total	$	12,653	$	15,676