NOTE 6. 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.

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 or portions thereof (which are risk-rated) are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering 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. We deem a loss confirmed when a loan or a portion of a loan is classified "loss" in accordance with bank regulatory classification guidelines, which state, "Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted".

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), which ever 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:


		March 31,		December 31,		March 31,
Dollars in thousands		2012		2011		2011
Commercial	$	99,386	$	99,024	$	92,227
Commercial real estate
Owner-occupied		153,528		158,754		182,956
Non-owner occupied		275,727		270,226		240,604
Construction and development
Land and land development		88,212		93,035		93,675
Construction		2,148		2,936		13,879
Residential real estate
Non-jumbo		219,485		221,733		233,308
Jumbo		62,836		61,535		61,878
Home equity		50,884		50,898		50,499
Consumer		21,574		22,325		22,968
Other		2,540		2,762		4,326
Total loans, net of unearned fees		976,320		983,228		996,320
Less allowance for loan losses		18,523		17,712		16,933
Loans, net	$	957,797	$	965,516	$	979,387

The following table presents the contractual aging of the recorded investment in past due loans by class as of March 31, 2012 and 2011 and December 31, 2011.


						At March 31, 2012
												Recorded
												Investment
				Past Due								> 90 days
Dollars in thousands		30-59 days		60-89 days	> 90		days		Total		Current	and Accruing
Commercial	$	893	$	37	$	2,234		$	3,164	$	96,222	$	-
Commercial real estate
Ow ner-occupied		1,007		412		955			2,374		151,154		-
Non-owner occupied		1,411		-		1,928			3,339		272,388		-
Construction and dev elopment
Land and land dev elopment		375		1,960		13,906			16,241		71,971		-
Construction		-		-		887			887		1,261		-
Residential mortgage
Non-jumbo		2,679		2,409		2,863			7,951		211,534		-
Jumbo		1,337		-		12,621			13,958		48,878		-
Home equity		-		335		55			390		50,494		-
Consumer		156		103		26			285		21,289		-
Other		-		-		-			-		2,540		-
Total	$	7,858	$	5,256	$	35,475		$	48,589	$	927,731	$	-


						At December 31, 2011
													Recorded
													Investment
				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
Ow ner-occupied		4,241		197		664			5,102		153,652		-
Non-owner occupied		1,566		1,752		1,705			5,023		265,203		-
Construction and dev elopment
Land and land dev elopment		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 March 31, 2011
												Recorded
												Investment
				Past Due								> 90 days
Dollars in thousands		30-59 days		60-89 days	> 90		days		Total		Current	and Accruing
Commercial	$	906	$	4	$	2,142		$	3,052	$	89,175	$	-
Commercial real estate
Ow ner-occupied		72		473		2,765			3,310		179,646		-
Non-ow ner occupied		1,916		53		1,421			3,390		237,214		-
Construction and dev elopment
Land and land dev elopment		1,773		124		8,358			10,255		83,420		-
Construction		-		51		150			201		13,678		-
Residential mortgage
Non-jumbo		5,229		1,184		3,889			10,302		223,006		-
Jumbo		-		-		927			927		60,951		-
Home equity		148		-		74			222		50,277		-
Consumer		406		77		143			626		22,342		-
Other		8		3		9			19		4,307		9
Total	$	10,458	$	1,969	$	19,878		$	32,304	$	964,016	$	9

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at March 31, 2012, December 31, 2011 and March 31, 2011.


Dollars in thousands		3/31/2012		12/31/2011		3/31/2011
Commercial	$	2,477	$	3,260	$	2,186
Commercial real estate
Owner-occupied		1,989		2,815		3,785
Non-owner occupied		2,293		4,348		1,499
Construction and development
Land & land development		21,287		22,362		8,358
Construction		887		979		201
Residential mortgage
Non-jumbo		4,583		3,683		4,908
Jumbo		12,621		13,966		927
Home equity		550		538		508
Consumer		81		145		197
Other		-		-		-
Total	$	46,768	$	52,096	$	22,569

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
Loan Category		03/31/2012		12/31/2011		03/31/2011	measure impairment
Commerical	$	2,998	$	2,969	$	1,436	Fair value of collateral
Commerical real estate
Owner-occupied		11,263		9,698		8,393	Fair value of collateral
		2,724		2,580		2,618	Discounted cash flow
Non-owner occupied		10,375		9,790		4,455	Fair value of collateral
		-		-		530	Discounted cash flow
Construction and development
Land & land development		35,746		29,862		22,130	Fair value of collateral
		656		-		-	Discounted cash flow
Construction		735		735		92	Fair value of collateral
Residential mortgage
Non-jumbo		4,692		4,488		5,906	Fair value of collateral
		1,252		372		577	Discounted cash flow
Jumbo		19,899		18,147		15,401	Fair value of collateral
Home equity		353		407		210	Fair value of collateral
Consumer		329		8		-	Fair value of collateral
Total	$	91,022	$	79,056	$	61,748

The following tables present loans individually evaluated for impairment at March 31, 2012, December 31, 2011 and March 31, 2011.


				March 31, 2012
								Average		Interest Income
		Recorded		Unpaid	Related			Impaired		Recognized
Dollars in thousands		Investment		Principal Balance	Allowance			Balance		while impaired

Without a related allowance
Commercial	$	2,307	$	2,306	$	-	$	1,697	$	30
Commercial real estate
Owner-occupied		11,036		11,045		-		9,004		335
Non-owner occupied		6,307		6,308		-		6,046		305
Construction and development
Land & land development		18,732		18,732		-		10,920		334
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		3,876		3,886		-		3,139		99
Jumbo		15,661		15,662		-		14,621		200
Home equity		191		191				191		11
Consumer		293		293		-		11		1
Total without a related allowance	$	58,403	$	58,423	$	-	$	45,629	$	1,315

With a related allowance
Commercial	$	692	$	692	$	203	$	692	$	4
Commercial real estate
Owner-occupied		2,941		2,942		140		2,942		141
Non-owner occupied		4,065		4,067		439		3,366		116
Construction and development
Land & land development		17,667		17,670		3,070		16,148		65
Construction		735		735		419		-		-
Residential real estate
Non-jumbo		2,056		2,058		574		892		34
Jumbo		4,227		4,237		753		2,243		1
Home equity		162		162		111		162		-
Consumer		36		36		1		-		-
Total with a related allowance	$	32,581	$	32,599	$	5,710	$	26,445	$	361

Total
Commercial	$	64,482	$	64,497	$	4,271	$	50,815	$	1,330
Residential real estate		26,173		26,196		1,438		21,248		345
Consumer		329		329		1		11		1
Total	$	90,984	$	91,022	$	5,710	$	72,074	$	1,676


				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


				March 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	$	1,422	$	1,423	$	-	$	215	$	1
Commercial real estate
Owner-occupied		7,049		7,068		-		1,761		12
Non-owner occupied		1,637		1,638		-		728		8
Construction and development
Land & land development		19,217		19,217		-		5,417		16
Construction		-		-		-		-		-
Residential real estate
Non-jumbo		4,055		4,077		-		2,439		19
Jumbo		13,128		13,129		-		4,376		75
Home equity		-		-		-		-		-
Total without a related allowance	$	46,508	$	46,552	$	-	$	14,936	$	131

With a related allowance
Commercial	$	14	$	14	$	14	$	-	$	-
Commercial real estate
Owner-occupied		3,943		3,943		280		2,198		12
Non-owner occupied		3,341		3,347		470		721		7
Construction and development
Land & land development		2,912		2,912		1,160		2,352		3
Construction		92		92		5		1		-
Residential real estate
Non-jumbo		2,404		2,406		681		718		6
Jumbo		2,272		2,272		448		757		-
Home equity		210		210		210		178		-
Total with a related allowance	$	15,188	$	15,196	$	3,268	$	6,925	$	28

Total
Commercial	$	39,627	$	39,654	$	1,929	$	13,393	$	59
Residential real estate		22,069		22,094		1,339		8,468		100
Total	$	61,696	$	61,748	$	3,268	$	21,861	$	159

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 TDRs of $47,837,000 and $47,770,000 at March 31, 2012 and December 31, 2011, 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 ended March 31, 2012. 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
				March 31, 2012
			Pre-modification Post-modification
		Number of		Recorded		Recorded
dollars in thousands	Modifications			Investment		Investment
Commercial		2	$	1,031	$	1,039
Commercial real estate
Owner-occupied		-		-		-
Non-owner occupied		1		336		350
Construction and development
Land & land development		-		-		-
Construction		-		-		-
Residential real estate
Non-jumbo		1		60		62
Jumbo		-		-		-
Home equity		-		-		-
Consumer		1		38		38
Total		5	$	1,465	$	1,489

The following table presents defaults during the stated period of TDRs that were restructured during the past twelve months. 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
	March 31, 2012
	Number		Recorded
	of		Investment
dollars in thousands	Defaults	at Default Date
Commercial	-	$	-
Commercial real estate
Owner-occupied	1		521
Non-owner occupied	-		-
Construction and development
Land & land development	2		1,191
Construction	-		-
Residential real estate
Non-jumbo	1		258
Jumbo	3		4,727
Home equity	-		-
Consumer	-		-
Total	7	$	6,697

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 of $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.

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		3/31/2012	12/31/2011			3/31/2012 12/31/2011				3/31/2012		12/31/2011		3/31/2012		12/31/2011		3/31/2012		12/31/2011
Pass	$	44,723	$	47,521	$	1,261	$	1,886	$	85,626	$	84,225	$	138,422	$	143,845	$	258,250	$	253,319
OLEM (Special Mention)		8,305		18,615		-		-		6,398		6,889		4,157		5,474		12,231		10,421
Substandard		35,184		26,899		887		1,049		7,362		7,910		10,949		9,435		5,246		6,486
Doubtful		-		-		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-		-		-
Total	$	88,212	$	93,035	$	2,148	$	2,935	$	99,386	$	99,024	$	153,528	$	158,754	$	275,727	$	270,226

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		3/31/2012		12/31/2011		3/31/2011		3/31/2012		12/31/2011		3/31/2011
Residential real estate
Non-jumbo	$	214,902	$	218,050	$	228,400	$	4,583	$	3,683	$	4,908
Jumbo		50,215		47,570		60,951		12,621		13,965		927
Home Equity		50,334		50,360		49,991		550		538		508
Consumer		21,493		22,180		22,771		81		145		197
Other		2,540		2,762		4,326		-		-		-
Total	$	339,484	$	340,922	$	366,439	$	17,835	$	18,331	$	6,540

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.