Note D. Loans and Allowance for Loan Losses

Management segregates the loan portfolio into portfolio segments. Under applicable accounting rules, a loan portfolio segment is determined based on the level at which a bank develops and documents a systematic method for determining its allowance for loan losses. The Bank's portfolio segments are 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 following tables set forth, as of June 30, 2011 and December 31, 2010, the balance of both the allowance for loan losses and all “financing receivables” (that is, the principal amount of all loans plus accrued and unpaid interest as of the applicable measurement date) by portfolio segment, which is then further segregated by amounts evaluated for impairment collectively and individually. The allowance for loan losses allocated to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments.

Allowance for Credit losses and Recorded Investment in Financing Receivables
For the Period Ended June 30, 2011
				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
Allowance for credit losses:
Beginning balance	$	376,946		$	1,470,692		$	26,590		$	505,515		$	40,400	$	2,420,143
Charge-offs		(12,071	)		(104,419	)		(11,196	)		(76,882	)		-		(204,568	)
Recoveries		16,569			450			1,831			15,880			-		34,730
Provision		61,979			250,335			5,568			583,597			148,521		1,050,000
Ending balance	$	443,423		$	1,617,058		$	22,793		$	1,028,110		$	188,921	$	3,300,305

Ending balance: individually
evaluated for impairment	$	78,971		$	1,147,089		$	-		$	259,231		$	-	$	1,485,291

Ending Balance: collectively
evaluated for impairment	$	364,452		$	469,969		$	22,793		$	768,879		$	188,921	$	1,815,014

Ending Balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-

Financing receivables:
Ending balance	$	23,370,000		$	97,269,000		$	4,052,000		$	75,815,000		$	-	$	200,506,000

Ending balance: individually
evaluated for impairment	$	182,555		$	7,209,788		$	26,880		$	1,580,351		$	-	$	8,999,574

Ending balance: collectively
evaluated for impairment	$	23,187,445		$	90,059,212		$	4,025,120		$	74,234,649		$	-	$	191,506,426

Ending balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-	$	-

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Year Ended December 31, 2010
				Commercial
	Commercial			Real Estate			Consumer			Residential			Unallocated			Total
Allowance for credit losses:
Beginning balance	$	631,065		$	2,476,025		$	161,172		$	300,750		$	309,726		$	3,878,738
Charge-offs		(523,284	)		(2,496,345	)		(24,381	)		(165,350	)		-			(3,209,360	)
Recoveries		48,477			6,336			4,427			16,521			-			75,761
Provision		220,688			1,484,676			(114,628	)		353,594			(269,326	)		1,675,004
Ending balance	$	376,946		$	1,470,692		$	26,590		$	505,515		$	40,400		$	2,420,143

Ending balance: individually
evaluated for impairment	$	131,663		$	784,382		$	-		$	139,819		$	-		$	1,055,864

Ending balance: collectively
evaluated for impairment	$	245,283		$	686,310		$	26,590		$	365,696		$	40,400		$	1,364,279

Ending balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

Financing receivables:
Ending balance	$	24,661,000		$	108,856,000		$	4,451,000		$	78,671,000		$	-		$	216,639,000

Ending balance: individually
evaluated for impairment	$	364,163		$	6,862,175		$	24,028		$	259,406		$	-		$	7,509,772

Ending balance: collectively
evaluated for impairment	$	24,296,837		$	101,993,825		$	4,426,972		$	78,411,594		$	-		$	209,129,228

Ending balance: loans acquired with
deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-

Management divides the loan portfolio segments into classes, which are based on the initial measurement of the loan, risk characteristics of the loan and the method for monitoring and assessing the credit risk of the loan.

As of June 30, 2011 and December 31, 2010, loan balances outstanding more than 90 days and still accruing interest amounted to $654 thousand and $484 thousand, respectively. As of June 30, 2011 and December 31, 2010, non-accrual loans were $8.9 million and $7.5 million, respectively. The Bank considers all loans more than 90 days past due as non-performing loans.

The following tables present, by class, qualitative and quantitative information concerning the credit quality of financing receivables by credit quality indicators as of June 30, 2011 and December 31, 2010.

Credit Quality Indicators
As of June 30, 2011
	Performing		Non-Performing		Total
Commercial	$	22,689,168	$	680,832	$	23,370,000
Consumer		4,025,120		26,880		4,052,000

Real Estate:
Construction and Development:
1-4 family residential		13,401,000		-		13,401,000
Other construction loans		16,619,218		911,782		17,531,000
Commercial Real Estate:
Owner occupied		36,815,090		2,700,910		39,516,000
Non-owner occupied		36,772,652		3,449,348		40,222,000
Residential:
1-4 family residential		48,629,736		615,264		49,245,000
Multi-family		12,048,464		1,120,536		13,169,000
Total	$	191,000,448	$	9,505,552	$	200,506,000

Credit Quality Indicators
As of December 31, 2010
	Performing		Non-Performing		Total
Commercial	$	24,296,837	$	364,163	$	24,661,000
Consumer		4,426,783		24,217		4,451,000

Real Estate:
Construction and Development:
1-4 family residential		10,641,000		-		10,641,000
Other construction loans		17,521,218		911,782		18,433,000
Commercial Real Estate:
Owner occupied		37,311,142		2,777,858		40,089,000
Non-owner occupied		46,759,883		3,574,117		50,334,000
Residential:
1-4 family residential		54,622,211		341,789		54,964,000
Multi-family		13,066,000		-		13,066,000
Total	$	208,645,074	$	7,993,926	$	216,639,000

The following tables present, by class, an analysis as of June 30, 2011 and December 31, 2010 of the age of the recorded investment in financing receivables that are 30-89 days past due based on the Company's review policy along with financing receivables past due 90 days, both accruing and non-accruing.

Aged Analysis of Past Due Financing Receivables
As of June 30, 2011
	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Recievable		Recorded Investment > 90 Days and Accruing
Commercial	$	210,978	$	498,278	$	709,256	$	22,660,744	$	23,370,000	$	498,278
Consumer		42,464		12,331		54,795		3,997,205		4,052,000		-

Real Estate:
Construction & Development:
1-4 Family Residential		714,208		-		714,208		12,686,792		13,401,000		-
Other Construction Loan		-		911,782		911,782		16,619,218		17,531,000		-
Commercial Real Estate:
Owner Occupied		14,808		-		14,808		39,501,192		39,516,000		-
Non-Owner Occupied		-		1,400,140		1,400,140		38,821,860		40,222,000		-
Residential:
1-4 Family Residential		662,272		312,808		975,080		48,269,920		49,245,000		155,449
Multi-family		-		1,120,536		1,120,536		12,048,464		13,169,000		-
Total	$	1,644,730	$	4,255,875	$	5,900,605	$	194,605,395	$	200,506,000	$	653,727

Aged Analysis of Past Due Financing Receivables
As of December 31, 2010
	30-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current Loans		Total Financing Recievable		Recorded Investment > 90 Days and Accruing
Commercial	$	67,563	$	188,594	$	256,157	$	24,404,843	$	24,661,000	$	-
Consumer		52,579		24,217		76,796		4,374,204		4,451,000		189

Real Estate:
Construction & Development:
1-4 Family Residential		833,395		-		833,395		9,807,605		10,641,000		-
Other Construction Loan		190,430		911,782		1,102,212		17,330,788		18,433,000		483,965
Commercial Real Estate:
Owner Occupied		1,548,589		3,574,117		5,122,706		34,966,294		40,089,000		-
Non-Owner Occupied		-		-		-		50,334,000		50,334,000		-
Residential:
1-4 Family Residential		700,210		140,467		840,677		54,123,323		54,964,000		-
Multi-family		-		-		-		13,066,000		13,066,000		-
Total	$	3,392,766	$	4,839,177	$	8,231,943	$	208,407,057	$	216,639,000	$	484,154

The following table presents, by class, information regarding the recorded investment in financing receivables that have been placed on non-accrual status as of June 30, 2011 and December 31, 2010.

Financing Receivables on Non-Accrual Status
For the Periods Ended
	6/30/2011		12/31/2010

Commercial	$	182,554	$	364,163
Consumer		26,880		24,028
Real Estate:
Construction and Development:
1-4 Family Residential		-		-
Other Construction Loans		911,782		427,817
Commercial Real Estate
Owner Occupied		2,700,910		2,777,858
Non-owner Occupied		3,449,348		3,574,117
Residential
1-4 Family Residential		459,815		341,789
Multi-family		1,120,536		-
Total	$	8,851,825	$	7,509,772

The following tables present, by class, for loans that meet the definition of an impaired loan in sections 310-10-35-16 and 310-10-35-17 of Accounting Standards Codification Topic 310, “Receivables,” for the quarter ended June 30, 2011 and the year ended December 31, 2010, (1) the recorded investment in impaired loans for which there is a related allowance for credit loss, (2) the recorded investment in impaired loans for which there is not a related allowance for credit loss and (3) the total unpaid principal balance of impaired loans. Additionally, the table includes, by class, the average recorded investment in impaired loans and the amount of interest income recognized using a cash basis method of accounting during the time within that period that the loans were impaired.

Impaired Loans
For Quarter Ended June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	9,300	$	9,142	$	-	$	10,204	$	-
Consumer		30,438		29,739		-		31,869		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		849,523		1,040,782		-		839,137		-
Commercial Real Estate:
Owner Occupied		2,679,008		2,459,177		-		2,689,614		34,923
Non-Owner Occupied		-		-		-		-		-
Residential:
1-4 Family Residential		204,537		203,649		-		204,398		-
Multifamily		-		-		-		-		-

With Related Allowance Recorded:
Commercial		192,431		173,971		78,971		193,230		2,629
Consumer		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		175,807		454,000		45,500		173,784		-
Commercial Real Estate:
Owner Occupied		452,748		659,228		578,881		459,422		-
Non-Owner Occupied		3,686,594		3,567,849		522,707		3,746,041		-
Residential:
1-4 Family Residential		307,811		322,817		80,196		311,759		-
Multifamily		1,143,685		1,123,596		179,036		1,139,768		-

Total
Commercial		201,731		183,113		78,971		203,434		2,629
Consumer		30,438		29,739		-		31,869		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		1,025,330		1,494,782		45,500		1,012,921		-
Commercial Real Estate:
Owner Occupied		3,131,756		3,118,405		578,881		3,149,036		34,923
Non-Owner Occupied		3,686,594		3,567,849		522,707		3,746,041		-
Residential:
1-4 Family Residential		512,348		526,466		80,196		516,157		-
Multifamily		1,143,685		1,123,596		179,036		1,139,768		-
	$	9,731,882	$	10,043,950	$	1,485,291	$	9,799,226	$	37,552

Impaired Loans
For Year Ended December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Consumer		26,370		-		-		26,498		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		330,703		556,817		-		590,120		-
Commercial Real Estate:
Owner Occupied		1,398,337		1,273,530		-		1,302,045		21,113
Non-Owner Occupied		-		-		-		-		-
Residential:
1-4 Family Residential		202,904		128,219		-		213,837		7,533
Multifamily		-		-		-		-		-

With Related Allowance Recorded:
Commercial		387,464		364,163		131,663		373,183		2,898
Consumer		-		-		-		-		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		170,968		454,000		45,500		171,396		-
Commercial Real Estate:
Owner Occupied		1,612,482		1,731,769		179,765		1,569,355		17,482
Non-Owner Occupied		3,707,323		3,574,117		559,117		3,707,323		-
Residential:
1-4 Family Residential		203,813		192,467		139,819		222,159		2,504
Multifamily		-		-		-		-		-

Total
Commercial		387,464		364,163		131,663		373,183		2,898
Consumer		26,370		-		-		26,498		-
Real Estate:
Construction and Development:
1-4 Family Residential		-		-		-		-		-
Other Construction Loans		501,671		1,010,817		45,500		761,516		-
Commercial Real Estate:
Owner Occupied		3,010,819		3,005,299		179,765		2,871,400		38,595
Non-Owner Occupied		3,707,323		3,574,117		559,117		3,707,323		-
Residential:
1-4 Family Residential		406,717		320,686		139,819		435,996		10,037
Multifamily		-		-		-		-		-
	$	8,040,364	$	8,275,082	$	1,055,864	$	8,175,916	$	51,530