LOANS

Loans are summarized as follows:

	June 30,			December 31,
(Dollars in thousands)	2011			2010

Commercial	$	31,433		$	42,265
Commercial Real Estate:
Land Development		43,204			56,086
Building Lots		9,311			11,333
Other		450,785			490,345
Real estate construction		7,356			11,034
Residential mortgage		157,395			163,975
Consumer and home equity		74,525			77,781
Indirect consumer		25,739			29,588
Loans held for sale		5,708			6,388
		805,456			888,795
Less:
Net deferred loan origination fees		(333	)		(473	)
Allowance for loan losses		(17,708	)		(22,665	)
		(18,041	)		(23,138	)

Net Loans	$	787,415		$	865,657

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

Three Months Ended
June 30, 2011				Commercial			Real Estate			Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,679		$	20,536		$	104		$	776		$	742		$	754		$	24,591
Provision for loan losses		(225	)		9,655			-			131			(29	)		(15	)		9,517
Charge-offs		(100	)		(16,068	)		(9	)		(205	)		(38	)		(56	)		(16,476	)
Recoveries		17			10			-			-			15			34			76
Total ending allowance balance	$	1,371		$	14,133		$	95		$	702		$	690		$	717		$	17,708

Six Months Ended
June 30, 2011				Commercial			Real Estate			Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,657		$	18,595		$	158		$	751		$	708		$	796		$	22,665
Provision for loan losses		(203	)		13,006			-			174			55			(50	)		12,982
Charge-offs		(142	)		(17,684	)		(63	)		(224	)		(136	)		(87	)		(18,336	)
Recoveries		59			216			-			1			63			58			397
Total ending allowance balance	$	1,371		$	14,133		$	95		$	702		$	690		$	717		$	17,708

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

	Three Months Ended			Six Months Ended
(Dollars in thousands)	June 30,			June 30,
	2010			2010

Balance, beginning of period	$	18,810		$	17,719
Provision for loan losses		3,274			5,026
Charge-offs		(1,193	)		(1,904	)
Recoveries		62			112
Balance, end of period	$	20,953		$	20,953

We did not implement any changes to our accounting policies or methodology during the current period.

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

June 30, 2011			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	566	$	6,796		-	$	220	$	130	$	33	$	7,745
Collectively evaluated for impairment		805		7,337		95		482		560		684		9,963

Total ending allowance balance	$	1,371	$	14,133		95	$	702	$	690	$	717	$	17,708

Loans:
Loans individually evaluated for impairment	$	4,102	$	78,005	$	998	$	1,311	$	247	$	176	$	84,839
Loans collectively evaluated for impairment		27,331		425,295		6,358		156,084		74,278		25,563		714,909
Loans acquired with deteriorated credit quality		-		-		-		-		-		-		-

Total ending loans balance	$	31,433	$	503,300	$	7,356	$	157,395	$	74,525	$	25,739	$	799,748

December 31, 2010			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	691	$	11,872		24	$	334	$	147	$	29	$	13,097
Collectively evaluated for impairment		966		6,723		134		417		561		767		9,568

Total ending allowance balance	$	1,657	$	18,595		158	$	751	$	708	$	796	$	22,665


Loans:
Loans individually evaluated for impairment	$	1,870	$	86,250	$	1,267	$	1,609	$	337	$	91	$	91,424
Loans collectively evaluated for impairment		40,395		471,514		9,767		162,366		77,444		29,497		790,983
Loans acquired with deteriorated credit quality		-		-		-		-		-		-		-

Total ending loans balance	$	42,265	$	557,764	$	11,034	$	163,975	$	77,781	$	29,588	$	882,407

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits.

							Three Months Ended						Six Months Ended
							June 30, 2011						June 30, 2011
June 30, 2011	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized

With no related allowance recorded:
Commercial	$	3,115	$	3,114	$	-	$	1,689	$	80	$	80	$	1,230	$	58	$	58
Commercial Real Estate:
Land Development		22,165		13,012		-		9,019		188		188		7,869		164		164
Building Lots		-		-		-		-		-		-		-		-		-
Other		40,640		38,311		-		41,228		1,680		1,680		38,263		1,593		1,593
Real Estate Construction		1,717		998		-		644		8		8		491		17		17
Residential Mortgage		-		-		-		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-		-		-		-

With an allowance recorded:
Commercial		988		988		566		1,326		63		63		1,403		67		67
Commercial Real Estate:
Land Development		817		817		1,042		9,481		198		198		12,096		253		253
Building Lots		3,663		1,654		348		2,542		7		7		2,838		5		5
Other		24,211		24,211		5,406		25,419		1,036		1,036		26,143		1,088		1,088
Real Estate Construction		-		-		-		-		-		-		361		13		13
Residential Mortgage		1,406		1,311		220		1,591		24		24		1,597		3		3
Consumer and Home Equity		247		247		130		273		-		-		294		-		-
Indirect Consumer		176		176		33		157		1		1		135		-		-

Total	$	99,145	$	84,839	$	7,745	$	93,369	$	3,285	$	3,285	$	92,720	$	3,261	$	3,261

December 31, 2010	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
(Dollars in thousands)	Balance		Investment		Allocated

With no related allowance recorded:
Commercial	$	312	$	312	$	-
Commercial Real Estate:
Land Development		5,569		5,569		-
Building Lots		-		-		-
Other		34,327		32,332		-
Real Estate Construction		185		185		-
Residential Mortgage		-		-		-
Consumer and Home Equity		-		-		-
Indirect Consumer		-		-		-

With an allowance recorded:
Commercial		1,558		1,558		691
Commercial Real Estate:
Land Development		17,326		17,326		4,562
Building Lots		3,430		3,430		39
Other		27,593		27,593		7,271
Real Estate Construction		1,082		1,082		24
Residential Mortgage		1,609		1,609		334
Consumer and Home Equity		337		337		147
Indirect Consumer		91		91		29

Total	$	93,419	$	91,424	$	13,097

The following table presents information for loans individually evaluated for impairment as of June 30, 2010:

	June 30,
(Dollars in thousands)	2010

Average of individually impaired loans during period		62,406
Interest income recognized during impairment		1,936
Cash-basis interest income recognized		1,936

The following table presents the recorded investment in restructured, 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
June 30, 2011			Over 90 Days
			Still
(Dollars in thousands)	Restructured		Accruing		Nonaccrual

Commercial	$	382		-	$	312
Commercial Real Estate:
Land Development		2,394		-		6,844
Building Lots		-				1,417
Other		27,390		-		12,835
Real Estate Construction		-				998
Residential Mortgage		665		-		1,217
Consumer and Home Equity		70				277
Indirect Consumer		-		-		140

Total	$	30,901		-	$	24,040

			Loans Past Due
December 31, 2010			Over 90 Days
			Still
(Dollars in thousands)	Restructured		Accruing		Nonaccrual

Commercial	$	179		-	$	597
Commercial Real Estate:
Land Development		-		-		15,356
Building Lots		-				3,430
Other		3,394		-		19,939
Real Estate Construction		-				-
Residential Mortgage		306		-		2,294
Consumer and Home Equity		27				365
Indirect Consumer		-		-		188

Total	$	3,906		-	$	42,169

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

June 30, 2011	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total

Commercial	$	1,418	$	214	$	909	$	2,541	$	28,892	$	31,433
Commercial Real Estate:
Land Development		161		-		6,844		7,005		36,199		43,204
Building Lots		236		-		1,417		1,653		7,658		9,311
Other		5,526		4,864		18,465		28,855		421,930		450,785
Real Estate Construction		-		-		998		998		6,358		7,356
Residential Mortgage		674		355		2,378		3,407		153,988		157,395
Consumer and Home Equity		661		519		534		1,714		72,811		74,525
Indirect Consumer		211		78		140		429		25,310		25,739

Total	$	8,887	$	6,030	$	31,685	$	46,602	$	753,146	$	799,748

December 31, 2010	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total

Commercial	$	719	$	683	$	574	$	1,976	$	40,289	$	42,265
Commercial Real Estate:
Land Development		-		-		7,682		7,682		48,404		56,086
Building Lots		-		-		3,430		3,430		7,903		11,333
Other		2,824		10,110		16,294		29,228		461,117		490,345
Real Estate Construction		1,082		-		-		1,082		9,952		11,034
Residential Mortgage		313		962		4,386		5,661		158,314		163,975
Consumer and Home Equity		527		70		680		1,277		76,504		77,781
Indirect Consumer		386		51		188		625		28,963		29,588

Total	$	5,851	$	11,876	$	33,234	$	50,961	$	831,446	$	882,407

Troubled Debt Restructurings:

A troubled debt restructuring (“TDR”) is a situation where the Bank grants a concession to the borrower that the Bank would not otherwise have considered due to a borrower’s financial difficulties. All TDRs are considered impaired. The substantial majority of our residential mortgage and consumer TDRs involve reducing the borrower’s loan payment through a rate reduction for a set period of time based on the borrower’s ability to service the modified loan payment. The majority of our commercial and commercial real estate related TDRs involve a restructuring of loan terms such as a temporary forbearance or reduction in the payment amount to require only interest and/or extending the maturity date of the loan.

We have allocated $3.5 million and $151,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011 and December 31, 2010. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.

Credit Quality Indicators:

We categorize 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. We analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Criticized: Loans classified as criticized 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 in our 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.

Loss: Loans classified as loss are considered non-collectible and their continuance as bankable assets is not warranted.

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 included in groups of homogeneous loans.

As of June 30, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

June 30, 2011
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total

Commercial	$	-	$	24,416	$	2,915	$	3,692	$	410	$	-	$	31,433
Commercial Real Estate:
Land Development		-		23,821		5,554		13,829		-		-		43,204
Building Lots		-		7,089		568		1,654		-		-		9,311
Other		-		367,056		16,009		67,596		124		-		450,785
Real Estate Construction		-		6,358		-		998		-		-		7,356
Residential Mortgage		150,937		-		1,118		5,340		-		-		157,395
Consumer and Home Equity		72,527		-		792		1,206		-		-		74,525
Indirect Consumer		25,350		-		16		373		-		-		25,739

Total	$	248,814	$	428,740	$	26,972	$	94,688	$	534	$	-	$	799,748

December 31, 2010
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total

Commercial	$	-	$	38,036	$	2,359	$	1,412	$	458	$	-	$	42,265
Commercial Real Estate:
Land Development		-		29,769		3,422		22,895		-		-		56,086
Building Lots		-		7,903		-		3,430		-		-		11,333
Other		-		409,387		21,012		59,800		125		21		490,345
Real Estate Construction		-		9,767		-		1,267		-		-		11,034
Residential Mortgage		157,498		-		917		5,560		-		-		163,975
Consumer and Home Equity		76,086		-		599		1,072		-		24		77,781
Indirect Consumer		29,342		-		-		227		-		19		29,588

Total	$	262,926	$	494,862	$	28,309	$	95,663	$	583	$	64	$	882,407

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30, 2011 and December 31, 2010:

June 30, 2011	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer

Performing	$	155,513	$	74,178	$	25,599
Restructured & Non-accrual		1,882		347		140

Total	$	157,395	$	74,525	$	25,739

December 31, 2010	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer

Performing	$	161,375	$	77,389	$	29,400
Restructured & Non-accrual		2,600		392		188

Total	$	163,975	$	77,781	$	29,588