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:

	June 30, 2012					December 31, 2011
	Outstanding Balance		Percent of Total Portfolio			Outstanding Balance		Percent of Total Portfolio
	(In Thousands)					(In Thousands)
Real estate loans:
Construction	$	49,390		7.2	%	$	42,208		6.3	%
Secured by farmland		9,450		1.4	%		10,047		1.5	%
Secured by 1-4 family residential		252,775		36.9	%		236,760		35.3	%
Other real estate loans		263,124		38.4	%		275,428		41.0	%
Commercial loans		98,681		14.4	%		94,427		14.1	%
Consumer loans		12,490		1.8	%		12,523		1.8	%
		685,910		100.0	%		671,393		100.0	%
Less allowance for loan losses		14,969					14,623
Net loans	$	670,941				$	656,770

Loans presented in the table above exclude loans held for sale. The Company had $68.0 million and $92.5 million in mortgages held for sale at June 30, 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 June 30, 2012 and December 31, 2011.

	June 30, 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	$	143	$	1,914	$	1,972	$	4,029	$	45,361	$	49,390
Secured by farmland		-		-		-		-		9,450		9,450
Secured by 1-4 family residential		805		1,661		3,131		5,597		247,178		252,775
Other real estate loans		371		1,061		6,439		7,871		255,253		263,124
Commercial loans		355		-		1,987		2,342		96,339		98,681
Consumer loans		119		-		51		170		12,320		12,490
Total	$	1,793	$	4,636	$	13,580	$	20,009	$	665,901	$	685,910

	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 June 30, 2012 and December 31, 2011:

	June 30, 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	$	1,954	$	94	$	3,804	$	86
Secured by 1-4 family residential	7,939		441		11,839		1,097
Other real estate loans	6,929		739		7,567		-
Commercial loans	1,980		46		2,136		50
Consumer loans	-		51		-		-
Total	$	18,802	$	1,371	$	25,346	$	1,233

If interest on non-accrual loans had been accrued, such income would have approximated $553,000 for the six months ended June 30, 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 June 30, 2012 and December 31, 2011:

	June 30, 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	$	27,570	$	8,640	$	227,475	$	221,577	$	92,571	$	12,125	$	589,958
Special Mention	15,818		199		10,917		24,623		3,135		78		54,770
Substandard	6,002		611		12,895		16,666		2,833		287		39,294
Doubtful	-		-		1,488		258		142		-		1,888
Loss	-		-		-		-		-		-		-
Ending Balance	$	49,390	$	9,450	$	252,775	$	263,124	$	98,681	$	12,490	$	685,910

	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 six months ended June 30, 2012:

	June 30, 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	$	1,617	$	2,168	$	-	$	2,041	$	-
Secured by farmland		-		-		-		-		-
Secured by 1-4 family residential		2,374		2,764		-		2,075		18
Other real estate loans		4,578		4,947		-		4,550		113
Commercial loans		1,789		1,789		-		1,770		-
Consumer loans		-		-		-		-		-
Total with no related allowance		10,358		11,668		-		10,436		131

With an allowance recorded:
Real estate loans:
Construction		337		368		126		339		-
Secured by farmland		-		-		-		-		-
Secured by 1-4 family residential		6,858		7,731		2,398		7,065		17
Other real estate loans		5,145		5,188		1,049		5,188		51
Commercial loans		438		459		325		446		14
Consumer loans		-		-		-		-		-
Total with a related allowance		12,778		13,746		3,898		13,038		82
Total	$	23,136	$	25,414	$	3,898	$	23,474	$	213

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 June 30, 2012 was $8.4 million of which $4.1 million were included in the Company's non-accrual loan totals at that date and $4.3 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 $2.8 million or 24.9%. The amount of the valuation allowance related to total TDRs was $1.3 million and $1.7 million as of June 30, 2012 and December 31, 2011 respectively.

The $4.1 million in nonaccrual TDRs as of June 30, 2012 is comprised of $100,000 in real estate construction loans, $848,000 in 1-4 family real estate loans, and $3.2 million in other real estate loans. The $4.3 million in TDRs which were performing as agreed under restructured terms as of June 30, 2012 is comprised of $246,000 in commercial loans, $1.3 million in 1-4 family real estate loans, and $2.8 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 June 30, 2012:

	Loans modified as TDR's
	For the three months ended
	June 30, 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		251		236
Other real estate loans		-		-		-
Total real estate loans		1		251		236
Commercial loans		-		-		-
Consumer loans		-		-		-
Total		1	$	251	$	236

During the three months ended June 30, 2012, the Company modified one loan that was considered to be a TDR. The interest rate was lowered and the term was extended for this loan.

	Loans modified as TDR's
	For the six months ended
	June 30, 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		2		912		891
Other real estate loans		-		-		-
Total real estate loans		2		912		891
Commercial loans		-		-		-
Consumer loans		-		-		-
Total		2	$	912	$	891

During the six months ended June 30, 2012, the Company modified two loans that were considered to be TDRs. The interest rate was lowered for both loans and the term was extended for one loan.

During the six months ended June 30, 2012, the Company identified as TDRs two 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. On the basis of a current evaluation of loss for these loans, one loan with a recorded investment balance of $655,000 did not require the establishment of an allowance for loan losses at June 30, 2012 and the other, with a recorded investment balance of $236,000, required an allowance for loan losses of approximately $63,000 at June 30, 2012.

As of June 30, 2012, no loans restructured as TDRs during the six month period are included in the Company's non-accrual loans total. The loans identified as TDRs during this period are included in the Company's non-performing assets that are performing as agreed under the restructured terms.

No loans modified as TDRs from July 1, 2011 through June 30, 2012 subsequently defaulted (i.e., 90 days or more past due following a restructuring) during the three and six months ended June 30, 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 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.