Note 3 - Loans

Major classifications of loans at June 30, 2011 and December 31, 2010 are as follows (in thousands):

	June 30, 2011		December 31, 2010

Commercial and industrial	$	33,508		36,122
Commercial, secured by real estate		206,952		196,136
Residential real estate		187,540		190,277
Consumer		16,946		19,691
Agricultural		2,844		2,966
Other loans, including deposit overdrafts		9,466		9,413
		457,256		454,605
Deferred net origination costs		300		386
		457,556		454,991
Less allowance for loan losses		3,109		2,641
Loans, net	$	454,447		452,350

Non-accrual, past-due, and restructured loans as of June 30, 2011 and December 31, 2010 were as follows (in thousands):

	June 30, 2011			December 31, 2010
Non-accrual loans	$	3,086			3,761
Past-due 90 days or more and still accruing		670			300
Restructured loans		9,503			9,088
Total	$	13,259			13,149
Percent to total loans		2.90	%		2.89	%

Non-accrual loans at June 30, 2011 decreased from the balance at December 31, 2010 primarily due to the receipt of a $594,000 guarantee payment on a Small Business Administration loan during the first quarter 2011. Restructured loans at June 30, 2011 increased from the balance at December 31, 2010 primarily due to the modification of two commercial real estate loans to the same borrower totaling $626,000 during the first quarter 2011.

Loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of those loans at June 30, 2011 and December 31, 2010 were $67,942,000 and $70,705,000, respectively. Loans sold to the Federal Home Loan Mortgage Corporation during the three and six months ended June 30, 2011 totaled $976,000 and $2,698,000, respectively, and $954,000 and $2,554,000 during the three and six months ended June 30, 2010, respectively.

The allowance for loan losses and recorded investment in loans for the six months ended June 30 were as follows (000's):

	Commercial & Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Agricultural		Other			Unallocated		Total
June 30, 2011
Allowance for loan losses:
Balance, beginning of year	$	305			1,625		459			246			-		6			-		2,641
Provision charged to expenses		321			279		250			23			-		15			-		888
Losses charged off		(251	)		-		(132	)		(138	)		-		(58	)		-		(579	)
Recoveries		-			30		4			82			-		43					159
Balance, end of period	$	375			1,934		581			213			-		6			-		3,109

Ending balance: individually evaluated for impairment	$	133			341		82			-			-		-			-		556
Ending balance: collectively evaluated for impairment		242			1,593		499			213			-		6			-		2,553

Loans:
Ending balance	$	33,508			206,952		187,540			16,946			2,844		9,466			-		457,256
Ending balance: individually evaluated for impairment		780			11,923		533			-			-		-			-		13,236
Ending balance: collectively evaluated for impairment		32,728			195,029		187,007			16,946			2,844		9,466			-		444,020

	Commercial & Industrial			Commercial Real Estate		Residential Real Estate			Consumer			Agricultural		Other			Unallocated			Total
June 30, 2010
Allowance for loan losses:
Balance, beginning of year	$	546			1,628		491			313			-		9			11			2,998
Provision charged to expenses		(13	)		532		69			126			-		16			(11	)		719
Losses charged off		(288	)		-		(80	)		(247	)		-		(67	)		-			(682	)
Recoveries		-			-		1			66			-		48			-			115
Balance, end of period	$	245			2,160		481			258			-		6			-			3,150

Ending balance: individually evaluated for impairment	$	-			1,051		-			-			-		-			-			1,051
Ending balance: collectively evaluated for impairment		245			1,109		481			258			-		6			-			2,099

Loans:
Ending balance	$	37,767			193,311		193,089			22,442			3,206		9,446			-			459,261
Ending balance: individually evaluated for impairment		1,076			10,673		534			-			-		-			-			12,283
Ending balance: collectively evaluated for impairment		36,691			182,638		192,555			22,442			3,206		9,446			-			446,978

The Company uses a risk-rating system to quantify loan quality. A loan is assigned to a risk category based on relevant information about the ability of the borrower to service the debt including, but not limited to, current financial information, historical payment experience, credit documentation, public information, and current economic trends. The categories used are:

Pass – loans categorized in this category are higher quality loans that do not fit any of the other categories described below.

Other Assets Especially Mentioned (OAEM) - loans in this category are currently protected but are potentially weak. These loans constitute a risk but not to the point of justifying a classification of substandard. The credit risk may be relatively minor yet constitute an undue risk in light of the circumstances surrounding a specific asset.

Substandard – loans in this category are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified in this category have all the weaknesses inherent in loans classified 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.

An analysis of the Company's loan portfolio by credit quality indicators at June 30, 2011 and December 31, 2010 is as follows (000's):

	No Grade		Pass		OAEM		Substandard		Doubtful		Loss		Total
June 30, 2011
Commercial & industrial	$	1,213		30,193		1,116		986		-		-		33,508
Commercial, secured by real estate		2,382		189,873		4,794		7,652		2,251		-		206,952
Residential real estate		18,278		165,455		1,364		2,443		-		-		187,540
Consumer		392		16,483		-		54		12		5		16,946
Agricultural		299		2,545		-		-		-		-		2,844
Other		99		9,367		-		-		-		-		9,466
Total	$	22,663		413,916		7,274		11,135		2,263		5		457,256

December 31, 2010
Commercial & industrial	$	1,299		32,421		1,177		1,225		-		-		36,122
Commercial, secured by real estate		2,053		179,710		4,897		8,574		902		-		196,136
Residential real estate		17,346		170,900		264		1,702		65		-		190,277
Consumer		394		19,144		-		72		81		-		19,691
Agricultural		247		2,719		-		-		-		-		2,966
Other		116		9,297		-		-		-		-		9,413
Total	$	21,455		414,191		6,338		11,573		1,048		-		454,605

A loan portfolio aging analysis at June 30, 2011 and December 31, 2010 is as follows (000's):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans Greater Than 90 Days and Accruing
June 30, 2011
Commercial & industrial	$	-		-		-		-		33,508		33,508		-
Commercial, secured by real estate		85		-		2,366		2,451		204,501		206,952		35
Residential real estate		520		19		1,207		1,746		185,794		187,540		625
Consumer		98		57		10		165		16,781		16,946		10
Agricultural		42		-		-		42		2,802		2,844		-
Other		99		-		-		99		9,367		9,466		-
Total	$	844		76		3,583		4,503		452,753		457,256		670

December 31, 2010
Commercial & industrial	$	138		-		595		733		35,389		36,122		1
Commercial, secured by real estate		753		-		1,766		2,519		193,617		196,136		114
Residential real estate		482		36		698		1,216		189,061		190,277		110
Consumer		231		54		76		361		19,330		19,691		75
Agricultural		-		-		-		-		2,966		2,966		-
Other		5		-		-		5		9,408		9,413		-
Total	$	1,609		90		3,135		4,834		449,771		454,605		300

Impaired loans at June 30, 2011 and December 31, 2010 were as follows (000's):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2011
With no related allowance recorded:
Commercial & industrial	$	-		-		-		-		-
Commercial real estate		5,171		5,171		-		5,229		101
Residential real estate		332		332		-		332		-
Total		5,503		5,503		-		5,561		101

With an allowance recorded:
Commercial & industrial		648		781		133		1,090		28
Commercial real estate		6,411		6,752		341		6,816		133
Residential real estate		118		200		82		200		-
Total		7,177		7,733		556		8,106		161

Total:
Commercial & industrial		648		781		133		1,090		28
Commercial real estate		11,582		11,923		341		12,045		234
Residential real estate		450		532		82		532		-
Total	$	12,680		13,236		556		13,667		262

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2010
With no related allowance recorded:
Commercial & industrial	$	594		594		-		751		9
Commercial real estate		8,350		8,350		-		9,058		372
Residential real estate		533		533		-		534		-
Total		9,477		9,477		-		10,343		381

With an allowance recorded:
Commercial & industrial		356		476		120		693		29
Commercial real estate		2,974		3,150		176		3,403		142
Residential real estate		-		-		-		-		-
Total	$	3,330		3,626		296		4,096		171

Total:
Commercial & industrial	$	950		1,070		120		1,444		38
Commercial real estate		11,324		11,500		176		12,461		514
Residential real estate		533		533		-		534		-
Total	$	12,807		13,103		296		14,439		552

Non-accrual loans at June 30, 2011 and December 31, 2010 were as follows (000's):

	June 30, 2011		December 31, 2010

Commercial and industrial	$	-		595
Commercial, secured by real estate		2,331		2,377
Residential real estate		755		789
		3,086		3,761