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:

	March 31, 2012				December 31, 2011
	Outstanding Balance		Percent of Total Portfolio		Outstanding Balance		Percent of Total Portfolio
	(In Thousands)				(In Thousands)
Real estate loans:
Construction	$	47,089	6.9	%	$	42,208	6.3	%
Secured by farmland	9,616		1.4	%	10,047		1.5	%
Secured by 1-4 family residential	249,134		36.5	%	236,760		35.3	%
Other real estate loans	272,919		40.0	%	275,428		41.0	%
Commercial loans	91,371		13.4	%	94,427		14.1	%
Consumer loans	12,240		1.8	%	12,523		1.8	%
	682,369		100.0	%	671,393		100.0	%
Less allowance for loan losses	14,861				14,623
Net loans	$	667,508			$	656,770

Loans presented in the table above exclude loans held for sale. The Company had $81.0 million and $92.5 million in mortgages held for sale at March 31, 2012 and December 31, 2011, respectively.

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011.

	March 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	$	862	$	95	$	2,241	$	3,198	$	43,891	$	47,089
Secured by farmland	-		-		-		-		9,616		9,616
Secured by 1-4 family residential	2,076		1,116		7,763		10,955		238,179		249,134
Other real estate loans	1,701		209		7,099		9,009		263,910		272,919
Commercial loans	-		24		2,083		2,107		89,264		91,371
Consumer loans	13		71		-		84		12,156		12,240
Total	$	4,652	$	1,515	$	19,186	$	25,353	$	657,016	$	682,369

	December 31, 2011
					(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	$	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

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 March 31, 2012 and December 31, 2011:

	March 31, 2012				December 31, 2011
	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	$	2,241	$	-	$	3,804	$	86
Secured by 1-4 family residential	9,026		167		11,839		1,097
Other real estate loans	8,895		-		7,567		-
Commercial loans	2,083		-		2,136		50
Total	$	22,245	$	167	$	25,346	$	1,233

If interest on non-accrual loans had been accrued, such income would have approximated $350,000 for the three months ended March 31, 2012 and $1.5 million for the year ended December 31, 2011.

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 uncollectable and are charged off immediately.

The following tables present a summary of loan classifications by class of loan as of March 31, 2012 and December 31, 2011:

	March 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	$	29,315	$	8,804	$	222,355	$	233,031	$	85,129	$	11,965	$	590,599
Special Mention	3,448		199		11,002		21,657		3,789		70		40,165
Substandard	14,101		613		14,224		17,965		2,301		193		49,397
Doubtful	225		-		1,553		266		152		12		2,208
Loss	-		-		-		-		-		-		-
Ending Balance	$	47,089	$	9,616	$	249,134	$	272,919	$	91,371	$	12,240	$	682,369

	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

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

	March 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	$	1,851	$	2,421	$	-	$	2,271	$	-
Secured by farmland	-		-		-		-		-
Secured by 1-4 family residential	2,818		3,496		-		2,498		13
Other real estate loans	4,691		5,060		-		4,695		89
Commercial loans	1,759		1,759		-		1,755		-
Consumer loans	-		-		-		-		-
Total with no related allowance	11,119		12,736		-		11,219		102

With an allowance recorded:
Real estate loans:
Construction	390		529		89		392		-
Secured by farmland	-		-		-		-		-
Secured by 1-4 family residential	7,271		8,159		2,676		7,395		17
Other real estate loans	6,927		6,953		1,280		6,939		52
Commercial loans	582		604		414		585		14
Consumer loans	12		12		12		12		2
Total with a related allowance	15,182		16,257		4,471		15,323		85
Total	$	26,301	$	28,993	$	4,471	$	26,542	$	187

The following table presents loans identified as impaired by class of loan as of and for the year ended December 31, 2011:

	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

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 March 31, 2012 was $10.0 million of which $6.0 million were included in the Company's non-accrual loan totals at that date and $4.0 million represented loans performing as agreed according to the restructured terms. This compares with $11.2 million in total restructured loans at December 31, 2011, a decrease of $1.2 million or 10.7%. The amount of the valuation allowance related to total TDRs was $803,000 and $1.7 million as of March 31, 2012 and December 31, 2011 respectively.

The $6.0 million in nonaccrual TDRs as of March 31, 2012 is comprised of $4.9 million in real estate construction loans, $863,000 in 1-4 family real estate loans, and $226,000 in consumer loans. The $4.0 million in TDRs which were performing as agreed under restructured terms as of March 31, 2012 is represented comprised of $258,000 in commercial loans, $1.1 million 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.

The following table presents by class of loan, information related to loans modified in a TDR during the three months ended March 31, 2012:

	Loans modified as TDR's
	For the Three Months Ended
	March 31, 2012
Class of Loan	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(In thousands)
Real estate loans:
Construction	-	$	-	$	-
Secured by farmland	-	-		-
Secured by 1-4 family residential	1	658		658
Other real estate loans	-	-		-
Total real estate loans	1	658		658
Commercial loans	-	-		-
Consumer loans	-	-		-
Total	1	$	658	$	658

During the three months ended March 31, 2012, the Company modified one loan that was considered to be a TDR. The interest rate was lowered for this loan.

During the three months ended March 31, 2012, 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. On the basis of a current evaluation of loss for this loan, no allowance for loan losses was established for it as of March 31, 2012.

As of March 31, 2012, no loans restructured as TDRs during the three month period are included in the Company's non-accrual loans total. The identified TDR loan is included in the Company's non-performing assets that are performing as agreed under the restructured terms.

No loans modified as TDRs from April 1, 2011 through March 31, 2012 subsequently defaulted (i.e. 90 days or more past due following a restructuring) during the three months ended March 31, 2012.

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.