(4) Loans

The following table presents the composition of loans, segregated by class of loans, as of December 31:

	2011		2010

Commercial and Industrial
Commercial	$	48,986,102	$	53,220,341
Industrial		8,421,884		10,551,791

Real Estate
Commercial Construction		58,545,820		72,309,231
Residential Construction		3,530,502		4,373,011
Commercial		315,280,748		362,878,565
Residential		193,637,817		207,471,813
Farmland		48,225,406		52,778,389

Consumer and Other
Consumer		30,449,303		33,563,863
Other		9,243,739		16,103,669

Total Loans	$	716,321,321	$	813,250,673

Commercial and industrial loans are extended to a diverse group of businesses within the Company's market area. These loans are often underwritten based on the borrower's ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company's geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

Grades 1 and 2 - Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.

Grades 3 and 4 - Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

Grade 5 - This grade includes “special mention” loans on management's watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

Grade 6 - This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

Grades 7 and 8 - These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company's problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of December 31. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes.

December 31, 2011	Pass		Special Mention		Substandard		Total Loans

Commercial and Industrial
Commercial	$	42,586,230	$	1,480,726	$	4,919,146	$	48,986,102
Industrial		8,153,224		-		268,660		8,421,884

Real Estate
Commercial Construction		28,745,596		2,814,113		26,986,111		58,545,820
Residential Construction		3,227,392		303,110		-		3,530,502
Commercial		272,062,206		14,789,290		28,429,252		315,280,748
Residential		175,099,480		8,343,336		10,195,001		193,637,817
Farmland		43,664,126		1,413,476		3,147,804		48,225,406

Consumer and Other
Consumer		29,372,493		361,714		715,096		30,449,303
Other		9,028,428		99,418		115,893		9,243,739

Total Loans	$	611,939,175	$	29,605,183	$	74,776,963	$	716,321,321

December 31, 2010	Pass		Special Mention		Substandard		Total Loans

Commercial and Industrial
Commercial	$	48,731,982	$	2,498,305	$	1,990,054	$	53,220,341
Industrial		10,059,081		169,381		323,329		10,551,791

Real Estate
Commercial Construction		33,522,709		10,064,271		28,722,251		72,309,231
Residential Construction		3,974,130		204,000		194,881		4,373,011
Commercial		294,186,347		11,847,051		56,845,167		362,878,565
Residential		183,518,173		9,195,410		14,758,230		207,471,813
Farmland		49,499,619		1,838,814		1,439,956		52,778,389

Consumer and Other
Consumer		32,046,108		726,933		790,822		33,563,863
Other		14,553,167		1,185,260		365,242		16,103,669

Total Loans	$	670,091,316	$	37,729,425	$	105,429,932	$	813,250,673

A loan's risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company's ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $50,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Nonaccrual loans totaled $38,821,632 and $28,901,974 as of December 31, 2011 and 2010, respectively, and total recorded investment in loans past due 90 days or more and still accruing interest totaled $15,160 and $19,188, respectively. During its review of impaired loans, the Company determined the majority of its exposures on these loans were known losses. As a result, the exposures were charged off, reducing the specific allowances on impaired loans.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of December 31:

	Accruing Loans
2011	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans

Commercial and Industrial
Commercial	$	644,899	$	-	$	644,899	$	2,102,522	$	46,238,681	$	48,986,102
Industrial		-		-		-		85,670		8,336,214		8,421,884

Real Estate
Commercial Construction		513,905		-		513,905		23,578,263		34,453,652		58,545,820
Residential Construction		33,541		-		33,541		-		3,496,961		3,530,502
Commercial		2,930,743		-		2,930,743		9,193,650		303,156,355		315,280,748
Residential		2,251,009		15,160		2,266,169		3,110,032		188,261,616		193,637,817
Farmland		376,426		-		376,426		486,683		47,362,297		48,225,406

Consumer and Other
Consumer		410,041		-		410,041		221,360		29,817,902		30,449,303
Other		-		-		-		43,452		9,200,287		9,243,739

Total Loans	$	7,160,564	$	15,160	$	7,175,724	$	38,821,632	$	670,323,965	$	716,321,321

2010

Commercial and Industrial
Commercial	$	382,728	$	-	$	382,728	$	393,823	$	52,443,790	$	53,220,341
Industrial		100,810		-		100,810		175,062		10,275,919		10,551,791

Real Estate
Commercial Construction		1,514,127		-		1,514,127		10,181,795		60,613,309		72,309,231
Residential Construction		194,881		-		194,881		-		4,178,130		4,373,011
Commercial		11,790,383		-		11,790,383		13,567,530		337,520,652		362,878,565
Residential		4,268,098		15,876		4,283,974		3,057,049		200,130,790		207,471,813
Farmland		566,868		-		566,868		1,157,528		51,053,993		52,778,389

Consumer and Other
Consumer		702,795		3,312		706,107		290,115		32,567,641		33,563,863
Other		218,887		-		218,887		79,072		15,805,710		16,103,669

Total Loans	$	19,739,577	$	19,188	$	19,758,765	$	28,901,974	$	764,589,934	$	813,250,673

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1,639,800, $1,621,700 and $2,318,100 for the years ended December 31, 2011, 2010 and 2009, respectively.

During the first quarter, as a result of recently issued guidance regarding troubled debt restructurings, the Company reviewed its policy for designating loans as impaired. As a result of this review, the Company identified additional loans which are now included in the impaired loan disclosures that were not previously reported as impaired. The loans identified were those troubled debt restructurings which were on accrual status. The inclusion of these accruing troubled debt restructurings in the impaired loan disclosures for December 31, 2011 did not have an impact on the allowance for loan losses.

The following table details impaired loan data as of December 31, 2011:

	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	1,742,961	$	1,580,140	$	-	$	946,466	$	60,078		$	65,346
Agricultural		85,670		85,670		-		208,162		(4,024	)		-
Commercial Construction		17,699,542		12,799,454		-		13,309,517		116,077			143,443
Commercial Real Estate		34,686,574		29,384,623		-		27,027,403		832,590			834,161
Residential Real Estate		2,600,919		1,933,669		-		3,176,244		88,419			80,334
Farmland		277,656		227,233		-		342,280		66,273			66,273
Consumer		228,688		215,956		-		184,372		10,732			12,203
Other		51,666		43,452		-		39,621		1,107			1,606

		57,373,676		46,270,197		-		45,234,065		1,171,252			1,203,366

With An Allowance Recorded
Commercial		775,506		775,506		308,211		213,898		15,086			19,171
Agricultural		-		-		-		-		-			-
Commercial Construction		14,035,742		11,489,233		2,693,571		10,470,491		13,759			61,012
Commercial Real Estate		6,429,874		6,429,874		2,060,815		6,556,769		181,799			197,132
Residential Real Estate		4,771,867		4,041,950		674,998		3,858,609		97,383			96,534
Farmland		298,893		259,450		11,878		64,862		(17,958	)		-
Consumer		5,404		5,404		1,632		3,987		607			724
Other		-		-		-		19,566		-			-

		26,317,286		23,001,417		5,751,105		21,188,182		290,676			374,573

Total
Commercial		2,518,467		2,355,646		308,211		1,160,364		75,164			84,517
Agricultural		85,670		85,670		-		208,162		(4,024	)		-
Commercial Construction		31,735,284		24,288,687		2,693,571		23,780,008		129,836			204,455
Commercial Real Estate		41,116,448		35,814,497		2,060,815		33,584,172		1,014,389			1,031,293
Residential Real Estate		7,372,786		5,975,619		674,998		7,034,853		185,802			176,868
Farmland		576,549		486,683		11,878		407,142		48,315			66,273
Consumer		234,092		221,360		1,632		188,359		11,339			12,927
Other		51,666		43,452		-		59,187		1,107			1,606

	$	83,690,962	$	69,271,614	$	5,751,105	$	66,422,247	$	1,461,928		$	1,577,939

The following table details impaired loan data as of December 31, 2010:

	Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	258,676	$	-	$	308,508	$	(987	)	$	5,465
Agricultural		175,062		-		220,716		689			689
Commercial Construction		10,181,795		-		11,760,840		7,320			31,963
Residential Construction		-		-		8,248		-			-
Commercial Real Estate		4,270,905		-		9,041,753		80,585			85,448
Residential Real Estate		3,057,049		-		3,931,449		41,420			53,813
Farmland		1,157,528		-		645,619		(6,571	)		10,969
Consumer		290,115		-		296,301		17,166			19,342
Other		79,072		-		129,249		4,550			7,760

		19,470,202		-		26,342,683		144,172			215,449

With An Allowance Recorded
Commercial		135,146		116,159		33,787		(1,125	)		3,316
Commercial Real Estate		9,296,626		539,671		2,324,156		341,937			475,999

		9,431,772		655,830		2,357,943		340,812			479,315

Total
Commercial		393,822		116,159		342,295		(2,112	)		8,781
Agricultural		175,062		-		220,716		689			689
Commercial Construction		10,181,795		-		11,760,840		7,320			31,963
Residential Construction		-		-		8,248		-			-
Commercial Real Estate		13,567,531		539,671		11,365,909		422,522			561,447
Residential Real Estate		3,057,049		-		3,931,449		41,420			53,813
Farmland		1,157,528		-		645,619		(6,571	)		10,969
Consumer		290,115		-		296,301		17,166			19,342
Other		79,072		-		129,249		4,550			7,760

	$	28,901,974	$	655,830	$	28,700,626	$	484,984		$	694,764

Troubled Debt Restructurings (TDRs) are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower's financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower's specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company's senior lending staff, who then determine whether the loan meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

Interest rate reductions - Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

Amortization or maturity date changes - Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

Principal reductions - These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

As discussed in Note 1, Summary of Significant Accounting Policies, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of December 31, 2011. The following tables present the number of loan contracts restructured during the 12 months ended December 31, 2011 and the pre- and post-modification recorded investment as well as the number of contracts and the recorded investment for those TDRs modified during the previous 12 months which subsequently defaulted during the period. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due.

Troubled Debt Restructurings	# of Contracts		Pre-Modification		Post-Modification

Commercial		3	$	3,240,469	$	1,541,882
Commercial Construction		3		1,430,147		1,430,101
Commercial RE		9		20,827,349		15,906,547
Residential RE		8		1,505,356		1,456,878

Total Loans		23	$	27,003,321	$	20,335,408

Troubled Debt Restructurings That Subsequently Defaulted	# of Contracts		Recorded Investment

Commercial		1	$	1,175,922
Commercial Construction		3		4,475,473
Commercial RE		3		2,322,361

Total Loans		7	$	7,973,756