(4) Loans

The following table presents the composition of loans segregated by class of loans, as of June 30, 2011 and December 31, 2010.

	June 30, 2011		December 31, 2010
Commercial and Industrial
Commercial	$	48,466	$	53,220
Industrial		11,965		10,552

Real Estate
Commercial Construction		68,426		72,309
Residential Construction		4,046		4,373
Commercial		330,192		362,878
Residential		201,119		207,472
Farmland		48,010		52,778

Consumer and Other
Consumer		32,071		33,564
Other		14,815		16,104

Total Loans	$	759,110	$	813,250

Commercial and industrial loans are extended to a diverse group of businesses within the company's market area. These loans are often underwritten based on the borrower's ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company's geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

Grades 1 and 2 – Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates

Grades 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

Grade 5 – This grade includes “special mention” loans on management's watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

Grade 6 – This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company's problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of June 30, 2011 and December 31, 2010. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

June 30, 2011
	Pass		Special Mention		Substandard		Total Loans
Commercial and Industrial
Commercial	$	45,329	$	745	$	2,392	$	48,466
Industrial		11,548		--		417		11,965

Real Estate
Commercial Construction		30,574		5,573		32,279		68,426
Residential Construction		3,814		232		--		4,046
Commercial		278,941		11,863		39,388		330,192
Residential		181,714		7,288		12,117		201,119
Farmland		46,375		688		947		48,010

Consumer and Other
Consumer		30,920		365		786		32,071
Other		14,541		121		153		14,815

Total Loans	$	643,756	$	26,875	$	88,479	$	759,110

December 31, 2010
	Pass		Special Mention		Substandard		Total Loans
Commercial and Industrial
Commercial	$	48,732	$	2,498	$	1,990	$	53,220
Industrial		10,059		169		324		10,552

Real Estate
Commercial Construction		33,523		10,064		28,722		72,309
Residential Construction		3,974		204		195		4,373
Commercial		294,186		11,847		56,845		362,878
Residential		183,518		9,196		14,758		207,472
Farmland		49,500		1,838		1,440		52,778

Consumer and Other
Consumer		32,046		727		791		33,564
Other		14,553		1,186		365		16,104

Total Loans	$	670,091	$	37,729	$	105,430	$	813,250

A loan's risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company's ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $50,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010:

June 30, 2011
	Accruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Industrial
Commercial	$	374	$	--	$	374	$	309	$	47,783	$	48,466
Industrial		--		--		--		196		11,769		11,965

Real Estate
Commercial Construction		259		--		259		25,192		42,975		68,426
Residential Construction		--		--		--		--		4,046		4,046
Commercial		3,525		--		3,525		14,386		312,281		330,192
Residential		2,424		--		2,424		4,292		194,403		201,119
Farmland		489		--		489		212		47,309		48,010

Consumer and Other
Consumer		526		--		526		158		31,387		32,071
Other		57		--		57		43		14,715		14,815

Total Loans	$	7,654	$	--	$	7,654	$	44,788	$	706,668	$	759,110

December 31, 2010
	Accruing Loans
	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
Commercial and Industrial
Commercial	$	382	$	--	$	382	$	394	$	52,444	$	53,220
Industrial		101		--		101		175		10,276		10,552

Real Estate
Commercial Construction		1,514		--		1,514		10,182		60,613		72,309
Residential Construction		195		--		195		--		4,178		4,373
Commercial		11,790		--		11,790		13,568		337,520		362,878
Residential		4,268		16		4,284		3,057		200,131		207,472
Farmland		567		--		567		1,157		51,054		52,778

Consumer and Other
Consumer		703		3		706		290		32,568		33,564
Other		219		--		219		79		15,806		16,104

Total Loans	$	19,739	$	19	$	19,758	$	28,902	$	764,590	$	813,250

Nonaccrual loans are loans for which principal and interest are doubtful of collection in accordance with original loan terms and for which accruals of interest have been discontinued due to payment delinquency. Nonaccrual loans totaled $44,788 and $28,902 as of June 30, 2011 and December 31, 2010, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $0 and $19, respectively. During its review of impaired loans, the company determined the majority of its exposures on these loans were known losses. As a result, the exposures were charged off, reducing the specific allowances on impaired loans.

During the first quarter, as a result of recently issued guidance regarding troubled debt restructurings, the Company reviewed its policy for designating loans as impaired. As a result of this review, the Company identified additional loans which are now included in the impaired loan disclosures that were not previously reported as impaired. The loans identified were those troubled debt restructurings which were on accrual status. The inclusion of these accruing troubled debt restructurings in the impaired loan disclosures for June 30, 2011 did not have an impact on the allowance for loan losses.

The following table details impaired loan data as of June 30, 2011:

June 30, 2011
					Average		Interest			Interest
	Impaired		Related		Recorded		Income			Income
	Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	373	$	--	$	282	$	7		$	14
Agricultural		196		--		254		(28	)		--
Commercial Construction		13,485		--		10,642		41			67
Commercial Real Estate		28,744		--		23,436		251			261
Residential Real Estate		4,277		--		3,517		32			49
Farmland		211		--		328		66			66
Consumer		158		--		181		3			4
Other		43		--		33		1			1

		47,487		--		38,673		373			462

With An Allowance Recorded
Commercial		--		--		10		--			--
Commercial Construction		12,418		2,965		10,198		58			101
Commercial Real Estate		7,072		1,473		8,372		114			151
Residential Real Estate		5,488		512		3,024		125			124
Other		--		--		39		--			--

		24,978		4,950		21,643		297			376

Total
Commercial		373		--		292		7			14
Agricultural		196		--		254		(28	)		--
Commercial Construction		25,903		2,965		20,840		99			168
Commercial Real Estate		35,816		1,473		31,808		365			412
Residential Real Estate		9,765		512		6,541		157			173
Farmland		211		--		328		66			66
Consumer		158		--		181		3			4
Other		43		--		72		1			1

	$	72,465	$	4,950	$	60,316	$	670		$	838

The Company does not have any unfunded commitments to lend to a customer that has a troubled debt restructured loan as of June 30, 2011.

The following table details impaired loan data as of December 31, 2010:

December 31, 2010
					Average		Interest			Interest
	Impaired		Related		Recorded		Income			Income
	Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	259	$	--	$	309	$	(1	)	$	6
Agricultural		175		--		221		1			1
Commercial Construction		10,182		--		11,761		7			32
Residential Construction		--		--		8		--			--
Commercial Real Estate		4,271		--		9,042		81			85
Residential Real Estate		3,057		--		3,931		41			54
Farmland		1,157		--		646		(7	)		11
Consumer		290		--		296		17			19
Other		79		--		129		5			8

		19,470		--		26,343		144			216

With An Allowance Recorded
Commercial		135		116		34		(1	)		3
Commercial Real Estate		9,297		540		2,324		342			476

		9,432		656		2,358		341			479

Total
Commercial		394		116		343		(2	)		9
Agricultural		175		--		221		1			1
Commercial Construction		10,182		--		11,761		7			32
Residential Construction		--		--		8		--			--
Commercial Real Estate		13,568		540		11,366		423			561
Residential Real Estate		3,057		--		3,931		41			54
Farmland		1,157		--		646		(7	)		11
Consumer		290		--		296		17			19
Other		79		--		129		5			8

	$	28,902	$	656	$	28,701	$	485		$	695