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, 2012					December 31, 2011
	Outstanding Balance		Percent of Total Portfolio			Outstanding Balance		Percent of Total Portfolio
	(In Thousands)					(In Thousands)
Real estate loans:
Construction	$	48,740		7.0	%	$	42,208		6.3	%
Secured by farmland		9,438		1.4	%		10,047		1.5	%
Secured by 1-4 family residential		254,079		36.7	%		236,760		35.3	%
Other real estate loans		258,679		37.4	%		275,428		41.0	%
Commercial loans		108,962		15.7	%		94,427		14.1	%
Consumer loans		12,466		1.8	%		12,523		1.8	%
		692,364		100.0	%		671,393		100.0	%
Less allowance for loan losses		13,941					14,623
Net loans	$	678,423				$	656,770

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

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2012 and December 31, 2011.

	September 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	$	175	$	—	$	3,142	$	3,317	$	45,423	$	48,740
Secured by farmland		—		—		—		—		9,438		9,438
Secured by 1-4 family residential		4,838		208		2,817		7,863		246,216		254,079
Other real estate loans		855		253		6,794		7,902		250,777		258,679
Commercial loans		15		126		1,960		2,101		106,861		108,962
Consumer loans		61		22		33		116		12,350		12,466
Total	$	5,944	$	609	$	14,746	$	21,299	$	671,065	$	692,364

	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 September 30, 2012 and December 31, 2011:

	September 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	$	2,943	$	268	$	3,804	$	86
Secured by 1-4 family residential		8,653		399		11,839		1,097
Other real estate loans		8,881		130		7,567		—
Commercial loans		2,176		60		2,136		50
Consumer loans		30		3		—		—
Total	$	22,683	$	860	$	25,346	$	1,233

If interest on non-accrual loans had been accrued, such income would have approximated $1.0 million for the nine months ended September 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 September 30, 2012 and December 31, 2011:

September 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	$	27,342	$	8,629	$	230,963	$	218,427	$	102,620	$	12,310	$	600,291
Special Mention		15,810		199		4,235		23,155		3,442		60		46,901
Substandard		4,553		610		17,396		16,044		2,772		66		41,441
Doubtful		1,035		—		1,485		1,053		128		30		3,731
Loss		—		—		—		—		—		—		—
Ending Balance	$	48,740	$	9,438	$	254,079	$	258,679	$	108,962	$	12,466	$	692,364

	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 nine months ended September 30, 2012:

	September 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	$	1,629	$	2,180	$	—	$	2,071	$	—
Secured by farmland		—		—		—		—		—
Secured by 1-4 family residential		3,136		3,554		—		3,360		36
Other real estate loans		3,814		3,857		—		4,438		91
Commercial loans		1,938		1,938		—		1,919		—
Consumer loans		—		—		—		—		—
Total with no related allowance		10,517		11,529		—		11,788		127

With an allowance recorded:
Real estate loans:
Construction		1,314		2,539		198		1,913		—
Secured by farmland		—		—		—		—		—
Secured by 1-4 family residential		6,802		7,460		2,577		7,034		30
Other real estate loans		7,852		7,952		1,408		7,975		51
Commercial loans		471		492		361		467		13
Consumer loans		30		30		30		30		—
Total with a related allowance		16,469		18,473		4,574		17,419		94
Total	$	26,986	$	30,002	$	4,574	$	29,207	$	221

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 September 30, 2012 was $11.5 million of which $7.2 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, an increase of $0.3 million or 2.7%. The amount of the valuation allowance related to total TDRs was $2.0 million and $1.7 million as of September 30, 2012 and December 31, 2011 respectively.

The $7.2 million in nonaccrual TDRs as of September 30, 2012 is comprised of $74,000 in real estate construction loans, $2.3 million in 1-4 family real estate loans, $4.7 million in other real estate loans, and $213,000 in consumer loans. The $4.3 million in TDRs which were performing as agreed under restructured terms as of September 30, 2012 is comprised of $1.3 million in 1-4 family real estate loans, $2.8 million in other real estate loans and $233,000 in commercial 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 September 30, 2012:

	Loans modified as TDR's
	For the three months ended
	September 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	3	2,163		1,595
Other real estate loans	1	1,528		1,524
Total real estate loans	4	3,691		3,119
Commercial loans	—	—		—
Consumer loans	1	217		213
Total	5	$	3,908	$	3,332

During the three months ended September 30, 2012, the Company modified five loans that were considered to be TDRs and are summarized in the above table. The interest rate was lowered on three of the loans and repayment terms were modified on the other two.

	Loans modified as TDR's
	For the nine months ended
	September 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	5	3,075		2,486
Other real estate loans	1	1,528		1,524
Total real estate loans	6	4,603		4,010
Commercial loans	—	—		—
Consumer loans	1	217		213
Total	7	$	4,820	$	4,223

During the nine months ended September 30, 2012, the Company modified seven loans that were considered to be TDRs and are summarized on the above table. The interest rate was lowered for five of the loans, term was extended for one loan, and repayment terms were modified for two loans.

During the nine months ended September 30, 2012, the Company identified four loans with an aggregate recorded investment of $2.6 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. On the basis of a current evaluation of loss for these loans, they required the establishment of an allowance for loan losses of approximately $536,000 at September 30, 2012.

As of September 30, 2012, four loans restructured as TDRs during the nine month period with an aggregate recorded investment of $3.3 million are included in the Company's non-accrual loans total. The remaining 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 October 1, 2011 through September 30, 2012 subsequently defaulted (i.e., 90 days or more past due following a restructuring) during the three and nine months ended September 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.