Note 3.

Loans and Allowance for Loan Losses

Analysis of the allowance for loan losses follows:

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	As of and for the Period Ended December 31, 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		(599,320	)		-		-		(60,251	)		(596,607	)		(471,752	)				(1,727,930	)
Recoveries		11,750			160,724		-		39,863			-			3,382					215,719
Provision		589,421			417,368		44,863		(262,913	)		558,054			60,423		$	526,122		1,933,338
Ending balance at 12/31/2011	$	794,647		$	2,898,784	$	195,376	$	31,279		$	1,584,277		$	697,835		$	526,122	$	6,728,320

Ending balances individually evaluated for impairment	$	434,844		$	-	$	-	$	-		$	207,700		$	37,000		$	-	$	679,544

Ending balances collectively evaluated for impairment	$	359,803		$	2,898,784	$	195,376	$	31,279		$	1,376,577		$	660,835		$	526,122	$	6,048,776

Loans Receivable
Individually evaluated for impairment	$	1,029,765		$	4,455,999	$	-	$	-		$	3,324,388		$	564,996				$	9,375,148
Collectively evaluated for impairment		28,030,939			196,964,153		38,111,739		5,451,186			135,721,739			45,158,947					449,438,703
Ending balance at 12/31/2011	$	29,060,704		$	201,420,152	$	38,111,739	$	5,451,186		$	139,046,127		$	45,723,943				$	458,813,851

	As of and for the Period Ended December 31
	2010			2009
Balance at beginning of year	$	5,481,963		$	4,779,662
Provision for loan losses		2,075,000			1,710,000
Recoveries of loans previously charged-off		94,859			81,106
Loan losses charged-off		(1,344,629	)		(1,088,805	)
Balance at end of year	$	6,307,193		$	5,481,963

Impaired loans for which an allowance has been provided	$	978,802		$	3,213,516
Impaired loans for which no allowance has been provided		446,361			175,429
	$	1,425,163		$	3,388,945

Allowance provided for impaired loans, included in the allowance for loan losses	$	790,700		$	1,163,072

Average balance in impaired loans	$	1,508,082		$	3,631,937

Credit Quality Indicators

	As of December 31, 2011
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	20,794,642	$	149,140,329	$	38,111,739	$	5,289,040	$	128,181,706	$	42,532,255	$	384,049,711
Special mention		2,901,436		27,414,713		-		82,624		3,422,104		1,067,145		34,888,022
Substandard		4,814,459		24,795,110		-		79,522		6,261,650		2,013,489		37,964,230
Doubtful		550,167		70,000		-		-		1,180,667		111,054		1,911,888
Loss		-		-		-		-		-		-		-
Total	$	29,060,704	$	201,420,152	$	38,111,739	$	5,451,186	$	139,046,127	$	45,723,943	$	458,813,851

	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		-		-		-		355,714		646,080		1,289,116
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 December 31, 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		Non-accruals
Commercial and industrial	$	216,059	$	164,011	$	441,960	$	822,030	$	28,238,674	$	29,060,704	$	-	$	986,927
Commercial real estate		1,655,903		946,185		252,490		2,854,579		198,565,573		201,420,152		-		252,490
Commercial construction		371,235		-		-		371,235		37,740,504		38,111,739		-		-
Consumer		139,389		29,398		17,525		186,311		5,264,875		5,451,186		-		3,707
Residential real estate		1,463,022		992,914		1,683,649		4,139,585		134,906,542		139,046,127		101,347		2,928,567
Home equity line of credit		348,105		150,031		53,942		552,078		45,171,865		45,723,943		-		450,248
Total	$	4,193,713	$	2,282,539	$	2,449,566	$	8,925,818	$	449,888,033	$	458,813,851	$	101,347	$	4,621,939

	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		Non-accruals
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

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	345,763	$	345,763	$	-	$	363,522	$	16,884
Commercial real estate		4,455,998		4,455,998		-		4,516,083		377,074
Commercial construction		-		-		-		-		-
Residential real estate		2,038,951		2,038,951				2,082,239		40,409

With an allowance recorded
Commercial and industrial		684,002		684,002		434,844		728,455		19,742
Commercial real estate		-		-		-		-		-
Commercial construction		-		-		-		-		-
Residential real estate		1,850,434		1,850,434		244,700		1,907,718		52,879

Total
Commercial and industrial		1,029,765		1,029,765		434,844		1,091,977		36,626
Commercial real estate		4,455,998		4,455,998		-		4,516,083		377,074
Commercial construction		-		-		-		-		-
Residential real estate		3,889,385		3,889,385		244,700		3,989,957		93,288
Total	$	9,375,148	$	9,375,148	$	679,544	$	9,598,017	$	506,988

	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

At December 31, 2011, there were $24.7 million of commercial loans classified as substandard which were deemed not to be impaired. Impaired loans totaled $9.4 million at December 31, 2011, representing an increase of $8.0 million from the year earlier. Most of the increase was due to the addition of three commercial loans to a single borrower. These loans are secured with real estate and are 57% guaranteed through the Small Business Administration and U.S. Department of Agriculture. The remaining increase in impaired loan balances was due to the addition of 13 commercial loans and 12 residential real estate loans with average balances of $56,000 and $227,000, respectively. Approximately $9.0 million of loans classified as impaired at December 31, 2011 were collateralized by commercial buildings, residential real estate, or land.

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

Troubled Debt Restructurings

	December 31, 2011					December 31, 2010
	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	2	$	435,829	$	435,829	1	$	255,000	$	250,000
Commercial real estate	-		-		-	-		-		-
Commercial construction	-		-		-	-		-		-
Consumer	-		-		-	-		-		-
Residential real estate	2		1,168,014		1,168,014	-		-		-
Home equity line of credit	-		-		-	-		-		-

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

In the third quarter of 2011, the Company adopted the provisions of ASU 2011-02. As a result of adopting the amendments in ASU No. 2011-02, the Company determined that there were four loans totaling $1,604,000 at December 31, 2011 which were classified as TDRs. Upon identifying these receivables as troubled debt restructurings, the Company identified them as impaired under the guidance in Section 310-10-35.

Two of the loans totaling $436,000 are commercial and industrial loans and secured by business assets and two loans totaling $1,168,000 and are secured by residential real estate. At December 31, 2011, all four TDRs were on non-accrual status, although two totaling $691,000 were current and performing in accordance with the modified terms. The other two loans totaling $912,000 were not performing in accordance with the modified terms, and an appropriate specific reserve had been established.

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

	Years ended December 31,
(In thousands except as noted)	2011			2010			2009
Non-accrual loans	$	4,621		$	2,109		$	3,410
Other real estate owned		1,776			2,821			2,480
Other repossessed assets owned		15			21			54
Non-performing corporate bond investments, at fair value		335			552			1,126
Total non-performing assets		6,747			5,503			7,070
Restructured loans still accruing		-			-			-
Loans past due 90 or more days and still accruing		101			263			354
Total non-performing and other risk assets	$	6,848		$	5,766		$	7,424

Allowance for loan losses to total loans		1.47	%		1.35	%		1.17	%
Non-accrual loans to total loans		1.39	%		0.45	%		0.73	%
Allowance for loan losses to non-performing loans		104.94	%		299.10	%		160.76	%
Total non-accrual loans and restructured loans still accruing to total loans		1.01	%		0.45	%		0.73	%
Allowance for loan losses to non-accrual loans and restructured loans still accruing		145.61	%		299.10	%		160.76	%
Total non-performing and other risk assets to total assets		1.10	%		0.92	%		1.24	%

Restructured loans on non-accrual status are included with non-accrual loans and not with restructured loans in the above table. There were four loans totaling $1,604,000 at December 31, 2011, and one loan totaling $255,000 at December 31, 2010, respectively, 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.