Note 5.

Allowance for Loan Losses

An analysis of the change in the allowance for loan losses for 2010.


	2010
Balance, beginning of year	$	3,769,287
Provision for loan losses		720,214
Recoveries		232,883
Loans charged off		(1,491,707	)

Balance, end of period	$	3,230,677

A disaggregation of the allowance for loan losses by segment is shown below.


	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
As of December 31, 2011:
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	)		—			(232,904	)		(29,162	)		(16,553	)		(211,117	)		—			(577,281	)
Recoveries		175			—			—			—			1,393			—			—			38,577			—			40,145
Provision		33,235			(3,000	)		32,117			(716,133	)		1,186,891			287,635			228,334			146,878			(700,957	)		495,000

Ending Balance	$	190,500		$	—		$	88,000		$	554,318		$	1,161,551		$	719,121		$	281,650		$	185,000		$	8,401		$	3,188,541


Individually evaluated for impairment	$	119,500		$	—		$	—		$	244,318		$	726,552		$	465,121		$	236,650		$	—		$	—		$	1,792,141
Collectively evaluated for impairment	$	71,000		$	—		$	88,000		$	310,000		$	435,000		$	254,000		$	45,000		$	185,000		$	8,401		$	1,396,401

LOAN RECEIVABLES:
Ending Balance:
Individually evaluated for impairment	$	408,640		$	—		$	—		$	1,447,278		$	3,187,147		$	1,790,858		$	560,197		$	—					$	7,394,120
Collectively evaluated for impairment		27,233,640			1,526,050			16,198,584			26,398,318			104,451,588			26,735,150			18,423,135			8,329,237						229,295,702


Total Gross Loans	$	27,642,280		$	1,526,050		$	16,198,584		$	27,845,596		$	107,638,735		$	28,526,008		$	18,983,332		$	8,329,237					$	236,689,822


	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
As of December 31, 2010:
ALLOWANCE FOR LOAN LOSSES:
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	$	1,908,075	$	—	$	981,978	$	1,966,334	$	1,803,831	$	1,474,024	$	242,927	$	569,918			$	8,947,087
Collectively evaluated for Impairment		28,712,295		1,603,519		11,805,581	$	27,464,382		113,726,486		29,469,001		17,348,964	$	8,295,687				238,425,915

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

Unallocated ALL declined during 2011 as loans individually evaluated for impairment were identified and allowance was allocated to them. Provision is allocated to segments based on the balance required by the ALL calculation for each segment. Hence, during 2011, provision expense was reallocated from Commercial Mortgages (Owner occupied) and Farmland into other segments, with most going to Residential First Mortgages.

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 December 31, 2011:	Construction, Land and Land Development		Farmland		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Commercial and Industrial		Total
INTERNAL RISK RATING GRADES
Grade:
Pass	$	20,365,500	$	1,526,050	$	11,209,765	$	17,875,112	$	13,790,715	$	64,767,142
Watch		2,807,742		—		1,847,911		7,079,654		3,952,068		15,687,375
Special mention		2,186,094		—		2,393,755		310,959		—		4,890,808
Substandard		1,940,326		—		681,403		2,323,122		457,698		5,402,549
Doubtful		342,618		—		65,750		256,749		782,851		1,447,968

Total	$	27,642,280	$	1,526,050	$	16,198,584	$	27,845,596	$	18,983,332	$	92,195,842


As of December 31, 2010:	Construction, Land and Land Development		Farmland		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Commercial and Industrial		Total
INTERNAL RISK RATING GRADES
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 December 31, 2011	Residential First Mortgages		Residential Junior Mortgages		Consumer Loans		Total
PAYMENT ACTIVITY STATUS
Performing	$	105,971,956	$	26,784,722	$	8,178,214	$	140,934,892
Nonperforming		1,666,779		1,741,286		151,023		3,559,088

Total	$	107,638,735	$	28,526,008	$	8,329,237	$	144,493,980


As of December 31, 2010	Residential First Mortgages		Residential Junior Mortgages		Consumer Loans		Total
PAYMENT ACTIVITY STATUS
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 December 31, 2011	Recorded Investment		Customers' Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected
With no related allowance:
Construction, land & land development	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—		—
Residential First Mortgages		901,132		901,132		—		726,266		52,293		52,378
Residential Junior Mortgages		131,226		131,226		—		66,245		7,325		6,208
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		258,875		258,875		—		208,153		14,311		14,309
Commercial & industrial		—		—		—		—		—		—

Consumer		—		—		—		—		—		—

	$	1,291,233	$	1,291,233	$	—	$	1,000,665	$	73,929	$	72,895


With an allowance recorded:
Construction, land & land development	$	408,640	$	408,640	$	119,500	$	355,822	$	3,865	$	3,260
Farmland		—		—		—		—		—		—
Residential First Mortgages		2,286,015		2,303,167		726,552		1,254,593		100,550		95,208
Residential Junior Mortgages		1,659,632		1,961,728		465,121		1,451,332		14,483		9,846
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		1,188,403		1,191,301		244,318		891,128		48,600		44,593
Commercial & industrial		560,197		610,822		236,650		356,905		15,982		14,548

Consumer		—		—		—		—		—		—

	$	6,102,887	$	6,475,658	$	1,792,141	$	4,309,779	$	183,480	$	167,455

Total Impaired Loans:
Construction, land & land development	$	408,640	$	408,640	$	119,500	$	355,822	$	3,865	$	3,260
Farmland		—		—		—		—		—		—
Residential First Mortgages		3,187,147		3,204,299		726,552		1,980,859		152,843		147,586
Residential Junior Mortgages		1,790,858		2,092,954		465,121		1,517,577		21,808		16,054
Commercial Mortgages (Non-owner occupied)		—		—		—		—		—		—
Commercial Mortgages (Owner occupied)		1,447,278		1,450,176		244,318		1,099,281		62,911		58,902
Commercial & industrial		560,197		610,822		236,650		356,905		15,982		14,548
Consumer		—		—		—		—		—		—

	$	7,394,120	$	7,766,891	$	1,792,141	$	5,310,444	$	257,409	$	240,350


IMPAIRED LOANS as of December 31, 2010:	Recorded Investment		Customers' Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Collected

With no related allowance:
Construction, land & land development	$	200,000	$	200,000	$	—	$	120,000	$	2,213	$	—
Farmland		—		—		—		—		—		—
Residential First Mortgages		1,145,848		1,148,692		—		910,146		63,077		60,955
Residential Junior Mortgages		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		—		—		—		—		—		—

	$	3,280,401	$	3,591,820	$	—	$	3,513,273	$	121,638	$	108,392


With an allowance recorded:
Construction, land & land development	$	142,618	$	142,618	$	64,518	$	146,155	$	4,723	$	4,791
Farmland		—		—		—		—		—		—
Residential First Mortgages		657,983		661,483		93,171		210,744		7,547		1,000
Residential Junior Mortgages		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		569,918		569,918		17,662		456,449		34,232		31,337

	$	3,653,174	$	3,674,391	$	640,450	$	2,651,195	$	26,885	$	132,339


Total Impaired Loans:
Construction, land & land development	$	342,618	$	342,618	$	64,518	$	266,155	$	6,936	$	4,791
Farmland		—		—		—		—		—		—
Residential First Mortgages		1,803,831		1,810,175		93,171		1,120,890		70,624		61,955
Residential Junior Mortgages		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		2,419,635		45,334		55,579
Commercial & industrial		65,000		93,948		—		145,064		10,884		4,843
Consumer		569,918		569,918		17,662		456,449		34,232		31,337

	$	6,933,575	$	7,266,211	$	640,450	$	6,164,468	$	248,523	$	240,731

At December 31, 2011, the Bank had four relationships that constitute troubled debt restructurings ("TDRs"), totaling $3.3 million. One relationship involves seven loans totaling $1.8 million, which is included above in the commercial and industrial segment; the construction, land and land development segment; and the residential junior mortgages segment. These loans had defaulted and 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 other three relationships each involve residential first mortgages for a total of $1.5 million in principal balances. Two of these three with balances of $905,631 as of December 31, 2011, were restructured during 2011. One of these two defaulted during 2011. Another TDR, which was restructured in 2010, defaulted in 2011. The two which have defaulted are on nonaccrual where the borrowers have filed for bankruptcy.

At December 31, 2011 and 2010, nonaccruing loans excluded from impaired loan disclosure totaled $681,592 and $899,350, respectively. If interest on these nonaccruing loans had been accrued, such income would have approximated $32,560 in 2011 and $34,567 in 2010.

Loans past due 90 days or more and still accruing interest totaled $60,069 and $202,349 on December 31, 2011 and 2010, respectively.