Note 4 – Loans

Loans were comprised of the following classifications at March 31, 2012 and December 31, 2011:

	March 31,			December 31,
	2012			2011

Commercial:
Commercial and Industrial Loans and Leases	$	296,185		$	293,172
Commercial Real Estate Loans		450,874			452,071
Agricultural Loans		147,295			167,693
Retail:
Home Equity Loans		74,273			77,070
Consumer Loans		42,161			47,409
Residential Mortgage Loans		85,768			86,134
Subtotal		1,096,556			1,123,549
Less: Unearned Income		(2,845	)		(2,556	)
Allowance for Loan Losses		(15,766	)		(15,312	)
Loans, net	$	1,077,945		$	1,105,681

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending March 31, 2012 and 2011:

	Commercial
	and
	Industrial			Commercial						Home						Residential
	Loans and			Real Estate			Agricultural			Equity			Consumer			Mortgage
	Leases			Loans			Loans			Loans			Loans			Loans			Unallocated			Total
March 31, 2012
Beginning Balance	$	3,493		$	9,297		$	926		$	258		$	190		$	402		$	746		$	15,312
Provision for Loan Losses		961			58			(175	)		(13	)		46			79			(266	)		690
Recoveries		45			19			—			1			31			2			—			98
Loans Charged-off		(39	)		(140	)		—			(42	)		(71	)		(42	)		—			(334	)
Ending Balance	$	4,460		$	9,234		$	751		$	204		$	196		$	441		$	480		$	15,766

	Commercial
	and
	Industrial			Commercial						Home						Residential
	Loans and			Real Estate			Agricultural			Equity			Consumer			Mortgage
	Leases			Loans			Loans			Loans			Loans			Loans			Unallocated		Total
March 31, 2011
Beginning Balance	$	3,713		$	7,497		$	750		$	220		$	362		$	543		$	232	$	13,317
Provision for Loan Losses		105			572			(96	)		104			84			223			308		1,300
Recoveries		3			92			—			2			32			—			—		129
Loans Charged-off		(1	)		(453	)		—			(55	)		(46	)		(18	)		—		(573	)
Ending Balance	$	3,820		$	7,708		$	654		$	271		$	432		$	748		$	540	$	14,173

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 March 31, 2012 and December 31, 2011:

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
March 31, 2012
Allowance for Loan Losses:
Ending Allowance Balance Attributable to Loans:
Individually Evaluated for Impairment	$	5,618	$	1,270	$	4,348	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,071		3,190		4,809		751		204		196		441		480
Acquired with Deteriorated Credit Quality		77		—		77		—		—		—		—		—
Total Ending Allowance Balance	$	15,766	$	4,460	$	9,234	$	751	$	204	$	196	$	441	$	480

Loans:
Loans Individually Evaluated for Impairment	$	14,985	$	2,866	$	12,119	$	—	$	—	$	—	$	—	$	—
Loans Collectively Evaluated for Impairment		1,073,319		292,474		428,821		149,428		74,513		42,156		85,927		—
Loans Acquired with Deteriorated Credit Quality		13,240		1,773		11,156		—		—		160		151		—
Total Ending Loans Balance ⁽¹⁾	$	1,101,544	$	297,113	$	452,096	$	149,428	$	74,513	$	42,316	$	86,078	$	—

⁽¹⁾ Total recorded investment in loans includes $4,988 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, 2011
Allowance for Loan Losses:
Ending Allowance Balance Attributable to Loans:
Individually Evaluated for Impairment	$	4,834	$	466	$	4,368	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,401		3,027		4,852		926		258		190		402		746
Acquired with Deteriorated Credit Quality		77		—		77		—		—		—		—		—
Total Ending Allowance Balance	$	15,312	$	3,493	$	9,297	$	926	$	258	$	190	$	402	$	746

Loans:
Loans Individually Evaluated for Impairment	$	16,613	$	3,567	$	13,046	$	—	$	—	$	—	$	—	$	—
Loans Collectively Evaluated for Impairment		1,096,571		287,924		427,063		170,513		77,323		47,431		86,317		—
Loans Acquired with Deteriorated Credit Quality		16,121		2,596		13,209		—		—		164		152		—
Total Ending Loans Balance ⁽¹⁾	$	1,129,305	$	294,087	$	453,318	$	170,513	$	77,323	$	47,595	$	86,469	$	—

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

The following table presents loans individually evaluated for impairment by class of loans including purchase credit impaired loans that subsequently result in additional allowance for loan losses as of March 31, 2012 and December 31, 2011:

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
March 31, 2012
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	48	$	46	$	—
Commercial Real Estate Loans		5,191		5,125		—
Agricultural Loans		—		—		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,820		2,820		1,270
Commercial Real Estate Loans		7,239		7,071		4,425
Agricultural Loans		—		—		—
Total	$	15,298	$	15,062	$	5,695

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
December 31, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	1,084	$	1,066	$	—
Commercial Real Estate Loans		5,959		5,894		—
Agricultural Loans		—		—		—


With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,502		2,501		466
Commercial Real Estate Loans		7,400		7,230		4,445
Agricultural Loans		—		—		—
Total	$	16,945	$	16,691	$	4,911

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
March 31, 2012
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	655	$	1	$	1
Commercial Real Estate Loans		5,550		4		4
Agricultural Loans		—		—		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,841		1		1
Commercial Real Estate Loans		7,283		6		4
Agricultural Loans		—		—		—
Total	$	16,329	$	12	$	10

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
March 31, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	366	$	1	$	1
Commercial Real Estate Loans		2,773		3		3
Agricultural Loans		55		—		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		4,638		3		3
Commercial Real Estate Loans		12,030		30		30
Agricultural Loans		—		—		—
Total	$	19,862	$	37	$	37

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 March 31, 2012 and December 31, 2011:

					Loans Past Due
					Over 90 Days
	Non-Accrual				& Still Accruing
	2012		2011		2012		2011

Commercial and Industrial Loans and Leases	$	2,778	$	3,471	$	—	$	—
Commercial Real Estate Loans		12,352		13,289		—		—
Agricultural Loans		—		—		208		—
Home Equity Loans		56		90		—		—
Consumer Loans		213		259		—		—
Residential Mortgage Loans		273		748		—		—
Total	$	15,672	$	17,857	$	208	$	—

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 March 31, 2012 and December 31, 2011:

							Greater than
			30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
March 31, 2012
Commercial and Industrial Loans and Leases	$	297,113	$	307	$	37	$	453	$	797	$	296,316
Commercial Real Estate Loans		452,096		705		—		5,306		6,011		446,085
Agricultural Loans		149,428		37		—		208		245		149,183
Home Equity Loans		74,513		55		8		55		118		74,395
Consumer Loans		42,316		381		43		42		466		41,850
Residential Mortgage Loans		86,078		1,696		614		272		2,582		83,496
Total ⁽¹⁾	$	1,101,544	$	3,181	$	702	$	6,336	$	10,219	$	1,091,325

⁽¹⁾ Total recorded investment in loans includes $4,988 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, 2011
Commercial and Industrial Loans and Leases	$	294,087	$	220	$	—	$	1,141	$	1,361	$	292,726
Commercial Real Estate Loans		453,318		381		148		5,920		6,449		446,869
Agricultural Loans		170,513		10		—		—		10		170,503
Home Equity Loans		77,323		176		6		90		272		77,051
Consumer Loans		47,595		287		117		221		625		46,970
Residential Mortgage Loans		86,469		2,752		893		748		4,393		82,076
Total ⁽¹⁾	$	1,129,305	$	3,826	$	1,164	$	8,120	$	13,110	$	1,116,195

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

Troubled Debt Restructurings:

The Company has allocated $197 of specific reserves on $397 in principal to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012. The Company had allocated $198 of specific reserves on $409 in principal to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011. The Company has not committed to lending any additional amounts as of March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

For the three months ended March 31, 2012, no troubled debt restructurings occurred. The troubled debt restructurings resulted in no charge-offs for the three months ended March 31, 2012.

For the three months ended March 31, 2012, there were no payment defaults within the twelve months following modification for troubled debt restructurings.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the company's internal underwriting policy.

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
March 31, 2012
Commercial and Industrial Loans and Leases	$	268,860	$	16,520	$	11,733	$	—	$	297,113
Commercial Real Estate Loans		398,505		28,205		25,386		—		452,096
Agricultural Loans		144,901		1,995		2,532		—		149,428
Total	$	812,266	$	46,720	$	39,651	$	—	$	898,637

			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2011
Commercial and Industrial Loans and Leases	$	264,037	$	16,188	$	13,862	$	—	$	294,087
Commercial Real Estate Loans		396,057		28,272		28,989		—		453,318
Agricultural Loans		165,153		2,744		2,616		—		170,513
Total	$	825,247	$	47,204	$	45,467	$	—	$	917,918

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 as of March 31, 2012 and December 31, 2011:

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
March 31, 2012
Performing	$	74,458	$	42,103	$	85,806
Nonperforming		55		213		272
Total	$	74,513	$	42,316	$	86,078

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
December 31, 2011
Performing	$	77,233	$	47,336	$	85,721
Nonperforming		90		259		748
Total	$	77,323	$	47,595	$	86,469

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 recorded investment of those loans is as follows:

	March 31, 2012

Commercial and Industrial Loans	$	1,773
Commercial Real Estate Loans		11,156
Home Equity Loans		—
Consumer Loans		160
Residential Mortgage Loans		151
Total	$	13,240

Carrying amount, Net of Allowance	$	13,163

	December 31, 2011

Commercial and Industrial Loans	$	2,596
Commercial Real Estate Loans		13,209
Home Equity Loans		—
Consumer Loans		164
Residential Mortgage Loans		152
Total	$	16,121

Carrying amount, Net of Allowance	$	16,044

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

	March 31, 2012			March 31, 2011

Balance at January 1	$	967		$	—
New Loans Purchased		—			2,042
Accretion of Income		(543	)		(250	)
Reclassifications from Non-accretable Difference		206			—
Charge-off of Accretable Yield		—			—
Balance at March 31	$	630		$	1,792

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2012 and 2011. No allowances for loan losses were reversed during the same periods.