NOTE 5: Loans and Allowance for Loan Losses:

Loans are carried at principal amounts outstanding. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment to yield. Interest income on all loans is recorded on an accrual basis. The accrual of interest and the amortization of net loan fees are generally discontinued on loans which 1) are maintained on a cash basis because of deterioration in the financial condition of the borrower; 2) for which payment in full of principal is not expected; or 3) upon which principal or interest has been in default for a period of 90 days or more. The accrual of interest however, may continue on these loans if they are well secured, in the process of collection, and management deems it appropriate. Non-accrual loans are reviewed individually by management to determine if they should be returned to accrual status. The Company defines past due loans based on contractual payment and maturity dates.

The Company accounts for nonrefundable fees and costs associated with originating or acquiring loans by requiring that loan origination fees be recognized over the life of the related loan as an adjustment on the loan’s yield. Certain direct loan origination costs shall be recognized over the life of the related loan as a reduction of the loan’s yield.

The Company accounts for impaired loans by requiring that all loans for which it is estimated that the Company will be unable to collect all amounts due according to the terms of the loan agreement be recorded at the loan's fair value. Fair value may be determined based upon the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.

Additional accounting guidance allows the Company to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how the Company estimates interest income related to impaired loans.

When the ultimate collectability of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income and then to principal.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting, provided they are performing in accordance with their restructured terms.

Management believes that the allowance is adequate to absorb inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Management’s judgments are based on numerous assumptions about current events which management believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

The allowance is also subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests. In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at the time of their examination.

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

The following is a summary of the non-accrual loans as of June 30, 2012 and December 31, 2011.

June 30, 2012
Loans Receivable on Non-Accrual
Commercial	$	9,098
Commercial Real Estate:
Commercial Real Estate - Construction		-
Commercial Real Estate - Other		3,194,405
Consumer:
Consumer Real Estate		67,981
Consumer - Other		-
Total	$	3,271,484

December 31, 2011
Loans Receivable on Non-Accrual
Commercial	$	4,018
Commercial Real Estate:
Commercial Real Estate - Construction		-
Commercial Real Estate - Other		851,672
Consumer:
Consumer Real Estate		67,981
Consumer - Other		-
Total	$	923,671

The following is a schedule of the Bank’s delinquent loans, excluding mortgage loans held for sale, as of June 30, 2012 and December 31, 2011.

June 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	177,836		-		-		177,836		52,843,764		53,021,600		-
Commercial Real Estate:
Commercial Real Estate -Construction		-		-		-		-		3,685,093		3,685,093		-
Commercial Real Estate -Other		212,081		32,082		2,922,383		3,166,546		102,673,618		105,840,164		140,578
Consumer:
Consumer- Real Estate		29,999		-		-		29,999		43,397,931		43,427,930		-
Consumer-Other		-		10,026		12,023		22,049		4,753,359		4,775,408		12,023
Total	$	419,916		42,108		2,934,406		3,396,430		207,353,765		210,750,195		152,601

December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing
Commercial	$	50,892		-		-		50,892		55,514,633		55,565,525		-
Commercial Real Estate:
Commercial Real Estate -Construction		-		-		-		-		3,564,327		3,564,327		-
Commercial Real Estate -Other		1,268,321		-		788,167		2,056,488		104,352,133		106,408,621		282,173
Consumer:
Consumer- Real Estate		-		-		-		-		43,185,861		43,185,861		-
Consumer-Other		4,401		30,319		605		35,325		4,949,453		4,984,778		-
Total	$	1,323,614		30,319		788,772		2,142,705		211,566,407		213,709,112		282,173

As of June 30, 2012 and December 31, 2011, loans individually evaluated and considered impaired are presented in the following table:

Impaired and Restructured Loans For the Six Months Ended June 30, 2012
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investments		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	96,350	$	9,099	$	-	$	14,044	$	3,769
Commercial Real Estate		10,869,709		8,772,411		-		8,747,715		1,738,669
Consumer Real Estate		319,536		313,754		-		316,787		56,446
Consumer Other		-		-		-		-		-

Total	$	11,285,595	$	9,095,264	$	-	$	9,078,546	$	1,798,884

With an allowance recorded:
Commercial	$	1,360,535	$	1,275,462	$	1,275,462	$	1,294,481	$	140,833
Commercial Real Estate		311,000		265,857		167,782		277,250		90,249
Consumer Real Estate		822,750		819,323		345,494		819,423		317,948
Consumer Other		50,000		49,540		49,540		49,610		4,815

Total	$	2,544,285	$	2,410,182	$	1,838,278	$	2,440,764	$	553,845

Impaired and Restructured Loans For the Year Ended December 31, 2011
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investments		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial	$	83,350	$	4,018	$	-	$	8,625	$	315
Commercial Real Estate		4,289,820		4,321,755		-		4,299,045		99,046
Consumer Real Estate		319,536		315,926		-		317,776		12,596
Consumer Other		-		-		-		-		-

Total	$	4,692,706	$	4,641,699	$	-	$	4,625,446	$	111,957

With an allowance recorded:
Commercial	$	1,360,535	$	1,281,462	$	1,281,462	$	1,298,891	$	57,458
Commercial Real Estate		668,950		625,648		187,713		634,511		9,957
Consumer Real Estate		822,750		819,341		345,494		819,423		34,636
Consumer Other		50,000		49,742		49,742		49,742		-

Total	$	2,902,235	$	2,776,193	$	1,864,411	$	2,802,567	$	102,051

The following table illustrates credit risks by category and internally assigned grades at June 30, 2012 and December 31, 2011.

June 30, 2012
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer – Real Estate		Consumer – Other

Pass	$	45,531,537	$	3,213,176	$	89,428,001	$	38,103,655	$	4,085,876
Watch		3,372,468		-		2,917,880		3,165,784		325,039
OAEM		1,135,938		471,917		4,993,485		658,763		187,152
Sub-Standard		2,981,657		-		8,500,798		1,499,728		177,341
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Total	$	53,021,600	$	3,685,093	$	105,840,164	$	43,427,930	$	4,775,408

December 31, 2011
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer – Real Estate		Consumer – Other

Pass	$	48,160,256	$	3,088,190	$	93,889,871	$	38,551,256	$	4,390,391
Watch		4,000,123		476,137		4,581,885		3,312,679		214,617
OAEM		2,071,137		-		1,905,745		212,545		311,905
Sub-Standard		1,334,009		-		6,031,120		1,109,381		67,865
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-

Total	$	55,565,525	$	3,564,327	$	106,408,621	$	43,185,861	$	4,984,778

The following table sets forth the changes in the allowance and an allocation of the allowance by loan category at June 30, 2012 and December 31, 2011. The allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors described above.

June 30, 2012
	Commercial			Commercial Real Estate			Consumer Real Estate			Consumer Other			Unallocated		Total
Allowance for Loan Losses
Beginning Balance	$	1,586,510		$	420,367		$	450,338		$	91,402		$	558,267	$	3,106,884
Charge-offs		(17,152	)		(43,734	)		(26,488	)		(230	)		-		(87,604	)
Recoveries		104,968			7,229			10,000			102			-		122,299
Provisions		(240,479	)		(107,326	)		138,993			(9,850	)		418,662		200,000
Ending Balance		1,433,847			276,536			572,843			81,424			976,929		3,341,579
Ending Balances:
Individually evaluated for impairment		1,284,560			9,038,269			1,133,077			49,540			-		11,505,446
Collectively evaluated for impairment	$	51,737,040		$	100,486,988		$	42,294,853		$	4,725,868		$	-	$	199,244,749

December 31, 2011
	Commercial			Commercial Real Estate			Consumer Real Estate		Consumer Other			Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	1,502,298		$	128,334		$	218,897	$	27,200		$	1,061,859		$	2,938,588
Charge-offs		(17,943	)		(303,403	)		-		(62,368	)		-			(383,714	)
Recoveries		42,662			28,838			-		510			-			72,010
Provisions		59,493			566,598			231,441		126,060			(503,592	)		480,000
Ending Balance		1,586,510			420,367			450,338		91,402			558,267			3,106,884
Ending Balances:
Individually evaluated for impairment		1,285,480			4,947,403			1,135,267		49,742			-			7,417,892
Collectively evaluated for impairment	$	54,280,045		$	105,025,545		$	42,050,594	$	4,935,036		$	-		$	206,291,220

Restructured loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $2,514,489 and $491,153 at June 30, 2012 and December 31, 2011, respectively, and are illustrated in the following table. At June 30, 2012 and December 31, 2011, all restructured loans were performing as agreed. There was one restructured loan at December 31, 2010 in the amount of $153,015 that failed to continue to perform as agreed upon and, as a result, the loan was charged off in March 2011.

Modification
As of June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial			$		$	-
Commercial Real Estate		3	$	2,400,797	$	2,400,797
Commercial Real Estate Construction		-	$		$	-
Consumer Real Estate –Prime		1	$	113,692	$	113,692
Consumer Real Estate-Subprime		-	$	-	$	-
Consumer Other		-	$	-	$	-
Troubled Debt Restructurings That Subsequently Defaulted
Commercial		-	$	-	$	-
Commercial Real Estate		-	$	-	$	-
Commercial Real Estate Construction		-	$	-	$	-
Consumer Real Estate -Prime		-	$	-	$	-
Consumer Real Estate-Subprime		-	$	-	$	-
Consumer Other		-	$	-	$	-

Modification
As of December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial			$		$	-
Commercial Real Estate		1	$	375,323	$	375,323
Commercial Real Estate Construction		-	$	-	$	-
Consumer Real Estate –Prime		1	$	115,830	$	115,830
Consumer Real Estate-Subprime		-	$	-	$	-
Consumer Other		-	$	-	$	-
Troubled Debt Restructurings That Subsequently Defaulted
Commercial		-	$	-	$	-
Commercial Real Estate		1	$	153,015	$	153,015
Commercial Real Estate Construction		-	$	-	$	-
Consumer Real Estate -Prime		-	$	-		-
Consumer Real Estate-Subprime		-	$	-	$	-
Consumer Other		-	$	-	$	-