Note 4. Loans and Allowance for Loan Losses

At June 30, 2011 and December 31, 2010, loans are summarized as follows (in thousands):

	June 30,			December 31,
	2011			2010
Commercial real estate-mortgage:
Owner-occupied	$	63,801		$	64,971
All other		62,060			64,060
Consumer real estate-mortgage		68,030			71,878
Construction and land development		29,637			29,848
Commercial and industrial		43,673			51,160
Consumer and other		2,970			3,330
Total loans		270,171			285,247
Less: Allowance for loan losses		(6,814	)		(9,132	)

Loans, net	$	263,357		$	276,115

The composition of loans by primary loan classification as well as impaired and performing loan status at June 30, 2011 and December 31, 2010 is summarized in the tables below (dollar amounts in thousands):

June 30, 2011	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	114,475	$	59,008	$	28,262	$	41,952	$	2,970	$	246,667
Impaired loans		11,386		9,022		1,375		1,721		-		23,504
Total	$	125,861	$	68,030	$	29,637	$	43,673	$	2,970	$	270,171

December 31, 2010	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	119,084	$	61,455	$	27,774	$	50,492	$	3,279	$	262,084
Impaired loans		9,947		10,423		2,074		668		51		23,163
Total	$	129,031	$	71,878	$	29,848	$	51,160	$	3,330	$	285,247

The following tables show the allowance allocation by loan classification for impaired and performing loans as of June 30, 2011 and December 31, 2010 (dollar amounts in thousands):

June 30, 2011	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
Allowance related to:	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	1,983	$	1,079	$	559	$	678	$	62	$	4,361
Impaired loans		1,192		851		-		410		-		2,453
Total	$	3,175	$	1,930	$	559	$	1,088	$	62	$	6,814

December 31, 2010	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
Allowance related to:	Mortgage		Mortgage		Development		Industrial		and Other		Total
Performing loans	$	887	$	691	$	3,178	$	588	$	48	$	5,392
Impaired loans		906		2,420		60		337		17		3,740
Total	$	1,793	$	3,111	$	3,238	$	925	$	65	$	9,132

The following tables detail the changes in the allowance for loan losses for the six month period ending June 30, 2011 and year ending December 31, 2010 by loan classification (dollars in thousands):

June 30, 2011	Commercial			Consumer			Construction			Commercial
	Real Estate-			Real Estate-			and Land			and			Consumer
	Mortgage			Mortgage			Development			Industrial			and Other			Total
Beginning balance	$	1,793		$	3,111		$	3,238		$	925		$	65		$	9,132
Charged-off loans		(1,188	)		(1,429	)		(60	)		(21	)		(9	)		(2,707	)
Recovery of charge-offs		240			12			24			70			13			359
Provision for loan losses		2,330			236			(2,643	)		114			(7	)		30
Ending balance	$	3,175		$	1,930		$	559		$	1,088		$	62		$	6,814

December 31, 2010	Commercial			Consumer			Construction			Commercial
	Real Estate-			Real Estate-			and Land			And			Consumer
	Mortgage			Mortgage			Development			Industrial			and Other			Total
Beginning balance	$	1,189		$	719		$	3,179		$	786		$	32		$	5,905
Charged-off loans		(2,309	)		(562	)		(1,260	)		(443	)		(114	)		(4,688	)
Recovery of charge-offs		213			54			19			282			56			624
Provision for loan losses		2,700			2,900			1,300			300			91			7,291
Ending balance	$	1,793		$	3,111		$	3,238		$	925		$	65		$	9,132

Credit quality indicators:

Federal regulations require us to review and classify our assets on a regular basis. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses.

The following table outlines the amount of each loan classification and the amount categorized into each risk rating as of June 30, 2011 and December 31, 2010 (amounts in thousands):

June 30, 2011	Commercial		Consumer		Construction		Commercial
	Real estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Pass	$	101,708	$	51,008	$	25,489	$	36,040	$	2,893	$	223,138
Special mention		11,627		3,555		1,825		5,603		27		22,637
Substandard		1,140		4,445		948		309		50		6,892
Substandard-impaired		8,852		9,022		1,375		1,721		-		20,970
Doubtful		2,534		-		-		-		-		2,534
	$	125,861	$	68,030	$	29,637	$	43,673	$	2,970	$	270,171

December 31, 2010	Commercial		Consumer		Construction		Commercial
	Real Estate-		Real Estate-		and Land		and		Consumer
	Mortgage		Mortgage		Development		Industrial		and Other		Total
Pass	$	97,692	$	49,974	$	24,401	$	41,963	$	3,215	$	217,245
Special mention		19,289		3,786		2,121		7,405		54		32,655
Substandard		2,103		7,695		1,252		1,124		10		12,184
Substandard-impaired		9,947		10,423		2,074		668		51		23,163
	$	129,031	$	71,878	$	29,848	$	51,160	$	3,330	$	285,247

After the Bank’s independent loan review department completes the loan grade assignment, a loan impairment analysis is performed on loans graded substandard or worse. The following tables present summary information pertaining to impaired loans by loan classification as of June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011	Unpaid				Average
	Principal		Related		Recorded
	Balance		Allowance		Investment
Impaired loans with no recorded allowance
Commercial real estate – mortgage	$	5,411	$	-	$	3,591
Consumer real estate – mortgage		5,380		-		4,612
Construction and land development		1,375		-		1,056
Commercial and industrial		1,180		-		938
Consumer and other		-		-		-
Total	$	13,346	$	-	$	10,197

Impaired loans with a recorded allowance
Commercial real estate – mortgage	$	5,975	$	1,192	$	6,001
Consumer real estate – mortgage		3,642		851		6,286
Construction and land development		-		-		365
Commercial and industrial		541		410		604
Consumer and other		-		-		155
Total	$	10,158	$	2,453	$	13,411

Total impaired loans	$	23,504	$	2,453	$	23,608

December 31, 2010	Unpaid				Average
	Principal		Related		Recorded
	Balance		Allowance		Investment
Impaired loans with no recorded allowance
Commercial real estate – mortgage	$	1,663	$	-	$	2,747
Consumer real estate – mortgage		998		-		776
Construction and land development		1,793		-		1,526
Commercial and industrial		70		-		782
Consumer and other		2		-		1
Total	$	4,526	$	-	$	5,832

Impaired loans with a recorded allowance
Commercial real estate – mortgage	$	8,284	$	906	$	8,494
Consumer real estate – mortgage		9,425		2,420		8,968
Construction and land development		281		60		2,674
Commercial and industrial		598		337		1,060
Consumer and other		49		17		178
Total	$	18,637	$	3,740	$	21,374

Total impaired loans	$	23,163	$	3,740	$	27,206

Interest income recognized on impaired loans was approximately $643,000 and $943,000 for the six month ending June 30, 2011 and the year ending December 31, 2010, respectively. There was no interest income recognized on a cash basis on impaired loans during these periods.

Impaired loans also include loans that the Bank may elect to formally restructure due to the weakening credit status of a borrower such that the restructuring may facilitate a repayment plan that minimizes the potential losses, if any, that the Bank may have to otherwise incur. These loans are classified as impaired loans. At June 30, 2011 and December 31, 2010, there were approximately $1.8 million and $948 thousand, respectively, of accruing restructured loans that remain in a performing status.

The following tables present an aged analysis of past due loans as of June 30, 2011 and December 31, 2010 (dollars in thousands):

June 30, 2011	30-89 Days		Past Due 90
	Past Due and		Days or More				Total		Current		Total
	Accruing		and Accruing		Nonaccrual		Past Due		Loans		Loans
Commercial real estate:
Owner-occupied	$	567	$	-	$	2,727	$	3,394	$	60,507	$	63,801
All other		147		-		843		990		61,070		62,060
Consumer real estate-mortgage		1,010		-		3,122		4,132		63,898		68,030
Construction and land development		140		-		428		568		29,069		29,637
Commercial and industrial		170		-		76		141		43,532		43,673
Consumer and other		12		-		37		49		2,921		2,970
Total	$	2,046	$	-	$	7,233	$	9,174	$	260,997	$	270,171

December 31, 2010	30-89 Days		Past Due 90
	Past Due and		Days or More				Total		Current		Total
	Accruing		and Accruing		Nonaccrual		Past Due		Loans		Loans
Commercial real estate:
Owner-occupied	$	985	$	-	$	618	$	1,603	$	63,368	$	64,971
All other		203		-		7,808		8,011		56,049		64,060
Consumer real estate-mortgage		631		-		5,114		5,745		66,133		71,878
Construction and land development		317		-		-		317		29,531		29,848
Commercial and industrial		116		-		75		191		50,969		51,160
Consumer and other		54		-		18		72		3,258		3,330
Total	$	2,306	$	-	$	13,633	$	15,939	$	269,308	$	285,247