Note 4: Allowance for Loan Losses

A disaggregation of and an analysis of the change in the allowance for loan losses by segment is shown below.

Allowance for Loan Losses by Portfolio Segment

For the nine months ended September 30, 2011 (unaudited)


	Construction, Land and Land Development			Farmland		Commercial Mortgage (Non-Owner Occupied)			Commercial Mortgage (Owner Occupied)			Residential First Mortgages			Residential Junior Mortgages			Commercial and Industrial		Consumer Loans			Unallocated			Total
Allowance for loan losses:
Beginning Balance	$	192,518		$	3,000	$	108,000		$	1,270,451		$	206,171		$	460,648		$	69,869	$	210,662		$	709,358		$	3,230,677
(Charge-offs)		(35,428	)				(52,117	)					(149,571	)		(18,379	)				(61,881	)				$	(317,376	)
Recoveries		175											1,393								24,009					$	25,577
Provision		21,137			1,000		23,117			(240,140	)		694,506			176,677			31,343		(59,710	)		(262,930	)	$	385,000

Ending Balance	$	178,402		$	4,000	$	79,000		$	1,030,311		$	752,498		$	618,946		$	101,212	$	113,080		$	446,428		$	3,323,877


Individually evaluated for impairment	$	87,402		$	—	$	—		$	144,311		$	309,498		$	351,946		$	16,343	$	2,080		$	—		$	911,580
Collectively evaluated for impairment	$	91,000		$	4,000	$	79,000		$	886,000		$	443,000		$	267,000		$	84,869	$	111,000		$	446,428		$	2,412,297

LOAN RECEIVABLES:
Ending Balance:
Individually evaluated for impairment	$	342,618		$	—	$	—		$	1,131,746		$	1,782,559		$	1,479,630		$	635,658	$	554,140					$	5,926,351

Collectively evaluated for impairment		27,474,066			1,546,095		15,061,206			27,355,650			106,298,504			27,846,369			18,367,536		7,758,644						231,708,070

Total Gross Loans	$	27,816,684		$	1,546,095	$	15,061,206		$	28,487,396		$	108,081,063		$	29,325,999		$	19,003,194	$	8,312,784					$	237,634,421

Provision is negative for the Commercial Mortgages (Owner Occupied) segment due mainly to a reduction in the level of impaired loans in this segment, with a corresponding reduction in the required allowance. Provision is negative for Consumer loans because charge-offs are lower, resulting in a smaller historical charge-off factor.

Allowance for Loan Losses by Portfolio Segment

For the Year Ended December 31, 2010


	Construction, Land and Land Development		Farmland		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Residential First Mortgages		Residential Junior Mortgages		Commercial and Industrial		Consumer Loans		Unallocated		Total
Allowance for loan losses:
Beginning Balance																			$	3,769,287
Charge-offs																				(1,491,707	)
Recoveries																				232,883
Provision																				720,214

Ending Balance	$	192,518	$	3,000	$	108,000	$	1,270,451	$	206,171	$	460,648	$	69,869	$	210,662	$	709,358	$	3,230,677


Individually evaluated for impairment	$	64,518	$	—	$	—	$	397,451	$	93,171	$	67,648	$	—	$	17,662	$	—	$	640,450
Collectively evaluated for impairment	$	128,000	$	3,000	$	108,000	$	873,000	$	113,000	$	393,000	$	69,869	$	193,000	$	709,358	$	2,590,227

Loan Receivables:
Ending Balance:
Individually evaluated for impairment	$	342,618	$	—	$	711,850	$	1,966,334	$	1,803,831	$	1,474,024	$	65,000	$	569,918			$	6,933,575
Collectively evaluated for impairment		30,277,752		1,603,519		12,075,709		27,464,382		113,726,486		29,469,001		17,526,891		8,295,687				240,439,427


Total Gross Loans	$	30,620,370	$	1,603,519	$	12,787,559	$	29,430,716	$	115,530,317	$	30,943,025	$	17,591,891	$	8,865,605			$	247,373,002


	September 30, 2010
	(unaudited)
Balance, beginning of year	$	3,769,287
Provision for loan losses		523,792
Recoveries		198,851
Loans charged off		(1,163,411	)


Balance, end of period	$	3,328,519

Internal risk rating grades are assigned to commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, loans to real estate developers and contractors, and consumer loans greater than $250,000 with chronic delinquency, as shown in the following table. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades are evaluated as new information becomes available for each borrowing relationship or at least quarterly.


As of September 30, 2011 (unaudited)	Construction,				Commercial		Commercial
	Land and				Mortgages		Mortgages		Commercial
	Land				(Non-Owner		(Owner		and
INTERNAL RISK RATING GRADES	Development		Farmland		Occupied)		Occupied)		Industrial		Total
Grade:
Pass	$	20,592,533	$	1,546,095	$	10,142,571	$	19,286,834	$	13,942,117	$	65,510,150
Watch		3,129,281		—		2,503,426		5,826,134		3,682,728		15,141,569
Special mention		2,193,890		—		1,668,661		878,118		—		4,740,669
Substandard		1,900,980		—		746,548		2,496,310		1,363,349		6,507,187
Doubtful		—		—		—		—		15,000		15,000

Total	$	27,816,684	$	1,546,095	$	15,061,206	$	28,487,396	$	19,003,194	$	91,914,575


As of December 31, 2010	Construction,				Commercial		Commercial
	Land and				Mortgages		Mortgages		Commercial
	Land				(Non-Owner		(Owner		and
INTERNAL RISK RATING GRADES	Development		Farmland		Occupied)		Occupied)		Industrial		Total
Grade:
Pass	$	22,095,455	$	1,603,519	$	8,356,208	$	18,948,652	$	14,323,275	$	65,327,109
Watch		2,066,022		—		2,393,854		5,960,095		986,309		11,406,280
Special mention		4,036,860		—		318,043		2,592,417		1,334,108		8,281,428
Substandard		2,422,033		—		364,902		1,672,803		948,199		5,407,937
Doubtful		—		—		1,354,552		256,749		—		1,611,301

Total	$	30,620,370	$	1,603,519	$	12,787,559	$	29,430,716	$	17,591,891	$	92,034,055

Loans not assigned internal risk rating grades are comprised of residential mortgages and smaller consumer loans. Payment activity of these loans is reviewed monthly by management. Loans are considered to be nonperforming when they are delinquent by 90 days or more or on nonaccrual, as shown in the table below.


As of September 30, 2011 (unaudited)	Residential		Residential
	First		Junior		Consumer
PAYMENT ACTIVITY STATUS	Mortgages		Mortgages		Loans		Total
Performing	$	106,723,709	$	27,384,093	$	8,177,643	$	142,285,445
Nonperforming		1,357,354		1,941,906		135,141		3,434,401

Total	$	108,081,063	$	29,325,999	$	8,312,784	$	145,719,846


As of December 31, 2010	Residential		Residential
	First		Junior		Consumer
PAYMENT ACTIVITY STATUS	Mortgages		Mortgages		Loans		Total
Performing	$	113,356,307	$	29,772,376	$	8,820,488	$	151,949,171
Nonperforming		2,174,010		1,170,649		45,117		3,389,776

Total	$	115,530,317	$	30,943,025	$	8,865,605	$	155,338,947

The following table shows the Company's recorded investment and the customers' unpaid principal balances for impaired loans, with the associated allowance amount, if applicable. Also shown are the average recorded investments in impaired loans and the related amount of interest recognized and collected during the time the loans were impaired.

IMPAIRED LOANS

As of September 30, 2011 (unaudited)


With no related allowance:	Recorded Investment		Customers' Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
Construction, land & land development	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—		—
Residential First Mortgages		905,642		905,642		—		682,550		39,238		39,380
Residential Junior Mortgages (1)		100,000		100,000		—		50,000		4,396		4,333
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		259,762		259,762		—		195,473		10,733		10,750
Commercial & industrial		571,595		571,595		—		241,316		14,124		12,690
Consumer (2)		—		—		—		—		—		—

	$	1,836,999	$	1,836,999	$	—	$	1,169,338	$	68,491	$	67,153


With an allowance recorded:
Construction, land & land development	$	342,618	$	342,618	$	87,402	$	342,618	$	—	$	—
Farmland		—		—		—		—		—		—
Residential First Mortgages		876,917		879,359		309,498		883,684		28,854		32,700
Residential Junior Mortgages (1)		1,379,630		1,674,561		351,946		1,389,257		—		—
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		871,984		874,882		144,311		737,205		26,843		28,100
Commercial & industrial		64,063		115,479		16,343		64,766		453		453
Consumer (2)		554,140		554,140		2,080		560,374		25,107		29,012

	$	4,089,352	$	4,441,039	$	911,580	$	3,977,903	$	81,257	$	90,265


Total Impaired Loans:
Construction, land & land development	$	342,618	$	342,618	$	87,402	$	342,618	$	—	$	—
Farmland		—		—		—		—		—		—
Residential First Mortgages		1,782,559		1,785,001		309,498		1,566,234		68,092		72,080
Residential Junior Mortgages (1)		1,479,630		1,774,561		351,946		1,439,257		4,396		4,333
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		1,131,746		1,134,644		144,311		932,677		37,576		38,850
Commercial & industrial		635,658		687,074		16,343		306,082		14,577		13,143
Consumer (2)		554,140		554,140		2,080		560,374		25,107		29,012

	$	5,926,351	$	6,278,038	$	911,580	$	5,147,241	$	149,748	$	157,418

(1)	Junior mortgages include equity lines

(2)	includes credit cards

IMPAIRED LOANS

As of December 31, 2010


With no related allowance:	Recorded Investment		Customers' Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
Construction, land & land development	$	200,000	$	200,000	$	—	$	120,000	$	2,213	$	—
Residential First Mortgages		1,145,848		1,148,692		—		910,146		63,077		60,955
Residential Junior Mortgages (1)		542,376		822,003		—		726,032		24,787		24,042
Commercial Mortgages (Non-owner-occupied)		711,850		711,850		—		283,796		—		—
Commercial Mortgages (Owner-occupied)		615,327		615,327		—		1,328,235		20,677		18,552
Commercial & industrial		65,000		93,948		—		145,064		10,884		4,843
Consumer (2)		—		—		—		—		—		—

	$	3,280,401	$	3,591,820	$	—	$	3,513,274	$	121,638	$	108,392


With an allowance recorded:
Construction, land & land development	$	142,618	$	142,618	$	64,518	$	146,155	$	4,723	$	4,791
Residential First Mortgages		657,983		661,483		93,171		210,744		7,547		1,000
Residential Junior Mortgages (1)		931,648		931,648		67,648		746,447		55,726		58,184
Commercial Mortgages (Non-owner-occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner-occupied)		1,351,007		1,368,724		397,451		1,091,400		24,657		37,027
Commercial & industrial		—		—		—		—		—		—
Consumer (2)		569,918		569,918		17,662		456,449		34,232		31,337

	$	3,653,174	$	3,674,391	$	640,450	$	2,651,195	$	126,885	$	132,339


Total Impaired Loans:
Construction, land & land development	$	342,618	$	342,618	$	64,518	$	266,155	$	6,936	$	4,791
Residential First Mortgages		1,803,831		1,810,175		93,171		1,120,890		70,624		61,955
Residential Junior Mortgages (1)		1,474,024		1,753,651		67,648		1,472,479		80,513		82,226
Commercial Mortgages (Non-owner-occupied)		711,850		711,850		—		283,796		—		—
Commercial Mortgages (Owner-occupied)		1,966,334		1,984,051		397,451		2,419,636		45,334		55,579
Commercial & industrial		65,000		93,948		—		145,064		10,884		4,843
Consumer (2)		569,918		569,918		17,662		456,449		34,232		31,337

	$	6,933,575	$	7,266,211	$	640,450	$	6,164,469	$	248,523	$	240,731

(1)	Junior mortgages include equity lines

(2)	includes credit cards

At September 30, 2011, the Bank had two relationships that constitute troubled debt restructurings (TDR's). One relationship involves seven loans totaling $1.8 million at September 30, 2011, which are included above in the commercial and industrial segment; the construction, land and land development segment; and the residential junior mortgages segment. These loans have been nonaccruing since October of 2010, and were modified during the second quarter of 2011 to provide cross-collateralization between loans and reduced payments. The second relationship involves one loan included above in residential first mortgages, which is a commercial purpose loan secured by a residence, with a principal balance of $614,669 on September 30, 2011 and $623,692 on December 31, 2010. This loan was modified during the fourth quarter of 2010 to extend the amortization period by five years. Additionally, the repayment terms were modified to reflect the seasonal nature of the borrower's business, to more closely coincide with the borrower's cash flows. Prior to defaulting on the loan, this borrower notified the Bank during the third quarter that they would be going out of business. Therefore, the status of this loan was changed to nonaccruing in September, 2011.

At September 30, 2011and December 31, 2010, non-accrual loans excluded from the impaired loan disclosure totaled $790,345 and $899,350, respectively. If interest on these loans had been accrued, such income would have approximated $35,828 during the nine months ended September 30, 2011 and $34,567 during the year ended December 31, 2010.