Note 3.

Loans and Allowance for Loan Losses

Analysis of the allowance for loan losses follows:


	Nine Months Ended September 30, 2010
Balance at 12/31/2009	$	5,481,963
Provision for loan losses		1,450,000
Recoveries of loans previously charged-off		83,005
Loan losses charged-off		(1,284,456	)
Balance at 9/30/2010	$	5,730,512

	September 30, 2010
Impaired loans for which an allowance has been provided	$	965,317
Impaired loans for which no allowance has been provided		547,115
	$	1,512,432

Allowance provided for impaired loans, included in the allowance for loan losses	$	764,800

	Nine Months Ended September 30, 2010			Three Months Ended September 30, 2010
Average balance in impaired loans	$	1,588,991		$	1,558,044

Interest income recognized on impaired loans	$	46,806		$	13,884

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	As of December 31, 2010 and for the Nine Months Ended September 30, 2011
	Commercial and Industrial			Commercial Real Estate			Commercial Construction		Consumer			Residential Real Estate			Home Equity Line of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance at 12/31/2010	$	792,796		$	2,320,692		$	150,513	$	314,580		$	1,622,830		$	1,105,782				$	6,307,193
Charge-offs		(75,000	)		(248,194	)		-		(48,235	)		(358,705	)		(363,237	)				(1,093,371	)
Recoveries		-			159,224			-		35,395			-			3,182					197,801
Provision		131,844			1,070,911			6,210		(271,603	)		72,603			(15,334	)	$	476,203		1,470,834
Ending balance at 9/30/2011	$	849,640		$	3,302,633		$	156,723	$	30,137		$	1,336,728		$	730,393		$	476,203	$	6,882,457

Ending balances individually evaluated for impairment	$	537,400		$	-		$	-	$	-		$	-		$	-		$	-	$	537,400

Ending balances collectively evaluated for impairment	$	312,240		$	3,302,633		$	156,723	$	30,137		$	1,336,728		$	730,393		$	476,203	$	6,345,057

Loans Receivable
Individually evaluated for impairment	$	819,646		$	605,517		$	-	$	-		$	-		$	-				$	1,425,163
Collectively evaluated for impairment		28,998,802			214,743,618			27,389,565		7,031,226			136,137,440			51,022,985					465,323,636
Ending balance at 12/31/2010	$	29,818,448		$	215,349,135		$	27,389,565	$	7,031,226		$	136,137,440		$	51,022,985				$	466,748,799

Individually evaluated for impairment	$	1,038,700		$	580,321		$	-	$	-		$	719,325		$	-				$	2,338,346
Collectively evaluated for impairment		27,271,028			204,337,960			30,358,021		5,691,177			136,159,195			48,690,413					452,507,794
Ending balance at 9/30/2011	$	28,309,728		$	204,918,281		$	30,358,021	$	5,691,177		$	136,878,520		$	48,690,413				$	454,846,140

Credit Quality Indicators

	As of September 30, 2011
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	20,418,765	$	150,209,812	$	30,358,021	$	5,622,251	$	129,720,531	$	45,776,758	$	382,106,138
Special mention		2,549,391		26,047,001		-		46,948		2,886,147		1,139,465		32,668,952
Substandard		5,025,532		28,591,468		-		21,978		4,031,763		1,646,239		39,316,980
Doubtful		316,040		70,000		-		-		240,079		127,951		754,070
Loss		-		-		-		-		-		-		-
Total	$	28,309,728	$	204,918,281	$	30,358,021	$	5,691,177	$	136,878,520	$	48,690,413	$	454,846,140

	As of December 31, 2010
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	24,489,238	$	160,944,161	$	22,854,565	$	6,935,003	$	129,087,024	$	46,551,709	$	390,861,700
Special mention		3,118,443		41,077,145		4,535,000		59,602		2,834,248		1,839,000		53,463,438
Substandard		1,923,445		13,327,829		-		36,621		3,880,454		1,986,196		21,154,545
Doubtful		287,322		-		-		-		335,714		646,080		1,269,116
Loss		-		-		-		-		-		-		-
Total	$	29,818,448	$	215,349,135	$	27,389,565	$	7,031,226	$	136,137,440	$	51,022,985	$	466,748,799

Age Analysis of Past Due Loans Receivable

	As of September 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and Accruing		Nonaccruals
Commercial and industrial	$	827,991	$	411,817	$	588,683	$	1,828,491	$	26,481,237	$	28,309,728	$	-	$	833,224
Commercial real estate		2,115,897		1,483,001		510,321		4,109,219		200,809,062		204,918,281		-		510,321
Commercial construction		-		-		-		-		30,358,021		30,358,021		-		-
Consumer		67,482		14,211		33,639		115,332		5,575,845		5,691,177		5,118		105,108
Residential real estate		1,100,418		1,029,816		1,182,311		3,312,545		135,616,755		136,878,520		-		2,246,304
Home equity line of credit		422,653		427,973		276,556		1,127,182		47,563,231		48,690,413		-		804,262
Total	$	4,534,441	$	3,366,818	$	2,591,510	$	10,492,769	$	446,404,151	$	454,846,140	$	5,118	$	4,499,219

	As of December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and Accruing		Nonaccruals
Commercial and industrial	$	84,131	$	98,475	$	95,696	$	278,302	$	29,540,146	$	29,818,448	$	75,102	$	368,771
Commercial real estate		427,995		-		187,490		615,485		214,733,650		215,349,135		187,490		312,672
Commercial construction		-		-		-		-		27,389,565		27,389,565		-		-
Consumer		100,219		-		-		100,219		6,931,007		7,031,226		-		12,197
Residential real estate		1,208,344		551,353		502,119		2,261,816		133,875,624		136,137,440		-		769,000
Home equity line of credit		363,641		351,792		612,018		1,327,451		49,695,534		51,022,985		-		646,080
Total	$	2,184,330	$	1,001,620	$	1,397,323	$	4,583,273	$	462,165,526	$	466,748,799	$	262,592	$	2,108,720

Impaired Loans Receivable

	September 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	400,362	$	400,362	$	-	$	442,169	$	13,535
Commercial real estate		580,321		580,321		-		622,853		15,212
Commercial construction		-		-		-		-		-
Residential real estate		719,325		719,325		-		719,325		-
With an allowance recorded
Commercial and industrial		638,338		638,338		537,400		644,673		8,989
Commercial real estate		-		-		-		-		-
Commercial construction		-		-		-		-		-
Residential real estate		-		-		-		-		-
Total
Commercial and industrial		1,038,700		1,038,700		537,400		1,086,842		22,524
Commercial real estate		580,321		580,321		-		622,853		15,212
Commercial construction		-		-		-		-		-
Residential real estate		719,325		719,325		-		719,325		-
Total	$	2,338,346	$	2,338,346	$	537,400	$	2,429,020	$	37,736

	December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	133,689	$	133,689	$	-	$	167,891	$	3,317
Commercial real estate		312,672		312,672		-		333,554		-
Commercial construction		-		-		-		-		-

With an allowance recorded:
Commercial and industrial		829,092		829,092		641,900		856,290		46,044
Commercial real estate		149,710		149,710		148,800		150,345		8,454
Commercial construction		-		-		-		-		-

Total:
Commercial and industrial		962,781		962,781		641,900		1,024,181		49,361
Commercial real estate		462,382		462,382		148,800		483,899		8,454
Commercial construction		-		-		-		-		-
Total	$	1,425,163	$	1,425,163	$	790,700	$	1,508,080	$	57,815

The average recorded investment in impaired loans for the three months ended September 30, 2011 was $2,395,444 and the interest income recognized on impaired loans during the three months was $4,896.

No additional funds are committed to be advanced in connection with impaired loans.

Under authoritative accounting guidance, the above impaired loan disclosure does not exclude any commercial non-accrual loans at September 30, 2011 and 2010. Loans past due 90 days or more and still accruing interest at September 30, 2011 totaled $5,000, $263,000 at December 31, 2010, compared to $916,000 at September 30, 2010.

Troubled Debt Restructurings

	For the Three Months Ended September 30, 2011						For the Nine Months Ended September 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Commercial and industrial		-	$	-	$	-		3	$	448,570	$	448,570
Commercial real estate		-		-		-		-		-		-
Commercial construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-
Home equity line of credit		-		-		-		-		-		-

Troubled Debt Restructurings That Subsequently Defaulted
Commercial and industrial		-	$	-	$	-		-	$	-	$	-
Commercial real estate		-		-		-		-		-		-
Commercial construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Residential real estate		1		719,325		719,325		1		719,325		719,325
Home equity line of credit		-		-		-		-		-		-

In the third quarter of 2011, the Company adopted the provisions of ASU No. 2011-02, A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU No. 2011-02). As a result of adopting the amendments in ASU No. 2011-02, the Company reassessed terms and conditions to customers on restructured loans that had been completed in the past several months. Based on this reassessment, the Company determined that there were four loans totaling $1,142,161 at September 30, 2011 which were classified as troubled debt restructurings. Upon identifying these receivables as troubled debt restructurings, the Company identified them as impaired under the guidance in Section 310-10-35.

Non-performing Assets and Loans Contractually Past Due

Non-performing Assets, Restructured Loans Still Accruing, and Loans Contractually Past Due

(In thousands except as noted)	September 30, 2011			December 31, 2010			September 30, 2010
Non-accrual loans	$	4,499		$	2,109		$	2,070
Other real estate owned		3,614			2,821			2,821
Other repossessed assets owned		1			21			21
Non-performing corporate bond investments, at fair value		276			552			1,333
Total non-performing assets		8,390			5,503			6,245
Restructured loans still accruing		178			-			-
Loans past due 90 or more days and still accruing		5			263			916
Total non-performing and other risk assets	$	8,573		$	5,766		$	7,161

Allowance for loan losses to total loans		1.51	%		1.35	%		1.25	%
Non-accrual loans to total loans		0.99	%		0.45	%		0.44	%
Allowance for loan losses to non-accrual loans		152.97	%		299.10	%		276.84	%
Total non-accrual loans and restructured loans still accruing to total loans		1.03	%		0.45	%		0.44	%
Allowance for loan losses to non-accrual loans and restructured loans still accruing		147.15	%		299.10	%		276.84	%
Total non-performing and other risk assets to total assets		1.42	%		0.96	%		1.15	%

Restructured loans on non-accrual status are included with non-accrual loans and not with restructured loans in the above table. There were two loans totaling $964,000 at September 30, 2011, and one loan totaling $255,000 at December 31, 2010, that were both restructured and on non-accrual status. Restructured loans are included in the specific reserve calculation in the allowance for loan losses.

Authoritative accounting guidance requires that the impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. Authoritative accounting guidance also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans.

A loan is considered impaired when it is probable that the Bank will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and the current economic conditions. A performing loan may be considered impaired if the factors above indicate a need for impairment. A loan on non-accrual status may not be impaired if it is in the process of collection or if the shortfall in payment is insignificant. A delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payments generally is considered “insignificant” and would not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired loans under authoritative accounting guidance. As is the case for all loans, charge-offs for impaired loans occur when the loan or portion of the loan is determined to be uncollectible.

At September 30, 2011, there were $33.6 million of commercial loans classified as substandard which were deemed not to be impaired.