Note 3.

Loans, Net

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:

	2011				2010
	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
	(In Thousands)
Real estate loans:
Construction	$	42,208	6.3	%	$	68,110	10.3	%
Secured by farmland	10,047		1.5		11,532		1.7
Secured by 1-4 family residential	236,760		35.3		242,620		36.8
Other real estate loans	275,428		41.0		268,262		40.7
Commercial loans	94,427		14.1		56,385		8.6
Consumer loans	12,523		1.8		12,403		1.9
Total Gross Loans (1)	671,393		100.0	%	659,312		100.0	%
Less allowance for loan losses	14,623				14,967
Net loans	$	656,770			$	644,345

(1)	Gross loan balances at December 31, 2011 and 2010 are net of deferred loan costs of $1.9 million and $1.1 million respectively.

Loans presented in the table above exclude loans held for sale. The Company had $92.5 million and $59.4 million in mortgages held for sale at December 31, 2011 and 2010, respectively.

The following tables present a contractual aging of the recorded investment in past due loans by class of loans as of December 31, 2011 and December 31, 2010.

(In Thousands)			December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total Loans
Real estate loans:
Construction	$	696	$	-	$	3,285	$	3,981	$	38,227	$	42,208
Secured by farmland	415		-		-		415		9,632		10,047
Secured by 1-4 family residential	2,036		1,721		7,639		11,396		225,364		236,760
Other real estate loans	6,079		1,736		1,466		9,281		266,147		275,428
Commercial loans	1,751		121		315		2,187		92,240		94,427
Consumer loans	23		-		-		23		12,500		12,523
Total	$	11,000	$	3,578	$	12,705	$	27,283	$	644,110	$	671,393

(In Thousands)			December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Current		Total 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 December 31 of the indicated year:

	2011				2010
	Nonaccrual		Past due 90 days or more and still accruing		Nonaccrual		Past due 90 days or more and still accruing
	(In Thousands)
Real estate loans:
Construction	$	3,804	$	86	$	8,871	$	-
Secured by 1-4 family residential	11,839		1,097		10,817		676
Other real estate loans	7,567		-		7,509		218
Commercial loans	2,136		50		1,950		12
Consumer loans	-		-		239		3
Total	$	25,346	$	1,233	$	29,386	$	909

If interest on nonaccrual loans had been accrued, such income would have approximated $1,500,000, $722,000, and $207,000 for the years ended December 31, 2011, 2010, and 2009 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”, and “Doubtful”.

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 the recorded investment in loans by class of loan that have been classified according to the internal classification system as of December 31 of the indicated year:

December 31, 2011
(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	$	22,250	$	9,235	$	207,332	$	239,156	$	87,731	$	12,448	$	578,152
Special Mention	5,764		199		10,773		23,434		4,127		61		44,358
Substandard	13,163		613		17,062		12,592		2,374		14		45,818
Doubtful	1,031		-		1,593		246		195		-		3,065
Loss	-		-		-		-		-		-		-
Ending Balance	$	42,208	$	10,047	$	236,760	$	275,428	$	94,427	$	12,523	$	671,393

December 31, 2010
(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	$	31,744	$	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 tables present loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2011 and 2010:

	December 31, 2011
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	2,992	$	3,652	$	-	$	3,948	$	-
Secured by farmland	-		-		-		-
Secured by 1-4 family residential	3,978		4,656		-		4,424		7
Other real estate loans	4,732		4,775		-		5,729		95
Commercial loans	1,751		1,751		-		1,735		-
Consumer loans	-		-		-		-		-
Total with no related allowance	$	13,453	$	14,834	$	-	$	15,836	$	102
With an allowance recorded:
Real estate loans:
Construction	$	812	$	842	$	328	$	812	$	-
Secured by farmland	-		-		-		-			-
Secured by 1-4 family residential	8,697		10,417		3,076		9,047		17
Other real estate loans	5,581		5,581		1,192		5,076		64
Commercial loans	656		678		502		662		14
Consumer loans	-		-		-		-		-
Total with a related allowance	$	15,746	$	17,518	$	5,098	$	15,597	$	95
Total	$	29,199	$	32,352	$	5,098	$	31,433	$	197

	December 31, 2010
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income 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		7,202		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 table above represent the outstanding principal balance on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged off on each loan.

Troubled Debt Restructurings

Included in certain loan categories in the impaired loans are troubled debt restructurings (“TDRs”) that were classified as impaired. The total balance of TDRs at December 31, 2011 was $11.2 million of which $7.3 million were included in the Company's non-accrual loan totals at that date and $3.9 million represented loans performing as agreed to the restructured terms. This compares with $4.5 million in total restructured loans at December 31, 2010. The amount of the valuation allowance related to TDRs was $1.7 million and $532,000 as of December 31, 2011 and 2010 respectively.

The $7.3 million in nonaccrual TDRs as of December 31, 2011 is comprised of $1.3 million in real estate construction loans, $876,000 in 1-4 family real estate loans, and $5.2 million in other real estate loans. The $3.9 million in TDRs which were performing as agreed under restructured terms as of December 31, 2011 is comprised of $271,000 in commercial loans, $838,000 in 1-4 family real estate loans, and $2.7 million in other real estate loans. The Company considers all loans classified as TDRs to be impaired as of December 31, 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 year ended December 31, 2011:

	Loans modified as TDR's
	For the year ended
	December 31, 2011
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
		(In thousands)		(In thousands)
Real estate loans:
Construction	-	$	-	$	-
Secured by farmland	-	-		-
Secured by 1-4 family residential	5	726		718
Other real estate loans	7	7,623		7,667
Total real estate loans	12	8,349		8,385

Commercial loans	4	271		271
Consumer loans	-	-		-
Total	16	$	8,620	$	8,656

During the year ended December 31, 2011, the Company modified 16 loans that were considered to be TDRs. The terms were extended for 16 loans and the interest rates were lowered for 14 loans.

During the year ended December 31, 2011, the Company identified as TDRs 7 loans 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. The accounting amendments require prospective application of the impairment measurement guidance for those loans newly identified as impaired. As of December 31, 2011, the recorded investment in the loans for which the allowance was previously measured under a general allowance methodology and are now considered impaired and measured under a specific allowance methodology was $3.9 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $803,000.

As of December 31, 2011, $5.2 million of loans restructured as TDRs during the year are included in the Company's non-accrual loans total. The balance of the loans identified as TDRs during that period are reflected as non-performing assets which are performing as agreed under the restructured terms.

One loan modified as a TDR during the year ended December 31, 2011 with a year end balance of $2.1 million subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the year.

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 them 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 TDRs.