Note 6 – Loans and Allowance for Loan Losses

At December 31, 2011, the Company had 11 impaired loans totaling $3,605,142, all of which were on a non-accrual basis. Only one of those loans was past due over 30 days. At March 31, 2012, the Company had 10 impaired loans totaling $2,471,101, all of which were on a non-accrual basis and none of which was past due over 30 days. There was one accruing loan past due over 30 days totaling $75,000 and one overdraft past due for 60 days totaling $34 at March 31, 2012.

Changes in the allowance for loan losses by loan segment are summarized as follows for three months ended March 31, 2012 and 2011:

	One to								Commercial
	Four			Residential			Commercial		and
	Residential			Income			Real Estate		Industrial			Consumer			Installment			Other			Total

Beginning balance
January 1, 2012	$	44,586		$	40,438		$	1,201,839	$	238,448		$	976		$	11,289		$	387		$	1,537,963
Provision for loan
losses		(5,987	)		(328	)		29,769		(24,701	)		2,688			(1,389	)		(52	)		-

Loans charged off		-			-			-		-			(2,720	)		-			-			(2,720	)

Recoveries		-			-			-		-			-			-			-			-

Ending Balance
March 31, 2012	$	38,599		$	40,110		$	1,231,608	$	213,747		$	944		$	9,900		$	335		$	1,535,243

	One to							Commercial
	Four		Residential		Commercial			and
	Residential		Income		Real Estate			Industrial		Consumer			Installment		Other			Total

Beginning balance
January 1, 2011	$	46,335	$	2,876	$	1,140,786		$	241,243	$	746		$	9,178	$	989		$	1,442,153
Provision for loan
losses		1,902		6,630		(4,382	)		1,655		(325	)		213		(171	)		5,522

Loans charged off		-		-		-			-		-			-		-			-

Recoveries		-		-		-			-		-			-		-			-

Ending Balance
March 31, 2011	$	48,237	$	9,506	$	1,136,404		$	242,898	$	421		$	9,391	$	818		$	1,447,675

Loans serviced for others are portions of loans participated out to other banks. Loan balances are net of these participated balances. The unpaid principal balance of loans serviced for others was $1,643,855 and $1,654,001 at March 31, 2012 and December 31, 2011, respectively.

The following tables present loans and the allowance for loan losses by segment as of March 31, 2012 and December 31, 2011:

Loans and Allowance for Loan Losses (by loan segment)
As of March 31, 2012

	One to Four		Residential		Commercial		Commercial and
	Residential		Income		Real Estate		Industrial		Consumer		Installment		Other		Total

Loans:

Balance	$	2,394,606	$	1,865,592	$	43,293,279	$	7,712,787	$	34,752	$	337,707	$	9,256	$	55,647,979

Individually evaluated
for impairment		182,642		-		1,091,719		1,196,740		-		-		-		2,471,101

Collectively evaluated
for impairment		2,211,964		1,865,592		42,201,560		6,516,047		34,752		337,707		9,256		53,176,878

Allowance for loan losses:

Balance		38,599		40,110		1,231,608		213,747		944		9,900		335		1,535,243

Individually evaluated
for impairment		5,242		-		38,660		34,347		-		-		-		78,249

Collectively evaluated
for impairment		33,357		40,110		1,192,948		179,400		944		9,900		335		1,456,994

Loans and Allowance for Loan Losses (by loan segment)
As of December 31, 2011

	One to Four		Residential		Commercial		Commercial and
	Residential		Income		Real Estate		Industrial		Consumer		Installment		Other		Total

Loans:

Balance	$	2,368,205	$	1,880,824	$	43,816,693	$	8,082,845	$	30,737	$	612,923	$	10,684	$	56,802,911

Individually evaluated
for impairment		656,275		-		1,716,028		1,232,839		-		-		-		3,605,142

Collectively evaluated
for impairment		1,711,930		1,880,824		42,100,665		6,850,006		30,737		612,923		10,684		53,197,769

Allowance for loan losses:

Balance		44,586		40,438		1,201,839		238,448		976		11,289		387		1,537,963

Individually evaluated
for impairment		18,835		-		49,250		40,661		-		-		-		108,746

Collectively evaluated
for impairment		25,751		40,438		1,152,589		197,787		976		11,289		387		1,429,217

Management divides the loan portfolio into portfolio segments for purposes of developing and documenting a systematic method for determining its allowance for loan losses. The portfolio is segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.

The Company’s loan portfolio is divided into the following portfolio segments.

One to Four Family Residential. This portfolio segment consists of the origination of first mortgage loans and home equity second mortgage loans secured by one-to four-family owner occupied residential properties located in the Company’s market area. The Company has experienced no foreclosures on its owner occupied loan portfolio since May 2011 and believes this is due mainly to its conservative lending strategies including its non-participation in “interest only”, “Option ARM,” “sub-prime” or “Alt-A” loans.

One to Four Family Income. This portfolio segment consists of the origination of first mortgage loans secured by one-to four-family non-owner occupied residential properties in its market area. Such lending involves additional risks arising from the use of the properties by non-owners.

Commercial Real Estate Loans. This portfolio segment includes loans secured by commercial real estate, including multi-family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than one-to four-family mortgage loans. The increased risk is the result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.

Commercial and Industrial Loans. This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than one- to four-family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Consumer Loans. This portfolio segment includes loans to individuals for overdraft protection and personal lines of credit.

Installment Loans. This portfolio segment includes loans to individuals for personal purposes, including but not limited to automobile loans.

The following tables summarize the loan portfolio at March 31, 2012 and December 31, 2011 by credit risk profiles based on internally assigned grades. Information has been updated for each credit quality indicator as of those dates.

Credit Quality Indicators (by loan class)

As of March 31, 2012

	Grade
	Pass		Special Mention		Substandard		Doubtful		Total

One to four residential:
Closed-end	$	2,211,964	$	--	$	182,642	$	--	$	2,394,606

Residential income		1,865,592		--		--		--		1,865,592

Commercial real estate:
Owner occupied		19,116,867		-		1,605,226		--		20,722,093
Non-owner occupied		19,690,673		288,802		2,591,711		--		22,571,186

Commercial and industrial:
Secured		2,311,584				175,082		--		2,486,666
Unsecured		3,735,388		210,124		1,280,609		--		5,226,121

Consumer		34,752		--		--		--		34,752

Installment		337,707		--		--		--		337,707

Other		9,256		--		--		--		9,256

Total	$	49,313,783	$	498,926	$	5,835,270	$	-	$	55,647,979

Credit Quality Indicators (by loan class)

As of December 31, 2011

	Grade
	Pass		Special Mention		Substandard		Doubtful		Total

One to four residential:
Closed-end	$	1,711,932	$	--	$	656,273	$	--	$	2,368,205

Residential income		1,880,824		--		--		--		1,880,824

Commercial real estate:
Owner occupied		17,642,198		-		2,345,010		--		19,987,208
Non-owner occupied		21,044,610		290,358		2,494,517		--		23,829,485

Commercial and industrial:
Secured		2,840,543		-		1,142,687		--		3,983,230
Unsecured		3,200,770		223,798		675,047		--		4,099,615

Consumer		30,737		--		--		--		30,737

Installment		612,923		--		--		--		612,923

Other		10,684		--		--		--		10,684

Total	$	48,975,221	$	514,156	$	7,313,534	$	-	$	56,802,911

The Company’s policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that there continuance as assets is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as special mention.

When assets are classified as special mention, substandard or doubtful, the Company allocates a portion of the related general loss allowances to such assets as the Company deems prudent. Determinations as to the classification of assets and the amount of loss allowances are subject to review by regulatory agencies, which can require that we establish additional loss allowances. Management regularly reviews its asset portfolio to determine whether any assets require reclassification in accordance with applicable regulations.

The following tables set forth certain information with respect to delinquencies in the Company’s portfolio by loan class and amount as of March 31, 2012 and December 31, 2011:

Age Analysis of Past Due Loans (by class)

As of March 31, 2012

													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

One to four residential:
Closed-end	$	--	$	--	$	--	$	--	$	2,394,606	$	2,394,606	$	--

Residential income		--		--		--		--		1,865,592	$	1,865,592		--

Commercial real estate:
Owner occupied		--		--		--		--		20,722,093		20,722,093		--
Non-owner occupied		--		--		--		--		22,571,186		22,571,186		--

Commercial and industrial:
Secured		--		--		--		--		2,486,666		2,486,666		--
Unsecured		75,000		--		--		75,000		5,151,121		5,226,121		--

Consumer		--		--		--		--		34,752		34,752		--

Installment		--		--		--		--		337,707		337,707		--

Other		--		34		--		34		9,222		9,256		--

Total	$	75,000	$	34	$	--	$	75,034	$	55,572,945	$	55,647,979	$	--

Age Analysis of Past Due Loans (by class)

As of December 31, 2011

													Recorded
					Greater								Investment
	30-59 Days		60-89 Days		Than		Total				Total		90 Days or more
	Past Due		Past Due		90 Days		Past Due		Current		Loans		and Accruing

One to four residential:
Closed-end	$	--	$	--	$	--	$	--	$	2,368,205	$	2,368,205	$	--

Residential income		--		--		--		--		1,880,824	$	1,880,824		--

Commercial real estate:
Owner occupied		171,434		--		--		171,434		19,815,774		19,987,208		--
Non-owner occupied		--		--		--		--		23,829,485		23,829,485		--

Commercial and industrial:
Secured		--		--		--		--		3,983,230		3,983,230		--
Unsecured		--		--		--		--		4,099,615		4,099,615		--

Consumer		--		--		--		--		30,737		30,737		--

Installment		--		--		--		--		612,923		612,923		--

Other		--		--		--		--		10,684		10,684		--

Total	$	171,434	$	--	$	--	$	171,434	$	56,631,477	$	56,802,911	$	--

The following tables summarize impaired loans by loan class as of and for the period ended March 31, 2012 and December 31, 2011:

Impaired Loans (by loan class)

As of and For the Three Months Ended March 31, 2012

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With an allowance recorded:
One to four residential:
Closed-end	$	182,642	$	182,642	$	5,242	$	534,627	$	--

Commercial real estate:
Owner occupied		164,034		164,034		4,708		706,496		--
Non-owner occupied		927,685		927,685		33,904		845,243		--

Commercial and industrial:
Secured		1,196,740		1,196,740		34,346		1,216,243		--

Total:
One to four residential	$	182,642	$	182,642	$	5,242	$	534,627	$	--
Commercial real estate	$	1,091,719	$	1,091,719	$	38,612	$	1,551,739	$	--
Commercial and industrial	$	1,196,740	$	1,196,740	$	34,346	$	1,216,243	$	--

Impaired Loans (by loan class)

As of and For the Year Ended December 31, 2011

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

With an allowance recorded:
One to four residential:
Closed-end	$	656,275	$	656,275	$	18,835	$	805,914	$	--

Commercial real estate:
Owner occupied		893,259		893,259		25,637		1,201,115		--
Non-owner occupied		822,769		822,769		23,613		851,886		--

Commercial and industrial:
Secured		1,232,839		1,232,839		40,661		1,238,994		--

Total:
One to four residential	$	656,275	$	656,275	$	18,835	$	805,914	$	--
Commercial real estate	$	1,716,028	$	1,716,028	$	49,250	$	2,053,001	$	--
Commercial and industrial	$	1,232,839	$	1,232,839	$	40,661	$	1,238,994	$	--

A summary of nonaccrual loans by loan class is as follows:

Loans on Nonaccrual Status (by loan class)

	March 31, 2012		December 31, 2011
One to four residential:
Closed-end	$	182,642	$	656,275

Commercial real estate:
Owner occupied		164,034		893,259
Non-owner occupied		927,685		822,769

Commercial and industrial:
Secured		1,196,740		1,232,839

Total	$	2,471,101	$	3,605,142

A summary of troubled debt restructurings that occurred in the reporting period is as follows:

Modifications (by class)

For three-month period ended March 31, 2012

					Post-
			Pre-Modification		Modification		Recorded
	Number		Outstanding		Outstanding		Investment
	of		Recorded		Recorded		at
	Loans		Investment		Investment		03/31/12
Troubled Debt Restructurings
Commercial real estate:
Non-owner occupied		1	$	120,424	$	120,424	$	119,776

Commercial and industrial:
Secured		1		451,897		451,897		445,991
Unsecured		1		54,472		54,472		50,607

The Company had three loans that were modified in troubled debt restructurings during the period ended March 31, 2012. These modifications are classified as troubled debt restructurings because they were renewed at below-market interest rates due to the borrowers’ financial difficulties at the time of the restructuring. The loans are collateralized dependent and have zero impairment, thus no specific allowance has been established for these loans.

All loans modified in a trouble debt restructurings performed as agreed subsequent to the restructuring. The Company had no troubled debt restructurings in the three-month period ended March 31, 2011.