Note 2. Loans and Allowance for Loan Losses

The major components of loans in the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 are summarized below:


	2012			2011

Commercial	$	5,759		$	5,873
Real estate
Construction and land development		9,113			8,868
Residential, 1-4 families		27,802			26,568
Residential, 5 or more families		3,774			4,717
Farmland		1,295			1,306
Nonfarm, nonresidential		72,750			75,879
Agricultural		17			9
Consumer		810			2,487
Other		4,435			4,765

Gross loans		125,755			130,472
Unearned discount and net deferred loan fees and costs		(313	)		(314	)

Total loans		125,442			130,158
Allowance for loan losses		(2,873	)		(2,867	)

Net loans	$	122,569		$	127,291

Overdrafts that were reclassified as part of gross loans totaled $13 thousand and $7 thousand at March 31, 2012 and December 31, 2011, respectively.

As a part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade assigned to commercial and consumer loans, (ii) the level of classified commercial loans, (iii) net charge-offs, (iv) nonperforming loans, and (v) the general economic conditions in the Company's geographic markets.

The Company categorizes loans receivable 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. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

Pass—Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

Special Mention—Loans in this category are currently protected but are potentially weak, including adverse trends in borrower's operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company's credit position at some future date.

Substandard—A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

The following table presents the loan portfolio by credit quality indicator (risk grade) as of March 31, 2012 and December 31, 2011. Those loans with a risk grade above special mention have been combined in the pass column for presentation purposes.


March 31, 2012 (In thousands)	Pass		Special Mention		Sub- Standard		Doubtful		Total Loans

Commercial	$	3,047	$	—	$	2,712	$	—	$	5,759
Real Estate
Construction and land development		5,891		—		3,222		—		9,113
Residential, 1-4 families		26,963		—		839		—		27,802
Residential, 5 or more families		3,774		—		—		—		3,774
Farmland		1,295		—		—		—		1,295
Nonfarm, nonresidential		62,870		1,905		7,975		—		72,750
Agriculture		17		—		—		—		17
Consumer		810		—		—		—		810
Other		4,435		—		—		—		4,435

Total loans	$	109,102	$	1,905	$	14,748	$	—	$	125,755


December 31, 2011 (In thousands)	Pass		Special Mention		Sub- Standard		Doubtful		Total Loans

Commercial	$	3,161	$	—	$	2,712	$	—	$	5,873
Real Estate
Construction and land development		5,671		—		3,197		—		8,868
Residential, 1-4 families		25,730		—		838		—		26,568
Residential, 5 or more families		3,890		827		—		—		4,717
Farmland		1,306		—		—		—		1,306
Nonfarm, nonresidential		64,401		2,436		9,042		—		75,879
Agriculture		9		—		—		—		9
Consumer		2,487		—		—		—		2,487
Other		4,765		—		—		—		4,765

Total loans	$	111,420	$	3,263	$	15,789	$	—	$	130,472

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 substandard or below and an outstanding amount of $500 thousand or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans that are considered impaired.

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.

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, as of March 31, 2012 and December 31, 2011.

		00000000		00000000		00000000		00000000		00000000		00000000
	Accruing Loans
March 31, 2012 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans

Commercial	$	—	$	—	$	—	$	—	$	5,759	$	5,759
Real Estate
Construction and land development		—		—		—		3,222		5,891		9,113
Residential, 1-4 families		118		—		118		617		27,067		27,802
Residential, 5 or more families		—		—		—		—		3,774		3,774
Farmland		—		—		—		—		1,295		1,295
Nonfarm, nonresidential		122		—		122		5,501		67,127		72,750
Agriculture		—		—		—		—		17		17
Consumer		1		—		1		—		809		810
Other		—		—		—		—		4,435		4,435

Total loans	$	241	$	—	$	241	$	9,340	$	116,174	$	125,755

		00000000		00000000		00000000		00000000		00000000		00000000
	Accruing Loans
December 31, 2011 (In thousands)	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans

Commercial	$	1	$	2,700	$	2,701	$	—	$	3,172	$	5,873
Real Estate
Construction and land development		—		—		—		3,197		5,671		8,868
Residential, 1-4 families		—		—		—		612		25,956		26,568
Residential, 5 or more families		—		—		—		—		4,717		4,717
Farmland		—		—		—		—		1,306		1,306
Nonfarm, nonresidential		107		—		107		5,489		70,283		75,879
Agriculture		—		—		—		—		9		9
Consumer		3		—		3		—		2,484		2,487
Other		—		—		—		—		4,765		4,765

Total loans	$	111	$	2,700	$	2,811	$	9,298	$	118,363	$	130,472

The following table details impaired loan data as of March 31, 2012 and December 31, 2011:


March 31, 2012 (In thousands)	Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recorded		Interest Income Collected

With No Related Allowance Recorded
Commercial	$	—	$	—	$	—	$	—	$	—
Real Estate
Construction and land development		2,492		—		2,496		26		27
Nonfarm, nonresidential		2,500		—		2,500		—		—

		4,992		—		4,996		26		27


With an Allowance Recorded
Commercial		2,712		381		2,712		27		54
Real Estate
Construction and land development		3,221		699		3,229		—		—
Residential, 1-4 families		617		78		615		—		—
Nonfarm, nonresidential		4,953		601		4,958		22		23

		11,503		1,759		11,514		49		77


Total
Commercial		2,712		381		2,712		27		54
Real Estate
Construction and land development		5,713		699		5,725		26		27
Residential, 1-4 families		617		78		615		—		—
Nonfarm, nonresidential		7,453		601		7,458		22		23

	$	16,495	$	1,759	$	16,510	$	75	$	104


December 31, 2011 (In thousands)	Impaired Balance		Related Allowance		Average Recorded Investment		Interest Income Recorded			Interest Income Collected

With No Related Allowance Recorded
Commercial	$	—	$	—	$	—	$	—		$	—
Real Estate
Construction and land development		2,504		—		2,529		87			108
Nonfarm, nonresidential		2,500		—		2,500		(32	)		—

		5,004		—		5,029		55			108


With an Allowance Recorded
Commercial		12		12		12		—			—
Real Estate
Construction and land development		3,197		584		3,902		—			—
Residential, 1-4 families		612		73		791		13			16
Nonfarm, nonresidential		4,961		589		5,233		90			149

		8,782		1,258		9,938		103			165


Total
Commercial		12		12		12		—			—
Real Estate
Construction and land development		5,701		584		6,431		87			108
Residential, 1-4 families		612		73		791		13			16
Nonfarm, nonresidential		7,461		589		7,733		58			149

	$	13,786	$	1,258	$	14,967	$	158		$	273

The company is generally not committed to advance additional funds in connection with impaired loans.

As a result of adopting the amendments in Accounting Standards Update C ("ASU") 2011-02, the Bank reassessed all loan restructurings that occurred on or after the beginning of the fiscal year of adoption, January 1, 2011, to determine whether they are considered troubled debt restructurings ("TDRs") under the amended guidance. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulty as both events must be present. The Bank identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Bank identified them as impaired under the guidance in Accounting Standards Codification ("ASC") 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At March 31, 2012, the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $6.6 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss exposure was approximately $735 thousand.

The following is a schedule of loans that are considered Trouble Debt Restructurings at March 31, 2012.


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(In thousands)
Real Estate		3	$	6,570	$	6,570

Total		3	$	6,570	$	6,570

During the three months ended March 31, 2012, the Bank modified no loans that were considered to be troubled debt restructurings. We extended the maturity date term for none of these loans, lowered the interest rate for none of these loans, and entered into forbearance agreements on none of these loans.

The following is a schedule of loans that had been previously restructured and have subsequently defaulted at March 31, 2012.

Number of
Contracts

Pre-Modification
Outstanding
Recorded
Investment

Post-Modification
Outstanding
Recorded
Investment

(In thousands)

Real Estate

—

Total

—

During the three months ended March 31, 2012, no loan that had previously been restructured, was in default, none of which went into default in the quarter. The Bank considers a loan in default when it is 90 days or more past due or on nonaccrual status.

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings. All troubled debt restructurings are considered impaired loans. Loss exposure related to these loans are determined by management quarterly.

At March 31, 2012 there were $6.6 million in loans that are classified as trouble debt restructurings compared to $6.6 million at December 31, 2011.

The Company generally does not make commitments to lend additional funds to customers classified as trouble debt restructures.

The following tables detail activity in the allowance for loan losses, segregated by class of loan, for the three month periods ended March 31, 2012 and March 31, 2011. Allocation portion of the allowance to one category of loans does not preclude its activity to absorb losses in other loan categories and periodically may result in reallocation within the provision categories.


March 31, 2012 (In thousands)	Beginning Balance		Charge- Offs		Recoveries		Provision			Ending Balance

Commercial	$	35	$	—	$	—	$	369		$	404
Real Estate
Construction and land development		1,243		—		10		(394	)		859
Residential, 1-4 families		155		—		2		5			162
Residential, 5 or more families		—		—		—		—			—
Farmland		—		—		—		—			—
Nonfarm, nonresidential		1,255		—		—		13			1,268
Agriculture		3		—		—		—			3
Consumer		50		—		—		—			50
Other		126		—		1		—			127

	$	2,867	$	—	$	13	$	(7	)	$	2,873


March 31, 2011 (In thousands)	Beginning Balance		Charge- Offs		Recoveries		Provision		Ending Balance

Commercial	$	79	$	50	$	—	$	—	$	29
Real Estate
Construction and land development		1,729		123		—		83		1,689
Residential, 1-4 families		385		295		—		103		193
Residential, 5 or more families		—		—		—		—		—
Farmland		—		—		—		—		—
Nonfarm, nonresidential		710		—		—		—		710
Agriculture		3		—		—		—		3
Consumer		47		—		3		—		50
Other		120		—		2		—		122

	$	3,073	$	468	$	5	$	186	$	2,796

The following table indicates the allocation of the allowance for loan losses based on loans evaluated specifically for impairment and loans evaluated collectively for the periods ended March 31, 2012 and December 31, 2011.


March 31, 2012 (In thousands)	Individually Evaluate for Impairment			Ending Balance Collectively Evaluated Impairment			Total

Commercial	$	381		$	23		$	404
Real Estate
Construction and land development		699			160			859
Residential, 1-4 families		78			84			162
Residential, 5 or more families		—			—			—
Farmland		—			—			—
Nonfarm, nonresidential		601			667			1,268
Agriculture		—			3			3
Consumer		—			50			50
Other		—			127			127

Ending balance of allowance for loan losses	$	1,759		$	1,114		$	2,873

Ending balance to total allowance ratio		61.23	%		38.77	%		100	%

December 31, 2011 (In thousands)
Commercial	$	12		$	23		$	35
Real Estate
Construction and land development		584			659			1,243
Residential, 1-4 families		73			82			155
Residential, 5 or more families		—			—			—
Farmland		—			—			—
Nonfarm, nonresidential		589			666			1,255
Agriculture		—			3			3
Consumer		—			50			50
Other		—			126			126

Ending Balance	$	1,258		$	1,609		$	2,867

Ending balance of allowance to total allowance		43.88	%		56.12	%		100	%