(3)

Loans

The following table presents the composition of loans segregated by class of loans, as of June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
Commercial and Industrial
Commercial	$	55,274	$	48,986
Industrial		11,284		8,422

Real Estate
Commercial Construction		56,368		58,546
Residential Construction		4,169		3,530
Commercial		308,936		315,281
Residential		193,190		193,638
Farmland		48,748		48,225

Consumer and Other
Consumer		29,652		30,449
Other		8,740		9,244

Total Loans	$	716,361	$	716,321

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 of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the "pass" classification.

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 thisgrade.

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, 2012 and December 31, 2011. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

June 30, 2012
	Pass		Special Mention		Substandard		Total Loans
Commercial and Industrial
Commercial	$	48,827	$	2,050	$	4,397	$	55,274
Industrial		11,224		--		60		11,284

Real Estate
Commercial Construction		29,788		1,930		24,650		56,368
Residential Construction		3,861		103		205		4,169
Commercial		267,537		14,556		26,843		308,936
Residential		173,328		9,939		9,923		193,190
Farmland		44,892		1,169		2,687		48,748

Consumer and Other
Consumer		28,737		336		579		29,652
Other		8,632		13		95		8,740

Total Loans	$	616,826	$	30,096	$	69,439	$	716,361

December 31, 2011
	Pass		Special Mention		Substandard		Total Loans
Commercial and Industrial
Commercial	$	42,586	$	1,481	$	4,919	$	48,986
Industrial		8,153		--		269		8,422

Real Estate
Commercial Construction		28,746		2,814		26,986		58,546
Residential Construction		3,227		303		--		3,530
Commercial		272,062		14,790		28,429		315,281
Residential		175,100		8,343		10,195		193,638
Farmland		43,664		1,413		3,148		48,225

Consumer and Other
Consumer		29,372		362		715		30,449
Other		9,029		99		116		9,244

Total Loans	$	611,939	$	29,605	$	74,777	$	716,321

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. Nonaccrual loans totaled $35,474 and $38,822 as of June 30, 2012 and December 31, 2011, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest approximated $213 and $15, 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.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of June 30, 2012 and December 31, 2011:

June 30, 2012
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Industrial
Commercial	$	1,002	$	--	$	1,002	$	330	$	53,942	$	55,274
Industrial		--		--		--		45		11,239		11,284

Real Estate
Commercial Construction		66		182		248		22,659		33,461		56,368
Residential Construction		--		--		--		--		4,169		4,169
Commercial		2,769		--		2,769		6,639		299,528		308,936
Residential		2,340		31		2,371		3,231		187,588		193,190
Farmland		626		--		626		2,297		45,825		48,748

Consumer and Other
Consumer		297		--		297		237		29,118		29,652
Other		20		--		20		36		8,684		8,740

Total Loans	$	7,120	$	213	$	7,333	$	35,474	$	673,554	$	716,361

December 31, 2011
	Accruing Loans
			90 Days
	30-89 Days		or More		Total Accruing		Nonaccrual
	Past Due		Past Due		Loans Past Due		Loans		Current Loans		Total Loans
Commercial and Industrial
Commercial	$	645	$	--	$	645	$	2,103	$	46,238	$	48,986
Industrial		--		--		--		86		8,336		8,422

Real Estate
Commercial Construction		514		--		514		23,578		34,454		58,546
Residential Construction		33		--		33		--		3,497		3,530
Commercial		2,931		--		2,931		9,194		303,156		315,281
Residential		2,251		15		2,266		3,110		188,262		193,638
Farmland		376		--		376		487		47,362		48,225

Consumer and Other
Consumer		410		--		410		221		29,818		30,449
Other		--		--		--		43		9,201		9,244

Total Loans	$	7,160	$	15	$	7,175	$	38,822	$	670,324	$	716,321

The following table details impaired loan data as of June 30, 2012:

June 30, 2012
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	1,546	$	1,456	$	--	$	1,568	$	49		$	40
Agricultural		45		45		--		42		--			--
Commercial Construction		11,998		9,694		--		11,079		(7	)		4
Commercial Real Estate		33,857		28,254		--		30,136		358			325
Residential Real Estate		2,748		2,152		--		2,280		46			42
Farmland		2,340		2,297		--		2,297		32			44
Consumer		256		237		--		225		3			5
Other		38		36		--		40		--			--

		52,828		44,171		--		47,667		481			460

With An Allowance Recorded
Commercial		290		290		300		300		2			5
Agricultural		--		--		--		--		--			--
Commercial Construction		17,961		12,966		2,111		11,954		--			--
Commercial Real Estate		5,163		5,141		1,462		4,394		55			53
Residential Real Estate		4,852		4,139		868		4,092		46			45
Farmland		--		--		--		130		--			--
Consumer		--		--		--		--		--			--
Other		--		--		--		--		--			--

		28,266		22,536		4,741		20,870		103			103

Total
Commercial		1,836		1,746		300		1,868		51			45
Agricultural		45		45		--		42		--			--
Commercial Construction		29,959		22,660		2,111		23,033		(7	)		4
Commercial Real Estate		39,020		33,395		1,462		34,530		413			378
Residential Real Estate		7,600		6,291		868		6,372		92			87
Farmland		2,340		2,297		--		2,427		32			44
Consumer		256		237		--		225		3			5
Other		38		36		--		40		--			--

	$	81,094	$	66,707	$	4,741	$	68,537	$	584		$	563

The following table details impaired loan data as of December 31, 2011:

December 31, 2011
	Unpaid
	Contractual						Average		Interest			Interest
	Principal		Impaired		Related		Recorded		Income			Income
	Balance		Balance		Allowance		Investment		Recognized			Collected

With No Related Allowance Recorded
Commercial	$	1,743	$	1,580	$	--	$	947	$	60		$	65
Agricultural		86		86		--		208		(4	)		--
Commercial Construction		17,699		12,799		--		13,310		116			144
Commercial Real Estate		34,686		29,385		--		27,027		833			834
Residential Real Estate		2,601		1,934		--		3,176		88			80
Farmland		278		227		--		342		66			66
Consumer		229		216		--		184		11			12
Other		52		43		--		40		1			2

		57,374		46,270		--		45,234		1,171			1,203

With An Allowance Recorded
Commercial		775		776		308		214		15			19
Commercial Construction		14,036		11,489		2,693		10,470		14			61
Commercial Real Estate		6,430		6,430		2,061		6,557		182			197
Residential Real Estate		4,772		4,042		675		3,859		97			97
Farmland		299		260		12		65		(18	)		--
Consumer		5		5		2		4		1			1
Other		--		--		--		19		--			--

		26,317		23,002		5,751		21,188		291			375

Total
Commercial		2,518		2,356		308		1,161		75			84
Agricultural		86		86		--		208		(4	)		--
Commercial Construction		31,735		24,288		2,693		23,780		130			205
Commercial Real Estate		41,116		35,815		2,061		33,584		1,015			1,031
Residential Real Estate		7,373		5,976		675		7,035		185			177
Farmland		577		487		12		407		48			66
Consumer		234		221		2		188		12			13
Other		52		43		--		59		1			2

	$	83,691	$	69,272	$	5,751	$	66,422	$	1,462		$	1,578

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

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower's financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower's specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company's senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of June 30, 2012. The following tables present the number of loan contracts restructured during the three and six months ended June 30, 2012. It shows the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous twelve months which subsequently defaulted during the period. The company did not have any loans modified as a troubled debt restructured loan in the three month period ending June 30, 2012. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

	Three Months Ending June 30, 2012						Six Months Ending June 30, 2012
Troubled Debt Restructurings
	# of Contracts		Pre-Modification		Post-Modification		# of Contracts		Pre-Modification		Post-Modification

Commercial RE		----	$	----	$	----		1	$	57	$	57
Residential RE		----		----		----		1		227		224

Total Loans		----	$	----	$	----		2	$	284	$	281

	Three Months Ending June 30, 2012				Six Months Ending June 30, 2012
Troubled Debt Restructurings
That Subsequently Defaulted
	# of Contracts		Recorded Investment		# of Contracts		Recorded Investment

Commercial Construction		----	$	----		1	$	64
Residential RE		----		----		1		50

Total Loans		----	$	----		2	$	114