Note 4. 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, 2011					December 31, 2010
	Outstanding		Percent of			Outstanding		Percent of
	Balance		Total Portfolio			Balance		Total Portfolio
	(In Thousands)					(In Thousands)
Real estate loans:
Construction	$	48,572		7.2	%	$	68,110		10.3	%
Secured by farmland		10,377		1.5			11,532		1.7
Secured by 1-4 family residential		239,738		35.5			242,620		36.8
Other real estate loans		273,823		40.5			268,262		40.7
Commercial loans		91,296		13.5			56,385		8.6
Consumer loans		12,007		1.8			12,403		1.9
		675,813		100.0	%		659,312		100.0	%
Less allowance for loan losses		15,124					14,967

Net loans	$	660,689				$	644,345

Loans presented in the table above exclude loans held for sale. The Company had $66.9 million and $59.4 million in mortgages held for sale at September 30, 2011 and December 31, 2010, respectively.

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2011 and December 31, 2010.

	September 30, 2011 (In thousands)
	30-59 Days		60-89 Days		90 Days		Total Past				Total
	Past Due		Past Due		Or Greater		Due		Current		Loans

Real estate loans:
Construction	$	1,440	$	-	$	2,789	$	4,229	$	44,343	$	48,572
Secured by farmland		415		-		-		415		9,962		10,377
Secured by 1-4 family residential		6,502		1,340		10,313		18,155		221,583		239,738
Other real estate loans		899		3,375		1,719		5,993		267,830		273,823
Commercial loans		1,863		221		203		2,287		89,009		91,296
Consumer loans		6		-		-		6		12,001		12,007
		-		-		-		-		-		-
Total	$	11,125	$	4,936	$	15,024	$	31,085	$	644,728	$	675,813

	December 31, 2010 (In thousands)
	30-59 Days		60-89 Days		90 Days		Total Past				Total
	Past Due		Past Due		Or Greater		Due		Current		Loans

Real estate loans:
Construction	$	83	$	7,423	$	1,791	$	9,297	$	58,813	$	68,110
Secured by farmland		-		-		-		-		11,532		11,532
Secured by 1-4 family residential		2,938		-		7,729		10,667		231,953		242,620
Other real estate loans		4,438		3,887		1,385		9,710		258,552		268,262
Commercial loans		1,801		28		243		2,072		54,313		56,385
Consumer loans		22		41		242		305		12,098		12,403
		-		-		-		-		-		-
Total	$	9,282	$	11,379	$	11,390	$	32,051	$	627,261	$	659,312

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
			Past due 90				Past due 90
			days or more				days or more
	Nonaccrual		and still accruing		Nonaccrual		and still accruing
	(In Thousands)
Real estate loans:
Construction	$	4,229	$	-	$	8,871	$	-
Secured by farmland		-		-		-		-
Secured by 1-4 family residential		16,063		1,561		10,817		676
Other real estate loans		8,046		-		7,509		218
Commercial loans		2,147		-		1,950		12
Consumer loans		-		-		239		3


Total	$	30,485	$	1,561	$	29,386	$	909

If interest on nonaccrual loans had been accrued, such income would have approximated $1.5 million and $1.2 million for the nine months ended September 30, 2011 and 2010 respectively.

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 may be determined.

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

The following tables present a summary of loan classifications by class of loan as of September 30, 2011 and December 31, 2010:

	September 30, 2011 (In Thousands)
			Real Estate		Real Estate
	Real Estate		Secured by		Secured by 1-4		Other Real
	Construction		Farmland		Family Residential		Estate Loans		Commercial		Consumer		Total

Pass	$	26,615	$	9,565		206,466	$	239,591	$	84,218	$	11,928	$	578,383
Special Mention		6,524		812		9,939		20,836		4,478		66		42,655
Substandard		14,402		-		21,685		13,143		2,299		13		51,542
Doubtful		1,031		-		1,648		253		301		-		3,233
Loss		-		-		-		-		-		-		-
Ending Balance	$	48,572	$	10,377		239,738	$	273,823	$	91,296	$	12,007	$	675,813

	December 31, 2010 (In thousands)
			Real Estate		Real Estate
	Real Estate		Secured by		Secured by 1-4		Other Real
	Construction		Farmland		Family Residential		Estate Loans		Commercial		Consumer		Total

Pass	$	31,744	$	10,070		212,531	$	244,982	$	50,660	$	12,016	$	562,003
Special Mention		15,580		1,462		14,810		13,067		3,394		92		48,405
Substandard		20,561		-		14,616		9,939		2,331		295		47,742
Doubtful		225		-		663		274		-		-		1,162
Loss		-		-		-		-		-		-		-
Ending Balance	$	68,110	$	11,532		242,620	$	268,262	$	56,385	$	12,403	$	659,312

The following table presents loans identified as impaired by class of loan as of and for the nine months ended September 30, 2011:

	September 30, 2011 (In thousands)
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	3,300	$	3,960	$	-	$	4,248	$	-
Secured by farmland		-		-		-		-		-
Secured by 1-4 family residential		3,894		4,487		-		4,254		-
Other real estate loans		2,987		3,030		-		3,978		-
Commercial loans		1,723		1,723		-		1,721		-
Consumer loans		-		-		-		-		-

Total with no related allowance		11,904		13,200		-		14,201		-

With an allowance recorded:
Real estate loans:
Construction		929		959		416		930		-
Secured by farmland		-		-		-		-		-
Secured by 1-4 family residential		12,573		14,377		3,030		13,248		8
Other real estate loans		5,059		5,059		1,033		4,540		-
Commercial loans		424		446		406		426		-
Consumer loans		-		-		-		-		-

Total with a related allowance		18,985		20,841		4,885		19,144		8

Total	$	30,889	$	34,041	$	4,885	$	33,345	$	8

The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2010:

	December 31, 2010 (In thousands)
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	3,415	$	3,415	$	-	$	3,470	$	4
Secured by farmland		-		-		-		-
Secured by 1-4 family residential		5,450		6,281		-		5,992		-
Other real estate loans		1,303		1,303		-		1,316		-
Commercial loans		1,823		1,844		-		2,032		-
Consumer loans		-		-		-		28		-

Total with no related allowance		11,991		12,843		-		12,838		4

With an allowance recorded:
Real estate loans:
Construction		5,755		6,366		1,876		6,108		-
Secured by farmland		-		-		-		-
Secured by 1-4 family residential		5,422		6,518		1,099		6,076		-
Other real estate loans		7,056		7,201		2,010		7,235		48
Commercial loans		127		127		108		128		-
Consumer loans		239		239		239		240		-

Total with a related allowance		18,599		20,452		5,332		19,787		48

Total	$	30,590	$	33,295	$	5,332	$	32,625	$	52

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 (“TDR's”) that were classified as impaired. The total balance of TDR's at September 30, 2011 was $8.4 million of which $8.0 million were included in the Company's non-accrual loan totals at that date and $404,000 represented loans performing as agreed to the restructured terms. This compares with $4.5 million in total restructured loans at December 31, 2010, an increase of $3.9 million or 86.7%. The amount of the valuation allowance related to total TDR's was $1.5 million and $532,000 as of September 30, 2011 and December 31, 2010 respectively.

The $8.0 million in nonaccrual TDR's as of September 30, 2011 is comprised of $572,000 million in real estate construction loans, $3.9 million in 1-4 family real estate loans, $2.3 million in non-residential real estate loans, $764,000 in commercial loans, and $416,000 in consumer loans. The $404,000 in TDR's which were performing as agreed under restructured terms as of September 30, 2011 is represented by two 1-4 family real estate loans. The Company considers all loans classified as TDR's to be impaired as of September 30, 2011.

As a result of adopting the amendments in ASU 2011-02, “Receivables (Topic 310) – A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” The Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance using review procedures in effect at that time.

The following table presents by class of loan, information related to loans modified in a TDR during the nine and three months ended September 30, 2011:

	Loans modified as TDR's
	For the nine months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
Class of Loan	Contracts		Investment		Investment
	(In thousands)
Real estate loans:
Construction		-	$	-	$	-
Secured by farmland		-		-		-
Secured by 1-4 family residential		4		284		293
Other real estate loans		5		5,282		5,282
Total real estate loans		9		5,566		5,575

Commercial loans		-		-		-
Consumer loans		-		-		-
Total		9	$	5,566	$	5,575


	Loans modified as TDR's
	For the three months ended
	September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
Class of Loan	Contracts		Investment		Investment
	(In thousands)
Real estate loans:
Construction		-	$	-	$	-
Secured by farmland		-		-		-
Secured by 1-4 family residential		4		284		293
Other real estate loans		-		-		-
Total real estate loans		4		284		293

Commercial loans		-		-		-
Consumer loans		-		-		-
Total		4	$	284	$	293

During the nine months ended September 30, 2011, the Company modified nine loans that were considered to be TDR's. We extended the term and lowered the interest rate for all nine loans.

During the nine months ended September 30, 2011, the Company identified as a TDR one loan for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying this loan as a TDR, the Company evaluated it for impairment. The accounting amendments require prospective application of the impairment measurement guidance for those loans newly identified as impaired. As of September 30, 2011, the recorded investment in the loan for which the allowance was previously measured under a general allowance methodology and is now considered impaired and measured under a specific allowance methodology was $293,000, and the allowance for loan losses associated with that loan, on the basis of a current evaluation of loss was $127,000.

As of September 30, 2011, $5.3 million of loans restructured as TDR's during the nine month period are included in the Company's non-accrual loans total. The balance of the loans identified as TDR's during that period are reflected as non-performing assets which are performing as agreed under the restructured terms.

No loans modified in as TDR's from October 1, 2010 through September 30, 2011 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the nine and three months ended September 30, 2011.

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 TDR's 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. Management exercises significant judgment in developing estimates for potential losses associated with TDR's.