NOTE 5. LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination includes many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower's equity.

Consumer-related loans are generally charged off to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans are summarized as follows:


Dollars in thousands		2011			2010
Commercial	$		99,024	$	97,059
Commercial real estate
Owner-occupied			158,754		187,098
Non-owner occupied			270,226		235,337
Construction and development
Land and land development			93,035		99,085
Construction			2,936		13,691
Residential real estate
Non-jumbo			221,733		239,288
Jumbo			61,535		61,340
Home equity			50,898		50,987
Consumer			22,325		25,253
Other			2,762		3,405
Total loans, net of unearned fees			983,228		1,012,543
Less allowance for loan losses			17,712		17,224
Loans, net	$		965,516	$	995,319


The following presents loan maturities at December 31, 2011:

		Within			After 1 but		After
Dollars in thousands		1	Year		within 5 Years		5 Years
Commercial	$	32,198		$	40,926	$	25,900
Commercial real estate		43,789			80,622		304,569
Construction and development		61,142			6,355		28,474
Residential real estate		25,691			18,929		289,546
Consumer		3,740			15,209		3,376
Other		312			1,596		854
	$	166,872		$	163,637	$	652,719
Loans due after one year with:
Variable rates				$	192,946
Fixed rates					623,410
				$	816,356

The following table presents the contractual aging of the recorded investment in past due loans by class as of December 31, 2011 and 2010.


						At December 31, 2011
				Past Due									> 90	days
Dollars in thousands		30-59 days		60-89 days	> 90		days		Total		Current		and Accruing
Commercial	$	904	$	324	$	2,544		$	3,772	$	95,252	$	-
Commercial real estate
Owner-occupied		4,241		197		664			5,102		153,652		-
Non-owner occupied		1,566		1,752		1,705			5,023		265,203		-
Construction and development
Land and land development		1,539		116		16,392			18,047		74,988		344
Construction		106		-		979			1,085		1,851		-
Residential mortgage
Non-jumbo		4,730		1,624		2,336			8,690		213,043		-
Jumbo		699		-		13,965			14,664		46,871		-
Home equity		-		223		91			314		50,584		-
Consumer		381		144		85			610		21,715		-
Other		-		-		-			-		2,762		-
Total	$	14,166	$	4,380	$	38,761		$	57,307	$	925,921	$	344


						At December 31, 2010
				Past Due									> 90	days
Dollars in thousands		30-59 days		60-89 days	> 90		days		Total		Current		and Accruing
Commercial	$	388	$	307	$	1,286		$	1,981	$	95,078	$	-
Commercial real estate
Owner-occupied		364		-		1,348			1,712		185,386		-
Non-owner occupied		3,697		590		310			4,597		230,740		-
Construction and development
Land and land development		3,023		131		9,732			12,886		86,199		-
Construction		-		2		317			319		13,372		-
Residential mortgage
Non-jumbo		3,557		2,412		3,953			9,922		229,368		-
Jumbo		2,997		10,383		2,549			15,929		45,411		1,442
Home equity		501		270		51			822		50,165		-
Consumer		420		147		107			674		23,471		-
Other		9		10		-			19		4,492		-
Total	$	14,956	$	14,252	$	19,653		$	48,861	$	963,682	$	1,442

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at December 31, 2011 and 2010.


Dollars in thousands		2011		2010
Commercial	$	3,260	$	1,318
Commercial real estate
Owner-occupied		2,815		2,372
Non-owner occupied		4,348		314
Construction and development
Land & land development		22,362		9,732
Construction		979		317
Residential mortgage
Non-jumbo		3,683		4,918
Jumbo		13,966		1,106
Home equity		538		51
Consumer		145		141
Other		-		-
Total	$	52,096	$	20,269

Impaired loans: Impaired loans include the following:

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2,000,000, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.

Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured in a troubled debt restructuring, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The table below sets forth information about our impaired loans.


Method Used to Measure Impairment of Impaired Loans
Dollars in thousands
					Method used to
Loan Category		12/31/2011		12/31/2010	measure impairment
Commerical	$	2,969	$	630	Fair value of collateral
Commerical real estate
Owner-occupied		9,698		8,866	Fair value of collateral
		2,580		2,623	Discounted cash flow
Non-owner occupied		9,790		4,922	Fair value of collateral
		-		530	Discounted cash flow
Construction and development
Land & land development		29,862		16,515	Fair value of collateral
Construction		735		-	Fair value of collateral
Residential mortgage
Non-jumbo		4,488		4,533	Fair value of collateral
		372		753	Discounted cash flow
Jumbo		18,147		17,296	Fair value of collateral
Home equity		407		213	Fair value of collateral
Consumer		8		-	Discounted cash flow
Total	$	79,056	$	56,881

The following tables present loans individually evaluated for impairment at December 31, 2011 and 2010.


				December 31, 2011
								Average		Interest Income
		Recorded		Unpaid	Related			Impaired		Recognized
Dollars in thousands		Investment		Principal Balance	Allowance			Balance		while impaired

Without a related allowance
Commercial	$	2,074	$	2,076	$	-	$	874	$	10
Commercial real estate
Owner-occupied		9,013		9,034		-		8,132		253
Non-owner occupied		5,599		5,600		-		2,891		116
Construction and development
Land & land development		12,128		12,128		-		9,509		346
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,697		3,708		-		2,843		68
Jumbo		15,203		15,204		-		12,626		-
Home equity		194		194		-		99		6
Total without a related allowance	$	47,908	$	47,944	$	-	$	36,974	$	799

With a related allowance
Commercial	$	893	$	893	$	247	$	661	$	1
Commercial real estate
Owner-occupied		3,244		3,244		465		3,588		143
Non-owner occupied		4,190		4,190		456		3,357		87
Construction and development
Land & land development		17,719		17,734		2,901		8,726		40
Construction		735		735		29		2		-
Residential real estate
Non-jumbo		1,150		1,152		209		706		31
Jumbo		2,943		2,943		275		1,349		-
Home equity		213		213		162		125		2
Consumer		8		8		1		-		-
Total with a related allowance	$	31,095	$	31,112	$	4,745	$	18,514	$	304

Total
Commercial	$	55,595	$	55,634	$	4,098	$	37,740	$	996
Residential real estate		23,400		23,414		646		17,748		107
Consumer		8		8		1		-		-
Total	$	79,003	$	79,056	$	4,745	$	55,488	$	1,103


				December 31, 2010
								Average		Interest Income
		Recorded		Unpaid	Related			Impaired		Recognized
Dollars in thousands		Investment		Principal Balance	Allowance			Balance		while impaired

Without a related allowance
Commercial	$	629	$	630	$	-	$	232	$	9
Commercial real estate
Owner-occupied		7,538		7,556		-		9,052		440
Non-owner occupied		3,314		3,321		-		12,852		734
Construction and development
Land & land development		9,213		9,214		-		12,852		468
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,161		2,696		-		2,074		76
Jumbo		14,822		14,822		-		7,887		547
Home equity		165		165		-		-		-
Total without a related allowance	$	37,842	$	38,404	$	-	$	44,949	$	2,274

With a related allowance
Commercial	$	-	$	-	$	-	$	-	$	-
Commercial real estate
Owner-occupied		3,933		3,933		265		670		-
Non-owner occupied		2,130		2,130		267		1,953		88
Construction and development
Land & land development		7,301		7,301		2,575		3,183		7
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		2,589		2,591		843		1,242		22
Jumbo		2,474		2,474		877		1,343		31
Home equity		48		48		48		12		1
Total with a related allowance	$	18,475	$	18,477	$	4,875	$	8,403	$	149

Total
Commercial	$	34,058	$	34,085	$	3,107	$	40,794	$	1,746
Residential real estate		22,259		22,796		1,768		12,558		677
Total	$	56,317	$	56,881	$	4,875	$	53,352	$	2,423

For the years ended December 31, 2011, 2010, and 2009, we recognized approximately $1,103,000, $2,423,000, and $298,000, in interest income on impaired loans after the date that the loans were deemed to be impaired. Using a cash-basis method of accounting, we would have recognized approximately the same amount of interest income on such loans.

A modification of a loan is considered a troubled debt restructuring ("TDR") when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to qualify as a TDR until a consistent payment history or change in the borrower's financial condition has been evidenced, generally no less than twelve months. Included in impaired loans are troubled debt restructurings of $47,770,000 and $31,712,000 at December 31, 2011 and 2010, respectively, with no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three months and twelve months ended December 31, 2011. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.


	For the Three Months Ended					For the Twelve Months Ended
		December 31, 2011					December 31, 2011
		Pre-modification Post-modification					Pre-modification Post-modification
	Number of		Recorded		Recorded	Number of		Recorded		Recorded
dollars in thousands	Modifications		Investment		Investment	Modifications		Investment		Investment
Commercial	-	$	- $		-	1	$	63	$	63
Commercial real estate
Owner-occupied	-		-		-	4		2,463		2,463
Non-owner occupied	-		-		-	5		7,248		7,248
Construction and development
Land & land development	-		-		-	5		3,715		3,683
Construction	-		-		-	-		-		-
Residential real estate
Non-jumbo	-		-		-	6		1,743		1,648
Jumbo	3		5,261		4,854	3		5,261		4,854
Home equity	-		-		-	-		-		-
Consumer	1		8		8	1		8		8
Total	4	$	5,269	$	4,862	25	$	20,501	$	19,967

The following table presents defaults during the stated period of TDRs that were restructured during 2011. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.


	For the Three Months Ended			For the Twelve Months Ended
	December 31, 2011			December 31, 2011
	Number		Recorded	Number		Recorded
	of		Investment	of		Investment
dollars in thousands	Defaults	at Default Date		Defaults		at Default Date
Commercial	-	$	-	- $		-
Commercial real estate
Owner-occupied	1		36	4		2,454
Non-owner occupied	-		-	3		3,594
Construction and development
Land & land development	1		1,002	5		3,684
Construction	-		-	-		-
Residential real estate
Non-jumbo	1		258	1		258
Jumbo	1		545	1		545
Home equity	-		-	-		-
Consumer	-		-	-		-
Total	4	$	1,841	14	$	10,535

We categorize 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. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure exceeding $2 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower's ability to repay, equity, and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon the internal risk ratings defined above.


Loan Risk Profile by Internal Risk Rating

		Construction and Development														Commercial Real Estate
		Land and land
		development				Construction				Commercial				Owner Occupied				Non-Owner Occupied
Dollars in thousands		2011		2010		2011		2010		2011		2010		2011		2010		2011		2010
Pass	$	47,521	$	63,061	$	1,886	$	13,320	$	84,225	$	89,129	$	143,845	$	167,048	$	253,319	$	218,555
OLEM (Special Mention)		18,615		19,509		-		249		6,889		6,481		5,474		4,417		10,421		14,154
Substandard		26,899		15,796		1,049		122		7,910		1,449		9,435		15,633		6,486		2,628
Doubtful		-		719		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	93,035	$	99,085	$	2,935	$	13,691	$	99,024	$	97,059	$	158,754	$	187,098	$	270,226	$	235,337

The following table presents the recorded investment in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.


		Performing				Nonperforming
Dollars in thousands		2011		2010		2011		2010
Residential real estate
Non-jumbo	$	218,050	$	233,857	$	3,683	$	5,433
Jumbo		47,570		59,307		13,965		2,033
Home Equity		50,360		50,936		538		51
Consumer		22,180		25,111		145		142
Other		2,762		3,405		-		-
Total	$	340,922	$	372,616	$	18,331	$	7,659

Industry concentrations: At December 31, 2011 and 2010, we had no concentrations of loans to any single industry in excess of 10% of total loans.

Loans to related parties: We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties). These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):


Dollars in thousands		2011				2010
Balance, beginning	$		7,838		$		4,076
Additions			8,670				6,602
Amounts collected			(4,457	)			(3,519	)
Other changes, net			5,012				679
Balance, ending	$		17,063		$		7,838

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.