Note 4 – Loans

Loans were comprised of the following classifications at June 30, 2011 and December 31, 2010:

	June 30,			December 31,
	2011			2010

Commercial:
Commercial and Industrial Loans and Leases	$	293,439		$	218,443
Commercial Real Estate Loans		440,704			339,555
Agricultural Loans		152,229			165,166
Retail:
Home Equity Loans		76,818			64,437
Consumer Loans		51,457			53,807
Residential Mortgage Loans		93,975			77,310
Subtotal		1,108,622			918,718
Less: Unearned Income		(1,875	)		(1,482	)
Allowance for Loan Losses		(14,780	)		(13,317	)
Loans, net	$	1,091,967		$	903,919

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending June 30, 2011:

	Commercial
	and
	Industrial			Commercial					Home						Residential
	Loans and			Real Estate			Agricultural		Equity			Consumer			Mortgage
	Leases			Loans			Loans		Loans			Loans			Loans			Unallocated		Total
June 30, 2011
Beginning Balance	$	3,820		$	7,708		$	654	$	271		$	432		$	748		$	540	$	14,173
Provision for Loan Losses		650			315			79		(18	)		—			115			159		1,300
Recoveries		3			11			—		1			27			15			—		57
Loans Charged-off		(181	)		(337	)		—		(41	)		(59	)		(132	)		—		(750	)
Ending Balance	$	4,292		$	7,697		$	733	$	213		$	400		$	746		$	699	$	14,780

The following table presents the activity in the allowance for loan losses by portfolio class for the six months ending June 30, 2011:

	Commercial
	and
	Industrial			Commercial						Home						Residential
	Loans and			Real Estate			Agricultural			Equity			Consumer			Mortgage
	Leases			Loans			Loans			Loans			Loans			Loans			Unallocated		Total
June 30, 2011
Beginning Balance	$	3,713		$	7,497		$	750		$	220		$	362		$	543		$	232	$	13,317
Provision for Loan Losses		755			887			(17	)		86			84			338			467		2,600
Recoveries		6			103			—			3			59			15			—		186
Loans Charged-off		(182	)		(790	)		—			(96	)		(105	)		(150	)		—		(1,323	)
Ending Balance	$	4,292		$	7,697		$	733		$	213		$	400		$	746		$	699	$	14,780

The following table presents the activity in the allowance for loan losses for the three months ended June 30, 2010:

Beginning Balance	$	10,713
Provision for Loan Losses		1,000
Loans Charged-off		(1,237	)
Recoveries		337
Ending Balance	$	10,813

The following table presents the activity in the allowance for loan losses for the six months ended June 30, 2010:

Beginning Balance	$	11,016
Provision for Loan Losses		2,500
Loans Charged-off		(3,142	)
Recoveries		439
Ending Balance	$	10,813

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2011 and December 31, 2010:

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
June 30, 2011
Allowance for Loan Losses:
Ending Allowance Balance
Attributable to Loans:
Individually Evaluated for Impairment	$	4,634	$	1,395	$	3,239	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,071		2,897		4,383		733		213		400		746		699
Acquired with Deteriorated Credit Quality		75		—		75		—		—		—		—		—
Total Ending Allowance Balance	$	14,780	$	4,292	$	7,697	$	733	$	213	$	400	$	746	$	699

Loans:
Loans Individually
Evaluated for Impairment	$	15,577	$	2,707	$	12,870	$	—	$	—	$	—	$	—	$	—
Loans Collectively
Evaluated for Impairment		1,081,233		288,785		415,515		154,226		77,078		51,459		94,170		—
Loans Acquired with Deteriorated Credit Quality		16,870		2,969		13,563		—		—		184		154		—
Total Ending Loans Balance (1)	$	1,113,680	$	294,461	$	441,948	$	154,226	$	77,078	$	51,643	$	94,324	$	—

(1) Total recorded investment in loans includes $5,058 in accrued interest.

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
December 31, 2010
Allowance for Loan Losses:
Ending Allowance Balance
Attributable to Loans:
Individually Evaluated for Impairment	$	4,583	$	1,387	$	3,196	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		8,734		2,326		4,301		750		220		362		543		232
Total Ending Allowance Balance	$	13,317	$	3,713	$	7,497	$	750	$	220	$	362	$	543	$	232

Loans:
Loans Individually
Evaluated for Impairment	$	16,833	$	3,421	$	13,357	$	55	$	—	$	—	$	—	$	—
Loans Collectively
Evaluated for Impairment		907,525		215,840		327,413		167,933		64,652		54,048		77,639		—
Total Ending Loans Balance (1)	$	924,358	$	219,261	$	340,770	$	167,988	$	64,652	$	54,048	$	77,639	$	—

(1) Total recorded investment in loans includes $5,640 in accrued interest.

The following table presents loans individually evaluated for impairment by class of loans as of and for the three month period ended June 30, 2011:

	Unpaid				Allowance for		Average		Interest		Cash
	Principal		Recorded		Loan Losses		Recorded		Income		Basis
	Balance		Investment		Allocated		Investment		Recognized		Recognized
June 30, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	117	$	96	$	—	$	730	$	2	$	2
Commercial Real Estate Loans		4,240		3,485		—		4,059		29		29
Agricultural Loans		—		—		—		20		6		6

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,597		2,638		1,395		3,961		4		4
Commercial Real Estate Loans		9,976		9,969		3,239		10,451		6		4
Agricultural Loans		—		—		—		—		—		—
Total	$	16,930	$	16,188	$	4,634	$	19,221	$	47	$	45

The following table presents loans individually evaluated for impairment by class of loans as of and for the six month period ended June 30, 2011:

	Unpaid				Allowance for		Average		Interest		Cash
	Principal		Recorded		Loan Losses		Recorded		Income		Basis
	Balance		Investment		Allocated		Investment		Recognized		Recognized
June 30, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	117	$	96	$	—	$	281	$	3	$	3
Commercial Real Estate Loans		4,240		3,485		—		2,388		32		32
Agricultural Loans		—		—		—		38		6		6

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,597		2,638		1,395		4,280		6		6
Commercial Real Estate Loans		9,976		9,969		3,239		11,181		36		34
Agricultural Loans		—		—		—		—		—		—
Total	$	16,930	$	16,188	$	4,634	$	18,168	$	83	$	81

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated

With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	570	$	585	$	—
Commercial Real Estate Loans		2,243		2,231		—
Agricultural Loans		55		55		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,779		2,836		1,387
Commercial Real Estate Loans		11,062		11,126		3,196
Agricultural Loans		—		—		—
Total	$	16,709	$	16,833	$	4,583

The following table presents information for loans individually evaluated for impairment for the three month period ended June 30, 2010:

Average Balance of Individually Impaired Loans During Period	$	7,556
Interest Income Recognized During Impairment		35
Interest Income Recognized on Cash Basis		35

The following table presents information for loans individually evaluated for impairment for the six month period ended June 30, 2010:

Average Balance of Individually Impaired Loans During Period	$	7,769
Interest Income Recognized During Impairment		51
Interest Income Recognized on Cash Basis		51

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2011 and December 31, 2010:

					Loans Past Due
					Over 90 Days
	Non-Accrual				& Still Accruing
	2011		2010		2011		2010

Commercial and Industrial Loans and Leases	$	2,624	$	514	$	11	$	547
Commercial Real Estate Loans		12,661		8,718		116		103
Agricultural Loans		—		55		—		—
Home Equity Loans		85		156		—		—
Consumer Loans		279		103		26		38
Residential Mortgage Loans		1,356		604		—		—
Total	$	17,005	$	10,150	$	153	$	688

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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

							Greater than
			30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
June 30, 2011
Commercial and Industrial Loans and Leases	$	294,461	$	776	$	51	$	2,534	$	3,361	$	291,100
Commercial Real Estate Loans		441,948		1,128		468		8,994		10,590		431,358
Agricultural Loans		154,226		83		43		—		126		154,100
Home Equity Loans		77,078		178		83		85		346		76,732
Consumer Loans		51,643		266		95		263		624		51,019
Residential Mortgage Loans		94,324		2,115		298		1,356		3,769		90,555
Total (1)	$	1,113,680	$	4,546	$	1,038	$	13,232	$	18,816	$	1,094,864

(1) Total recorded investment in loans includes $5,058 in accrued interest.

							Greater than
			30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
December 31, 2010
Commercial and Industrial Loans and Leases	$	219,261	$	1,876	$	782	$	1,011	$	3,669	$	215,592
Commercial Real Estate Loans		340,770		149		700		5,843		6,692		334,078
Agricultural Loans		167,988		363		—		55		418		167,570
Home Equity Loans		64,652		132		12		156		300		64,352
Consumer Loans		54,048		604		95		108		807		53,241
Residential Mortgage Loans		77,639		2,112		580		604		3,296		74,343
Total (1)	$	924,358	$	5,236	$	2,169	$	7,777	$	15,182	$	909,176

(1) Total recorded investment in loans includes $5,640 in accrued interest.

Troubled Debt Restructurings:

The Company has allocated $201 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011. The Company had allocated $173 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010. The Company has not committed to lending any additional amounts as of June 30, 2011 and December 31, 2010 to customers with outstanding loans that are classified as troubled debt restructurings.

Credit Quality Indicators:

The Company categorizes 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. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is a follows:

			Special
	Pass		Mention		Substandard		Doubtful		Total
June 30, 2011
Commercial and Industrial Loans and Leases	$	257,551	$	18,744	$	18,166	$	—	$	294,461
Commercial Real Estate Loans		383,947		29,980		28,021		—		441,948
Agricultural Loans		148,242		3,399		2,585		—		154,226
Total	$	789,740	$	52,123	$	48,772	$	—	$	890,635

			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2010
Commercial and Industrial Loans and Leases	$	192,494	$	14,782	$	11,985	$	—	$	219,261
Commercial Real Estate Loans		295,863		27,304		17,603		—		340,770
Agricultural Loans		161,871		3,294		2,823		—		167,988
Total	$	650,228	$	45,380	$	32,411	$	—	$	728,019

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity:

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
June 30, 2011
Performing	$	76,993	$	51,338	$	92,968
Nonperforming		85		305		1,356
Total	$	77,078	$	51,643	$	94,324

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
December 31, 2010
Performing	$	64,496	$	53,907	$	77,035
Nonperforming		156		141		604
Total	$	64,652	$	54,048	$	77,639

The following table presents financing receivable purchased and/or sold during the six months ended June 30, 2011 by portfolio class:

	Commercial
	and
	Industrial		Commercial				Home				Residential
	Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Leases		Loans		Loans		Loans		Loans		Loans		Total

Purchases	$	69,898	$	111,629	$	—	$	13,329	$	1,169	$	22,901	$	218,926

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

	June 30, 2011

Commercial and Industrial Loans	$	2,969
Commercial Real Estate Loans		13,563
Home Equity Loans		—
Consumer Loans		184
Residential Mortgage Loans		154
Total	$	16,870

Carrying amount, Net of Allowance	$	16,795

Accretable yield, or income expected to be collected, is as follows:

	June 30, 2011

Balance at April 1, 2011	$	1,792
New Loans Purchased		—
Accretion of Income		(314	)
Balance at June 30, 2011	$	1,478

Balance at January 1, 2011	$	—
New Loans Purchased		2,042
Accretion of Income		(564	)
Balance at June 30, 2011	$	1,478

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $75 during the three and six months ended June 30, 2011. No allowances for loan losses were reversed during the same periods.

Contractually required payments receivable of loans purchased during the year:

Commercial and Industrial Loans	$	4,542
Commercial Real Estate Loans		19,260
Home Equity Loans		28
Consumer Loans		217
Residential Mortgage Loans		458
Total	$	24,505

Cash Flows Expected to be Collected at Acquisition		$	19,695
Fair Value of Acquired Loans at Acquisition			17,653