BLUE RTOGE BANKSHARES, INC.  NOTES TO THE CONSOLIDATED FEVANCIAL STATEMENTS  December 31,2012  Note 4. Loans Receivable and Related Allowance for Loan Losses (Continued)  Management uses a nine point intemal risk rating system to monitor the credit quality of the overall  loan portfolio. The first five categories are considered not criticized, and are aggregated as "Pass"  rated. The criticized rating categories utilized by management generally follow Bank regulatory  definitions. The Special Mention category includes assets that are currently protected but are  potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a  Substandard classification. Loans in the Substandard category have well-defined weaknesses that  jeopardize the orderly liquidation of the debt, and have a distinct possibility that some loss will be  sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered  Substandard. Loans in the Doubtful category have all the weaknesses found in Substandard loans,  with the added provision that the weaknesses make collection of debt in fiill highly questionable and  improbable. Any portion of a loan that has been charged off is placed in the Loss category.  To help ensure that risk ratings are accurate and reflect the present and fiiture capacity of borrowers to  repay a loan as agreed, the Bank has a structured loan rating process with both intemal and external  oversight. The Bank’s loan officers are responsible for the timely and accurate risk rating ofthe loans  in their portfolios at origination and on an ongoing basis. The loan processing department confirms  the appropriate risk grade at origination and monitors all subsequent changes to risk ratings. The  Bank’s Loan Committee reviews risk grades when approvmg a loan and approves all risk rating  changes, except those made within the pass risk ratings. The Bank engages an extemal consultant to  conduct loan reviews on a semi-aimual basis. Generally, the external consultant reviews relationships  greater than $650,000 and all loans over $50,000 that are either in nonaccrual status, over 90 days  past due, or that are adversely classified. The extemal consultant also reviews a sample of new loans  during the year. The Bank’s process requires the review and evaluation of an impaired loan to be  updated at least quarterly. Loans in the Special Mention and Substandard categories that are  collectively evaluated for impairment are given separate consideration in the determination of the  allowance.  (Continued)  17  December 31,2011  Residential Loans  Commercial Real Estate  Consumer Loans  Commercial/Farm Loans  Total impaired loans  Impaired Loans with  Specific Allowance  Recorded  Investment  $  406,408  $ 406,408  $  $  Related  Allowance  100,000  100,000  Impaired  Loans with  No Specific  Allowance  Recorded  Investment  $ 72,668 5,856  1,667  $ 80,191 $  $  Total Impaired  Average  Recorded  Investment  72,668  409,066  5,856  1,667  489,257  $  $ $^{Loans }$ Unpaid  Principal  Balance  72,668  406,408  5,856  1,667  486,599  $  $  Interest  Income  Recognized  While  Impaired  5,912  13,116  1,066  490  20.583 