Loan Portfolio

The Company segregates its loan portfolio into three primary loan segments: Real Estate Loans, Commercial Loans, and Consumer Loans. Real estate loans are further segregated into the following classes: construction loans, loans secured by farmland, loans secured by 1-4 family residential real estate, and other real estate loans. Other real estate loans include commercial real estate loans. The consolidated loan portfolio was composed of the following on the dates indicated:



	September 30, 2013				December 31, 2012
	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
	(In Thousands)				(In Thousands)
Real estate loans:
Construction	$	37,155	5.2	%	$	50,218	7.1	%
Secured by farmland	11,504		1.6	%	11,876		1.7	%
Secured by 1-4 family residential	269,986		37.7	%	260,620		36.7	%
Other real estate loans	261,095		36.5	%	254,930		35.9	%
Commercial loans	123,285		17.2	%	118,573		16.8	%
Consumer loans	13,081		1.8	%	13,260		1.8	%
	716,106		100.0	%	709,477		100.0	%
Less allowance for loan losses	13,382				14,311
Net loans	$	702,724			$	695,166

Loans presented in the table above exclude loans held for sale. The Company had $41.9 million in mortgages held for sale at September 30, 2013 and $82.1 million at December 31, 2012.

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2013 and December 31, 2012.



	September 30, 2013
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	174	$	—	$	935	$	1,109	$	36,046	$	37,155
Secured by farmland	—		—		—		—		11,504		11,504
Secured by 1-4 family residential	940		396		1,604		2,940		267,046		269,986
Other real estate loans	576		—		4,068		4,644		256,451		261,095
Commercial loans	118		—		55		173		123,112		123,285
Consumer loans	7		9		38		54		13,027		13,081
Total	$	1,815	$	405	$	6,700	$	8,920	$	707,186	$	716,106



	December 31, 2012
					(In thousands)
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	—	$	108	$	2,043	$	2,151	$	48,067	$	50,218
Secured by farmland	415		—		—		415		11,461		11,876
Secured by 1-4 family residential	1,625		568		1,910		4,103		256,517		260,620
Other real estate loans	197		361		6,112		6,670		248,260		254,930
Commercial loans	—		44		144		188		118,385		118,573
Consumer loans	27		10		32		69		13,191		13,260
Total	$	2,264	$	1,091	$	10,241	$	13,596	$	695,881	$	709,477

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing by class of loans as of September 30, 2013 and December 31, 2012:



	September 30, 2013				December 31, 2012
	Non-accrual		Past due 90 days or more and still accruing		Non-accrual		Past due 90 days or more and still accruing
	(In Thousands)
Real estate loans:
Construction	$	2,629	$	400	$	2,861	$	780
Secured by 1-4 family residential	9,768		227		8,761		228
Other real estate loans	6,236		—		7,866		—
Commercial loans	1,862		—		2,146		34
Consumer loans	30		9		30		2
Total	$	20,525	$	636	$	21,664	$	1,044

If interest on non-accrual loans had been accrued, such income would have approximated $839,000 for the nine months ended September 30, 2013 and $1.35 million for the year ended December 31, 2012.

The Company utilizes an internal asset classification system as a means of measuring and monitoring credit risk in the loan portfolio. Under the Company’s classification system, problem and potential problem loans are classified as “Special Mention”, “Substandard”, “Doubtful” and “Loss”.

Special Mention: Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, the potential weaknesses may result in the deterioration of the repayment prospects for the credit.

Substandard: Loans classified as substandard have a well-defined weakness that jeopardizes the liquidation of the debt. Either the paying capacity of the borrower or the value of the collateral may be inadequate to protect the Company from potential losses.

Doubtful: Loans classified as doubtful have a very high possibility of loss. However, because of important and reasonably specific pending factors, classification as a loss is deferred until a more exact status can be determined.

Loss: Loans are classified as loss when they are deemed uncollectible and are charged off immediately.

The following tables present a summary of loan classifications by class of loan as of September 30, 2013 and December 31, 2012:



	September 30, 2013
					(In Thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	31,061	$	2,994	$	249,447	$	236,543	$	119,731	$	12,980	$	652,756
Special Mention	2,363		7,903		2,488		12,291		951		12		26,008
Substandard	3,171		607		16,053		12,261		2,489		59		34,640
Doubtful	560		—		1,998		—		114		30		2,702
Loss	—		—		—		—		—		—		—
Ending Balance	$	37,155	$	11,504	$	269,986	$	261,095	$	123,285	$	13,081	$	716,106



	December 31, 2012
					(In thousands)
	Real Estate Construction		Real Estate Secured by Farmland		Real Estate Secured by 1-4 Family Residential		Other Real Estate Loans		Commercial		Consumer		Total
Pass	$	29,741	$	11,068	$	237,121	$	228,052	$	112,298	$	13,134	$	631,414
Special Mention	15,540		199		3,767		12,949		3,332		47		35,834
Substandard	3,902		609		18,333		12,887		2,831		49		38,611
Doubtful	1,035		—		1,399		1,042		112		30		3,618
Loss	—		—		—		—		—		—		—
Ending Balance	$	50,218	$	11,876	$	260,620	$	254,930	$	118,573	$	13,260	$	709,477

The following table presents loans identified as impaired by class of loan as of and for the nine months ended September 30, 2013:



	September 30, 2013
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,910	$	2,187	$	—	$	1,927	$	13
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	4,363		4,840		—		4,664		6
Other real estate loans	4,347		4,581		—		4,421		111
Commercial loans	2,132		2,139		—		2,275		19
Consumer loans	—		—		—		—		—
Total with no related allowance	12,752		13,747		—		13,287		149

With an allowance recorded:
Real estate loans:
Construction	987		1,037		508		1,016		—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	6,477		6,707		2,904		6,644		51
Other real estate loans	4,995		5,288		830		5,077		71
Commercial loans	373		403		285		408		10
Consumer loans	30		30		30		30		—
Total with a related allowance	12,862		13,465		4,557		13,175		132
Total	$	25,614	$	27,212	$	4,557	$	26,462	$	281

The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2012:



	December 31, 2012
			(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,819	$	2,370	$	—	$	2,543	$	—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,248		3,667		—		3,712		50
Other real estate loans	3,135		3,178		—		3,141		91
Commercial loans	1,947		1,947		—		1,924		—
Consumer loans	—		—		—		—		—
Total with no related allowance	10,149		11,162		—		11,320		141

With an allowance recorded:
Real estate loans:
Construction	1,150		2,250		166		1,685		—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	7,544		8,203		2,724		7,842		65
Other real estate loans	7,505		7,605		1,045		7,691		73
Commercial loans	417		464		338		446		14
Consumer loans	30		30		30		30		—
Total with a related allowance	16,646		18,552		4,303		17,694		152
Total	$	26,795	$	29,714	$	4,303	$	29,014	$	293

The “Recorded Investment” amounts in the tables above represent the outstanding principal balance on each loan represented in the tables plus any accrued interest receivable on such loans. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the tables plus any amounts that have been charged off on each loan.

Troubled Debt Restructurings

Included in certain loan categories in the impaired loans table above are troubled debt restructurings (“TDRs”) that were classified as impaired. The total balance of TDRs at September 30, 2013 was $15.8 million of which $11.0 million were included in the Company’s non-accrual loan totals at that date and $4.8 million represented loans performing as agreed according to the restructured terms. The total amount of TDRs at September 30, 2013 represents an increase of $3.8 million or 31.7% from the amount at December 31, 2012 of $12.0 million. The amount of the valuation allowance related to total TDRs was $2.6 million and $2.0 million as of September 30, 2013 and December 31, 2012 respectively.

The $11.0 million in nonaccrual TDRs as of September 30, 2013 is comprised of $651,000 in real estate construction loans, $5.4 million in 1-4 family real estate loans, $4.9 million in other real estate loans, and $80,000 in commercial loans. The $4.8 million in TDRs which were performing as agreed under the restructured terms as of September 30, 2013 is comprised of $1.1 million in 1-4 family real estate loans, $3.1 million in other real estate loans and $642,000 in commercial loans. The Company considers all loans classified as TDRs to be impaired.

The following tables present by class of loan, information related to loans modified in a TDR during the three and nine months ended September 30, 2013:



	Loans modified as TDR's
	For the three months ended
	September 30, 2013
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Real estate loans:
Construction	1	$	45	$	41
Secured by farmland	—	—		—
Secured by 1-4 family residential	6	2,300		1,986
Other real estate loans	3	701		676
Total real estate loans	10	3,046		2,703
Commercial loans	1	50		49
Consumer loans	—	—		—
Total	11	$	3,096	$	2,752


	Loans modified as TDR's
	For the nine months ended
	September 30, 2013
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Real estate loans:
Construction	2	$	557	$	514
Secured by farmland	—	—		—
Secured by 1-4 family residential	11	3,549		3,227
Other real estate loans	5	869		824
Total real estate loans	18	4,975		4,565
Commercial loans	2	517		515
Consumer loans	—	—		—
Total	20	$	5,492	$	5,080

During the three months ended September 30, 2013, the Company modified eleven loans that were considered to be TDRs and are summarized in the above table. The interest rates were reduced on ten of the loans and maturity dates were extended on nine of the loans.

During the nine months ended September 30, 2013, the Company modified twenty loans that were considered to be TDRs and are summarized in the above table. The interest rates were reduced on fifteen of the loans and maturity dates were extended on fifteen of the loans.

During the nine months ended September 30, 2013, the Company identified ten loans with an aggregate recorded investment of $3.8 million as TDRs for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying these loans as TDRs, the Company evaluated them for impairment and determined, based on a current evaluation, that these loans required an allowance for loan losses balance of $1.1 million at September 30, 2013.

One loan modified as a TDR in the past twelve months subsequently defaulted (i.e., 90 days or more past due following a restructuring) during the nine months ended September 30, 2013. The recorded investment of this loan was $712,000 as is classified as a 1-4 family residential loan.

Management considers troubled debt restructurings and subsequent defaults in restructured loans in the determination of the adequacy of the Company’s allowance for loan losses. When identified as a TDR, a loan is evaluated for potential loss based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs if the loan is collateral dependent. Loans identified as TDRs frequently are on non-accrual status at the time of the restructuring and, in some cases, partial charge-offs may have already been taken against the loan and a specific allowance may have already been established for the loan. As a result of any modification as a TDR, the specific reserve associated with the loan may be increased. Additionally, loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future defaults. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. As a result, any specific allowance may be increased, adjustments may be made in the allocation of the total allowance balance, or partial charge-offs may be taken to further write-down the carrying value of the loan.