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, 2013					December 31, 2012
	Outstanding Balance		Percent of Total Portfolio			Outstanding Balance		Percent of Total Portfolio
	(In Thousands)					(In Thousands)
Real estate loans:
Construction	$	46,089		6.5	%	$	50,218		7.1	%
Secured by farmland		11,805		1.7	%		11,876		1.7	%
Secured by 1-4 family residential		268,770		37.6	%		260,620		36.7	%
Other real estate loans		259,403		36.3	%		254,930		35.9	%
Commercial loans		116,021		16.2	%		118,573		16.7	%
Consumer loans		12,498		1.7	%		13,260		1.9	%
		714,586		100.0	%		709,477		100.0	%
Less allowance for loan losses		13,508					14,311
Net loans	$	701,078				$	695,166

Loans presented in the table above exclude loans held for sale. The Company had $48.7 million in mortgages held for sale at March 31, 2013 and $82.1 million at December 31, 2012.

The following table presents a contractual aging of the recorded investment in past due loans by class of loans as of March 31, 2013 and December 31, 2012.

	March 31, 2013
					(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	$	—	$	591	$	1,964	$	2,555	$	43,534	$	46,089
Secured by farmland	415		—		—		415		11,390		11,805
Secured by 1-4 family residential	796		244		2,308		3,348		265,422		268,770
Other real estate loans	391		194		4,648		5,233		254,170		259,403
Commercial loans	—		145		1,906		2,051		113,970		116,021
Consumer loans	23		2		42		67		12,431		12,498
Total	$	1,625	$	1,176	$	10,868	$	13,669	$	700,917	$	714,586

	December 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	$	—	$	108	$	2,043	$	2,151	$	48,067	$	50,218
Secured by farmland	415		—		—		415		11,461		11,876
Secured by 1-4 family residential	1,625		568		1,910		4,103		256,517		260,620
Other real estate loans	197		361		6,112		6,670		248,260		254,930
Commercial loans	—		44		144		188		118,385		118,573
Consumer loans	27		10		32		69		13,191		13,260
Total	$	2,264	$	1,091	$	10,241	$	13,596	$	695,881	$	709,477

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, 2013 and December 31, 2012:

	March 31, 2013				December 31, 2012
	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	$	2,790	$	268	$	2,861	$	780
Secured by 1-4 family residential	8,396		532		8,761		228
Other real estate loans	6,663		—		7,866		—
Commercial loans	2,140		—		2,146		34
Consumer loans	30		12		30		2
Total	$	20,019	$	812	$	21,664	$	1,044

If interest on non-accrual loans had been accrued, such income would have approximated $297,000 for the three months ended March 31, 2013 and $1.35 million for the year ended December 31, 2012.

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 uncollectible and are charged off immediately.

The following tables present a summary of loan classifications by class of loan as of March 31, 2013 and December 31, 2012:

	March 31, 2013
					(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	$	26,895	$	11,197	$	247,313	$	235,066	$	112,097	$	12,364	$	644,932
Special Mention	15,329		—		2,472		11,640		1,041		31		30,513
Substandard	3,344		608		17,718		12,455		2,794		63		36,982
Doubtful	521		—		1,267		242		89		40		2,159
Loss	—		—		—		—		—		—		—
Ending Balance	$	46,089	$	11,805	$	268,770	$	259,403	$	116,021	$	12,498	$	714,586

	December 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	$	29,741	$	11,068	$	237,121	$	228,052	$	112,298	$	13,134	$	631,414
Special Mention	15,540		199		3,767		12,949		3,332		47		35,834
Substandard	3,902		609		18,333		12,887		2,831		49		38,611
Doubtful	1,035		—		1,399		1,042		112		30		3,618
Loss	—		—		—		—		—		—		—
Ending Balance	$	50,218	$	11,876	$	260,620	$	254,930	$	118,573	$	13,260	$	709,477

The following table presents loans identified as impaired by class of loan as of and for the three months ended March 31, 2013:

	March 31, 2013
	(In thousands)
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate loans:
Construction	$	1,812	$	2,445	$	—	$	1,898	$	7
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	3,798		4,215		—		3,888		37
Other real estate loans	2,509		2,552		—		2,529		93
Commercial loans	1,946		1,946		—		1,946		—
Consumer loans	—		—		—		—		—
Total with no related allowance	10,065		11,158		—		10,261		137

With an allowance recorded:
Real estate loans:
Construction	1,084		1,114		484		1,099		—
Secured by farmland	—		—		—		—		—
Secured by 1-4 family residential	6,379		6,914		2,035		6,407		51
Other real estate loans	6,915		6,915		964		6,940		71
Commercial loans	890		912		791		900		30
Consumer loans	30		30		30		30		—
Total with a related allowance	15,298		15,885		4,304		15,376		152
Total	$	25,363	$	27,043	$	4,304	$	25,637	$	289

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

	December 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	$	1,819	$	2,370	$	—	$	2,543	$	—
Secured by farmland	—		—		—		—
Secured by 1-4 family residential	3,248		3,667		—		3,712		50
Other real estate loans	3,135		3,178		—		3,141		91
Commercial loans	1,947		1,947		—		1,924		—
Consumer loans	—		—		—		—		—
Total with no related allowance	10,149		11,162		—		11,320		141

With an allowance recorded:
Real estate loans:
Construction	1,150		2,250		166		1,685		—
Secured by farmland	—		—		—		—
Secured by 1-4 family residential	7,544		8,203		2,724		7,842		65
Other real estate loans	7,505		7,605		1,045		7,691		73
Commercial loans	417		464		338		446		14
Consumer loans	30		30		30		30		—
Total with a related allowance	16,646		18,552		4,303		17,694		152
Total	$	26,795	$	29,714	$	4,303	$	29,014	$	293

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, 2013 was $12.0 million of which $7.1 million were included in the Company's non-accrual loan totals at that date and $4.9 million represented loans performing as agreed according to the restructured terms. The total amount of TDRs is unchanged from the amount at December 31, 2012. The amount of the valuation allowance related to total TDRs was $1.5 million and $2.0 million as of March 31, 2013 and December 31, 2012 respectively.

The $7.1 million in nonaccrual TDRs as of March 31, 2013 is comprised of $62,000 in real estate construction loans, $2.3 million in 1-4 family real estate loans, $4.7 million in other real estate loans, and $55,000 in commercial loans. The $4.9 million in TDRs which were performing as agreed under restructured terms as of March 31, 2013 is comprised of $106,000 in real estate construction loans, $1.8 million in 1-4 family real estate loans, $2.8 million in other real estate loans and $206,000 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 March 31, 2013:

	Loans modified as TDR's
	For the three months ended
	March 31, 2013
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	48,000		48,000
Other real estate loans	2	168,000		148,000
Total real estate loans	3	216,000		196,000
Commercial loans	—	—		—
Consumer loans	—	—		—
Total	3	$	216,000	$	196,000

During the three months ended March 31, 2013, the Company modified three loans that were considered to be TDRs and are summarized in the above table. The maturity dates were extended on two of the loans and repayment terms were modified on one loan.

During the three months ended March 31, 2013, the Company identified two loans with an aggregate recorded investment of $148,000 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 no allowance for loan losses at March 31, 2013.

As of March 31, 2013, two loans restructured as TDRs during the three month period with an aggregate recorded investment of $148,000 are included in the Company's non-accrual loans total. The remaining loan identified as a TDR during this period is included in the Company's non-performing assets that are performing as agreed under the restructured terms.

A total of four loans modified as TDRs in the past twelve months subsequently defaulted (i.e., 90 days or more past due following a restructuring) during the three months ended March 31, 2013.

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.