Note 4 - Loans and Allowance for Loan Losses

Loans at December 31, 2011 and December 31, 2010 were as follows:

	December 31, 2011						December 31, 2010
	Balance			%			Balance			%

Commercial	$	214,206,431			46.3	%	$	233,882,777			48.0	%
Commercial real estate
Construction		32,124,555			6.9	%		32,749,663			6.7	%
Other		86,289,841			18.7	%		85,894,544			17.7	%
Residential real estate
Traditional		53,985,443			11.7	%		54,236,553			11.1	%
Jumbo		27,859,610			6.0	%		25,833,656			5.3	%
Home equity		34,593,258			7.4	%		38,395,005			7.9	%
Consumer		13,767,906			3.0	%		15,979,973			3.3	%
Total loans		462,827,044			100.0	%		486,972,171			100.0	%
Net deferred loan costs (fees)		(265,870	)					(58,056	)
Allowance for loan losses		(9,408,013	)					(12,489,400	)

Net loans	$	453,153,161					$	474,424,715

The following tables summarize changes in the Company's allowance for loan losses for the periods indicated:

For the year ended December 31, 2011:

	Commercial			Commercial Real Estate			Residential Real Estate			Home Equity			Consumer			Unallocated		Total
Beginning balance 1/1/2011	$	5,790,945		$	6,183,365		$	386,992		$	77,051		$	28,711		$	22,336	$	12,489,400
Provision expense		(879,621	)		4,840,844			200,612			39,199			(20,963	)		39,929		4,220,000
Charge-offs		(1,751,096	)		(6,398,449	)		(7,033	)		(65,739	)		-			-		(8,222,317	)
Recoveries		803,050			80,188			-			26,412			11,280			-		920,930
Ending Balance 12/31/2011	$	3,963,278		$	4,705,948		$	580,571		$	76,923		$	19,028		$	62,265	$	9,408,013

For the year ended December 31	2010			2009
Beginning balance 1/1	$	11,598,389		$	10,654,879
Provision expense		4,745,000			10,735,000
Charge-offs		(4,488,982	)		(10,321,717	)
Recoveries		634,993			530,227
Ending Balance 12/31	$	12,489,400		$	11,598,389

The following tables present the fair value of the Company's loans sold by portfolio segment for the periods indicated:

For the year ended December 31, 2011:
Commercial	$	2,924,839
Commercial Real Estate		1,201,862

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

December 31, 2011	Individually evaluated for impairment		Collectively evaluated for impairment		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Commercial	$	724,605	$	3,238,673	$	3,963,278
Commercial Real Estate
Construction		1,765,000		762,094		2,527,094
Other		341,000		1,837,854		2,178,854
Residential Real Estate
Traditional		-		191,662		191,662
Jumbo		290,000		98,909		388,909
Home Equity		5,000		71,923		76,923
Consumer		-		19,028		19,028
Unallocated		-		62,265		62,265
Total	$	3,125,605	$	6,282,408	$	9,408,013

Loans:
Commercial	$	8,818,710	$	206,084,106	$	214,902,816
Commercial Real Estate
Construction		5,742,203		26,379,914		32,122,117
Other		1,468,978		84,932,468		86,401,446
Residential Real Estate
Traditional		-		54,112,445		54,112,445
Jumbo		1,214,846		26,710,303		27,925,149
Home Equity		340,313		34,477,182		34,817,495
Consumer		-		13,972,956		13,972,956
Unallocated		-		-		-
Total	$	17,585,050	$	446,669,374	$	464,254,424

December 31, 2010	Individually evaluated for impairment		Collectively evaluated for impairment		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Commercial	$	794,796	$	4,996,149	$	5,790,945
Commercial Real Estate
Construction		2,547,000		664,665		3,211,665
Other		445,000		2,526,700		2,971,700
Residential Real Estate
Traditional		-		262,134		262,134
Jumbo		-		124,858		124,858
Home Equity		-		77,051		77,051
Consumer		-		28,711		28,711
Unallocated		-		22,336		22,336
Total	$	3,786,796	$	8,702,604	$	12,489,400

Loans:
Commercial	$	15,793,811	$	218,713,379	$	234,507,190
Commercial Real Estate
Construction		7,537,656		25,289,702		32,827,358
Other		5,853,845		80,188,113		86,041,958
Residential Real Estate
Traditional		-		54,373,838		54,373,838
Jumbo		-		25,899,046		25,899,046
Home Equity		-		38,620,639		38,620,639
Consumer		-		16,186,219		16,186,219
Unallocated		-		-		-
Total	$	29,185,312	$	459,270,936	$	488,456,248

The following tables present loans individually evaluated for impairment by class of loans as of December 31, 2011 and December 31, 2010:

December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	5,580,204	$	5,485,888	$	-
Commercial Real Estate
Construction		2,133,547		2,134,090		-
Other		267,610		267,509		-
Residential Real Estate
Traditional		-		-		-
Jumbo		-		-		-
Home Equity		-		-		-
Consumer		-		-		-
		7,981,361		7,887,487		-
With related allowance recorded:
Commercial		3,328,648		3,332,822		724,605
Commercial Real Estate
Construction		3,597,546		3,608,113		1,765,000
Other		1,198,072		1,201,469		341,000
Residential Real Estate
Traditional		-		-		-
Jumbo		1,174,022		1,214,846		290,000
Home Equity		337,833		340,313		5,000
Consumer		-		-		-
		9,636,121		9,697,563		3,125,605

	$	17,617,482	$	17,585,050	$	3,125,605

December 31, 2010	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	10,842,732	$	10,865,175	$	-
Commercial Real Estate
Construction		1,379,094		1,379,638		-
Other		2,208,130		2,208,205		-
Residential Real Estate
Traditional		-		-		-
Jumbo		-		-		-
Home Equity		-		-		-
Consumer		-		-		-
		14,429,956		14,453,018		-
With related allowance recorded:
Commercial		4,910,918		4,928,636		794,796
Commercial Real Estate
Construction		6,156,859		6,158,018		2,547,000
Other		3,640,193		3,645,640		445,000
Residential Real Estate
Traditional		-		-		-
Jumbo		-		-		-
Home Equity		-		-		-
Consumer		-		-		-
		14,707,970		14,732,294		3,786,796

	$	29,137,926	$	29,185,312	$	3,786,796

The following tables present the average impaired loans, interest recognized on impaired loans, and cash-basis interest income recognized on impaired loans for years ended December 31, 2011 and December 31, 2010:

	For the year ended	December 31, 2011

Average impaired loans during the period:
Commercial		$	10,380,885
Commercial Real Estate
Construction			6,946,998
Other			6,394,974
Residential Real Estate
Traditional			-
Jumbo			234,804
Home Equity			67,567

Interest recognized on impaired loans:
Commercial			448,639
Commercial Real Estate
Construction			373,517
Other			228,811
Residential Real Estate
Traditional			-
Jumbo			20,460
Home Equity			2,499

Cash-basis interest income recognized:
Commercial			436,937
Commercial Real Estate
Construction			354,967
Other			216,200
Residential Real Estate
Traditional			-
Jumbo			-
Home Equity			2,499

	For the year ended	December 31, 2010

Average impaired loans during the period		$	24,344,233

Interest recognized on impaired loans			1,107,073

Cash-basis interest income recognized			1,070,328

	For the year ended	December 31, 2009

Average impaired loans during the period		$	25,424,530

Interest recognized on impaired loans			938,621

Cash-basis interest income recognized			938,621

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 December 31, 2011 and December 31, 2010:

December 31, 2011	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Commercial	$	5,018,472	$	-
Commercial Real Estate
Construction		2,134,090		285,123
Other		977,324		149,409
Residential Real Estate
Traditional		520,998		169,168
Jumbo		-		1,214,846
Home Equity		29,961		195,459
Consumer		-		41,473
Total	$	8,680,845	$	2,055,478

December 31, 2010	Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Commercial	$	6,413,675	$	1,961,597
Commercial Real Estate
Construction		3,476,643		482,512
Other		2,208,205		-
Residential Real Estate
Traditional		825,432		229,213
Jumbo		-		-
Home Equity		17,292		179
Consumer		-		27,843
Total	$	12,941,247	$	2,701,344

The following tables present the aging of the recorded investment in past due loans as of December 31, 2011 and December 31, 2010:

December 31, 2011	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Loans Not Past Due
Commercial	$	1,633,467	$	3,804,642	$	2,396,430		7,834,539	$	207,068,277
Commercial Real Estate
Construction		-		63,517		1,280,115		1,343,632		30,778,485
Other		-		-		1,126,733		1,126,733		85,274,713
Residential Real Estate
Traditional		519,241		81,550		690,166		1,290,957		52,821,488
Jumbo		-		-		1,214,846		1,214,846		26,710,303
Home Equity		742,025		-		225,420		967,445		33,850,050
Consumer		261,922		47,402		41,473		350,797		13,622,159
Total	$	3,156,655	$	3,997,111	$	6,975,183	$	14,128,949	$	450,125,475

December 31, 2010	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total Loans Not Past Due
Commercial	$	3,377,433	$	444,713	$	5,571,355		9,393,501	$	225,113,689
Commercial Real Estate
Construction		3,487,072		-		1,862,150		5,349,222		27,478,136
Other		-		239,392		2,208,205		2,447,597		83,594,361
Residential Real Estate
Traditional		738,767		121,252		1,054,645		1,914,664		52,459,174
Jumbo		1,183,388		-		-		1,183,388		24,715,658
Home Equity		48,433		-		17,471		65,904		38,554,735
Consumer		250,040		95,625		27,843		373,508		15,812,711
Total	$	9,085,133	$	900,982	$	10,741,669	$	20,727,784	$	467,728,464

Troubled Debt Restructurings:

The Company has allocated $1.0 million and $485,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011 and December 31, 2010. The Company has committed to lend additional amounts totaling up to $51,727 and $8,962 as of December 31, 2011 and December 31, 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

During the year ending December 31, 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included allowing an interest only period for twelve months and/or reducing the interest rate.

The following tables present the recorded investment in loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2011:

	December 31, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment*		Post-Modification Outstanding Recorded Investment*
Commercial		1	$	390,652	$	390,652
Commercial Real Estate:
Construction		2		1,363,790		1,363,790
Other		2		488,328		488,328

*Note: Pre-modification and post-modification recorded investment balances above represent balances prior to the modification and the balance as a result of the modification.

The troubled debt restructurings described above increased the allowance for loan losses by $1.0 million and resulted in no charge offs during the year ending December 31, 2011.

The following table presents the recorded investment by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ending December 31, 2011:

	December 31, 2011
	Number of Loans		Recorded Investment
Commercial		-	$	-
Commercial Real Estate:
Construction		2		1,321,536
Other		2		491,654

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $1.0 million and resulted in no charge offs during the year ending December 31, 2011.

The terms of certain other loans were modified during the year ending December 31, 2011 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2011 of $62.9 million for the year ending. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

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 the 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 analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly 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 included in groups of homogeneous loans. As of December 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of the recorded investment of loans by class of loans is as follows:

December 31, 2011	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial	$	-	$	187,479,747	$	16,599,802	$	5,804,795	$	5,018,472
Commercial Real Estate
Construction		-		23,690,072		2,579,325		3,718,630		2,134,090
Other		-		82,262,782		2,134,424		1,026,916		977,324
Residential Real Estate
Traditional		54,112,445		-		-		-		-
Jumbo		26,710,303		-		-		1,214,846		-
Home Equity		34,477,182		-		-		340,313		-
Consumer		13,972,956		-		-		-		-
Total	$	129,272,886	$	293,432,601	$	21,313,551	$	12,105,500	$	8,129,886

December 31, 2010	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial	$	-	$	197,230,795	$	15,507,296	$	15,459,634	$	6,309,465
Commercial Real Estate
Construction		-		13,900,165		3,104,775		12,345,774		3,476,643
Other		-		70,983,944		8,485,742		4,364,067		2,208,205
Residential Real Estate
Traditional		54,373,838		-		-		-		-
Jumbo		25,899,046		-		-		-		-
Home Equity		38,620,639		-		-		-		-
Consumer		16,186,219		-		-		-		-
Total	$	135,079,742	$	282,114,904	$	27,097,813	$	32,169,475	$	11,994,313

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential, home equity, and consumer classes, the Company also evaluates the credit quality based on the aging status of the loan, which was previously presented, and by activity. The following table presents the recorded investment in residential, home equity, and consumer loans based on aging status as of December 31, 2011 and December 31, 2010:

December 31, 2011	Not Past Due		30 - 89 DaysPast Due		Greater than 90 Days Past Due Still Accruing		Nonaccrual
Residential Real Estate
Traditional	$	52,821,488	$	600,791	$	169,168	$	520,998
Jumbo		26,710,303		-		1,214,846		-
Home Equity		33,850,050		742,025		195,459		29,961
Consumer		13,622,159		309,324		41,473		-
Total	$	127,004,000	$	1,652,140	$	1,620,946	$	550,959

December 31, 2010	Not Past Due		30 - 89 Days Past Due		Greater than 90 Days Past Due Still Accruing		Nonaccrual
Residential Real Estate
Traditional	$	52,459,174	$	860,019	$	229,213	$	825,432
Jumbo		24,715,658		1,183,388		-		-
Home Equity		38,554,735		48,433		179		17,292
Consumer		15,812,711		345,665		27,843		-
Total	$	131,542,278	$	2,437,505	$	257,235	$	842,724

The following table summarizes the Company's nonperforming assets at the dates indicated:

	December 31, 2011			December 31, 2010

Loans past due over 90 days and still accruing	$	2,007,098		$	2,688,135
Nonperforming restructured loans		1,804,724			7,501,958
Nonaccrual loans		8,682,161			12,939,331
Total nonperforming loans	$	12,493,983		$	23,129,424
Other real estate owned		3,129,231			4,284,263
Impaired Securities		331,464			421,529
Total nonperforming assets	$	15,954,678		$	27,835,216

Nonperforming assets to total assets		2.28	%		4.22	%

Nonperforming loans to total loans		2.70	%		4.75	%

Note:Loan balances disclosed in the chart above are reported at unpaid principal.