NOTE 6. ALLOWANCE FOR LOAN LOSSES

The activity of the allowance for loan losses by loan components during the nine months ended September 30, 2013 and 2012 was as follows:


	Construction									Commercial
	&			1-4 Family			Nonfarm,			&
	Development			Residential			Nonresidential			Industrial			Consumer			Other			Total

September 30, 2013

*Allowance for credit losses:*
Beginning balance	$	86,300		$	668,700		$	801,999		$	1,604,510		$	198,789		$	42,800		$	3,403,098
Charge-offs		—			(26,967	)		(166,517	)		(51,028	)		(67,988	)		—			(312,500	)
Recoveries		533			402			1,357			34,719			24,138			—			61,149
Provision		(4,833	)		38,717			185,598			(86,871	)		15,702			(200	)		148,113

Ending balance	$	82,000		$	680,852		$	822,437		$	1,501,330		$	170,641		$	42,600		$	3,299,860


Ending balance: individually evaluated for impairment	$	—		$	11,652		$	201,637		$	167,530		$	—		$	—		$	380,819

Ending balance: collectively evaluated for impairment	$	82,000		$	669,200		$	620,800		$	1,333,800		$	170,641		$	42,600		$	2,919,041

Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—


*Loans Receivable:*
Ending balance	$	4,941,654		$	38,040,049		$	61,366,016		$	67,225,422		$	6,071,806		$	3,900,689		$	181,545,636


Ending balance: individually evaluated for impairment	$	85,562		$	330,199		$	3,128,863		$	2,285,488		$	—		$	—		$	5,830,112

Ending balance: collectively evaluated for impairment	$	4,856,092		$	37,709,850		$	58,237,153		$	64,939,934		$	6,071,806		$	3,900,689		$	175,715,524

Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—


September 30, 2012

*Allowance for credit losses:*
Beginning balance	$	103,200		$	836,860		$	865,854		$	1,808,260		$	210,807		$	55,600		$	3,880,581
Charge-offs		(7,286	)		(271,224	)		(21,831	)		(710,645	)		(151,102	)		—			(1,162,088	)
Recoveries		250			752			83,968			132,949			16,393			—			234,312
Provision		8,105			142,712			(5,404	)		513,462			133,797			(12,300	)		780,372

Ending balance	$	104,269		$	709,100		$	922,587		$	1,744,026		$	209,895		$	43,300		$	3,733,177


Ending balance: individually evaluated for impairment	$	3,869		$	—		$	339,087		$	185,726		$	—		$	—		$	528,682

Ending balance: collectively evaluated for impairment	$	100,400		$	709,100		$	583,500		$	1,558,300		$	209,895		$	43,300		$	3,204,495

Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—


*Loans Receivable:*
Ending balance	$	5,585,372		$	36,853,785		$	48,853,854		$	84,317,344		$	7,090,254		$	4,183,808		$	186,884,417


Ending balance: individually evaluated for impairment	$	88,429		$	290,489		$	3,235,812		$	2,457,177		$	—		$	207,179		$	6,279,086

Ending balance: collectively evaluated for impairment	$	5,496,943		$	36,563,296		$	45,618,042		$	81,860,167		$	7,090,254		$	3,976,629		$	180,605,331

Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—		$	—		$	—		$	—		$	—

The following table presents impaired loans individually evaluated by class of loan as of September 30, 2013 and December 31, 2012 and the recognized interest income per the related period:


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized

September 30, 2013
With no related allowance recorded:
Construction and development	$	85,562	$	85,562	$	—	$	87,038	$	4,033
1-4 family residential		254,777		254,777		—		272,985		2,003
Nonfarm, nonresidential		1,660,595		1,742,231		—		1,830,858		41,522
Commercial and industrial		1,306,985		1,481,473		—		1,340,485		50,391
Consumer		—		—		—		—		—
Other loans		—		—		—		—		—

		3,307,919		3,564,043		—		3,531,366		97,949


With an allowance recorded:
Construction and development	$	—	$	—	$	—	$	—	$	—
1-4 family residential		75,422		75,422		11,652		79,601		1,275
Nonfarm, nonresidential		1,468,268		1,490,099		201,637		1,536,258		11,006
Commercial and industrial		978,503		978,503		167,530		1,011,624		11,601
Consumer		—		—		—		—		—
Other loans		—		—		—		—		—

		2,522,193		2,544,024		380,819		2,627,483		23,882


Combined:
Construction and development	$	85,562	$	85,562	$	—	$	87,038	$	4,033
1-4 family residential		330,199		330,199		11,652		352,586		3,278
Nonfarm, nonresidential		3,128,863		3,232,330		201,637		3,367,116		52,528
Commercial and industrial		2,285,488		2,459,976		167,530		2,352,109		61,992
Consumer		—		—		—		—		—
Other loans		—		—		—		—		—

	$	5,830,112	$	6,108,067	$	380,819	$	6,158,849	$	121,831


December 31, 2012
With no related allowance recorded:
Construction and development	$	86,567	$	86,567	$	—	$	87,668	$	4,898
1-4 family residential		284,884		284,884		—		287,802		19,798
Nonfarm, nonresidential		1,381,111		1,381,111		—		1,396,123		81,741
Commercial and industrial		1,372,796		1,547,284		—		1,312,662		67,194
Consumer		—		—		—		—		—
Other loans		195,989		195,989		—		199,895		18,025

		3,321,347		3,495,835		—		3,284,150		191,656


With an allowance recorded:
Construction and development	$	—	$	—	$	—	$	—	$	—
1-4 family residential		—		—		—		—		—
Nonfarm, nonresidential		1,804,769		1,826,600		319,699		1,813,156		70,705
Commercial and industrial		1,000,379		1,000,379		195,410		1,006,640		39,320
Consumer		—		—		—		—		—
Other loans		—		—		—		—		—

		2,805,148		2,826,979		515,109		2,819,796		110,025


Combined:
Construction and development	$	86,567	$	86,567	$	—	$	87,668	$	4,898
1-4 family residential		284,884		284,884		—		287,802		19,798
Nonfarm, nonresidential		3,185,880		3,207,711		319,699		3,209,279		152,446
Commercial and industrial		2,373,175		2,547,663		195,410		2,319,302		106,514
Consumer		—		—		—		—		—
Other loans		195,989		195,989		—		199,895		18,025

	$	6,126,495	$	6,322,814	$	515,109	$	6,103,946	$	301,681

The following presents by class, an aging analysis of the recorded investment in loans.


																			Recorded
																			Investment
																Total			> 90 Days
	30-59 Days			60-89 Days			90 Days Plus			Total						Financing			and
	Past Due			Past Due			Past Due			Past Due			Current			Receivables			Accruing
September 30, 2013

Construction and development	$	32,174		$	—		$	—		$	32,174		$	4,909,480		$	4,941,654		$	—
1-4 family residential		424,565			300,806			—			725,371			37,314,678			38,040,049			—
Nonfarm, nonresidential		383,177			184,056			437,363			1,004,596			60,361,420			61,366,016			—
Commercial and industrial		621,797			66,285			656,607			1,344,689			65,880,733			67,225,422			—
Consumer		102,363			54,138			3,115			159,616			5,912,190			6,071,806			3,115
Other loans		—			—			—			—			3,900,689			3,900,689			—

Total	$	1,564,076		$	605,285		$	1,097,085		$	3,266,446		$	178,279,190		$	181,545,636		$	3,115

Percentage of total loans		0.86	%		0.33	%		0.61	%		1.80	%		98.20	%		100.00	%


Non-accruals included above
Construction and development	$	—		$	—		$	—		$	—		$	71,010		$	71,010
1-4 family residential		54,778			—			—			54,778			251,538			306,316
Nonfarm, nonresidential		376,347			70,390			437,363			884,100			1,289,593			2,173,693
Commercial and industrial		530,408			—			656,607			1,187,015			132,977			1,319,992
Consumer		1,986			—			—			1,986			2,938			4,924
Other loans		—			—			—			—			—			—

	$	963,519		$	70,390		$	1,093,970		$	2,127,879		$	1,748,056		$	3,875,935


December 31, 2012

Construction and development	$	73,572		$	—		$	—		$	73,572		$	4,799,940		$	4,873,512		$	—
1-4 family residential		380,731			—			324,357			705,088			35,385,963			36,091,051			292,583
Nonfarm, nonresidential		711,408			197,479			386,160			1,295,047			47,698,820			48,993,867			—
Commercial and industrial		256,672			53,391			429,226			739,289			75,174,783			75,914,072			377,494
Consumer		172,379			28,922			13,643			214,944			6,488,419			6,703,363			13,643
Other loans		—			—			—			—			4,111,464			4,111,464			—

Total	$	1,594,762		$	279,792		$	1,153,386		$	3,027,940		$	173,659,389		$	176,687,329		$	683,720

Percentage of total loans		0.90	%		0.16	%		0.65	%		1.71	%		98.29	%		100.00	%


Non-accruals included above
Construction and development	$	73,572		$	—		$	—		$	73,572		$	12,995		$	86,567
1-4 family residential		84,838			—			31,775			116,613			359,129			475,742
Nonfarm, nonresidential		—			89,322			386,160			475,482			1,690,633			2,166,115
Commercial and industrial		—			—			51,731			51,731			760,662			812,393
Consumer		1,612			—			—			1,612			2,306			3,918
Other loans		—			—			—			—			195,990			195,990

	$	160,022		$	89,322		$	469,666		$	719,010		$	3,021,715		$	3,740,725

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further impairment or improvement to determine if appropriately classified. All other loans greater than $500,000, commercial lines greater than $250,000 and personal lines of credit greater than $100,000, and unsecured loans greater than $100,000 are specifically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as when a loan becomes past due, the Company will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans by credit quality indicator are provided in the following table.


							Special
	Total			Pass Credits			Mention			Substandard			Doubtful

September 30, 2013

Construction and development	$	4,941,654		$	4,870,644		$	71,010		$	—		$	—
1-4 family residential		38,040,049			37,732,683			307,366			—			—
Nonfarm, nonresidential		61,366,016			59,047,105			2,141,634			177,277			—
Commercial and industrial		67,225,422			65,970,308			1,255,114			—			—
Consumer		6,071,806			6,071,547			259			—			—
Other loans		3,900,689			3,900,689			—			—			—

	$	181,545,636		$	177,592,976		$	3,775,383		$	177,277		$	—


		100.0	%		97.8	%		2.1	%		0.1	%		—	%


Guaranteed portion of loans

Construction and development	$	16,268			16,268		$	—		$	—		$	—
1-4 family residential		707,922			662,783			45,139			—			—
Nonfarm, nonresidential		27,167,833			26,250,602			854,665			62,566			—
Commercial and industrial		16,885,330			16,018,413			866,917			—			—
Consumer		—			—			—			—			—
Other loans		498,984			498,984			—			—			—

	$	45,276,337		$	43,447,050		$	1,766,721		$	62,566		$	—


							Special
	Total			Pass Credits			Mention			Substandard			Doubtful

December 31, 2012

Construction and development	$	4,873,512		$	4,786,945		$	86,567		$	—		$	—
1-4 family residential		36,091,051			35,755,061			335,990			—			—
Nonfarm, nonresidential		48,993,867			47,500,758			1,230,275			262,834			—
Commercial and industrial		75,914,072			74,878,901			1,035,171			—			—
Consumer		6,703,363			6,696,475			6,888			—			—
Other loans		4,111,464			3,915,474			195,990			—			—

	$	176,687,329		$	173,533,614		$	2,890,881		$	262,834		$	—


		100.0	%		98.2	%		1.6	%		0.2	%		—	%


Guaranteed portion of loans

Construction and development	$	—		$	—		$	—		$	—		$	—
1-4 family residential		752,677			752,677			—			—			—
Nonfarm, nonresidential		19,855,775			19,654,773			201,002			—			—
Commercial and industrial		22,001,515			21,354,422			647,093			—			—
Consumer		—			—			—			—			—
Other loans		508,363			508,363			—			—			—

	$	43,118,330		$	42,270,235		$	848,095		$	—		$	—