Note 5. Allowance for Loan Losses

The allowance for loan losses is reviewed by the Company's management on a monthly basis and additions thereto are recorded pursuant to the results of such reviews. In assessing the allowance, several internal and external factors that might impact the performance of individual loans are considered. These factors include, but are not limited to, economic conditions and their impact upon borrowers' ability to repay loans, respective industry trends, borrower estimates and independent appraisals. Periodic changes in these factors impact the assessment of each loan and its overall impact on the allowance for loan losses.

The monitoring of credit risk also extends to unfunded credit commitments, such as unused commercial credit lines and letters of credit. A reserve is established as needed for estimates of probable losses on such commitments.

A summary of changes in the allowance for loan losses, by portfolio type, for the three months ended March 31, 2012 and 2011 are as follows:

As of March 31, 2012
	Real Estate Loans:												Non-Real Estate Loans:
(in thousands)	Construction and Land Development			Farmland		1-4 Family			Multi-family		Non-farm non-residential		Agricultural			Commercial and Industrial			Consumer and other			Unallocated		Total
Allowance for Credit Losses:
Beginning balance (12/31/11)	$	1,002		$	65	$	1,917		$	780	$	2,980	$	125		$	1,407		$	314		$	289	$	8,879
Charge-offs		(53	)		-		(71	)		-		-		(7	)		(100	)		(155	)		-		(386	)
Recoveries		5			-		11			-		106		-			40			97			-		259
Provision		304			32		212			63		191		(13	)		290			57			64		1,200
Ending Balance	$	1,258		$	97	$	2,069		$	843	$	3,277	$	105		$	1,637		$	313		$	353	$	9,952

As of March 31, 2011
	Real Estate Loans:															Non-Real Estate Loans:
(in thousands)	Construction and Land Development			Farmland			1-4 Family			Multi-family			Non-farm non-residential			Agricultural		Commercial and Industrial			Consumer and other			Unallocated			Total
Allowance for Credit Losses:
Beginning balance (12/31/10)	$	977		$	46		$	1,891		$	487		$	3,423		$	80	$	510		$	390		$	513		$	7,317
Charge-offs		(417	)		-			(157	)		-			(22	)		-		(1	)		(88	)		-			(685	)
Recoveries		-			-			6			-			7			-		63			57			-			133
Provision		(95	)		(5	)		557			(325	)		(287	)		117		900			(83	)		(315	)		464
Ending Balance	$	465		$	41		$	2,297		$	162		$	3,121		$	197	$	1,472		$	276		$	198		$	8,229

	As of March 31, 2012
	Real Estate Loans:										Non-Real Estate Loans:
(in thousands)	Construction and Land Development		Farmland		1-4 Family		Multi-family		Non-farm non-residential		Agricultural		Commercial and Industrial		Consumer and other		Unallocated		Total
Allowance individually evaluated for impairment	$	495	$	-	$	401	$	667	$	1,190	$	-	$	-	$	-	$	-	$	2,753
Allowance collectively evaluated for impairment	$	763	$	97	$	1,669	$	175	$	2,087	$	105	$	1,636	$	313	$	354	$	7,199
Allowance at March 31, 2012	$	1,258	$	97	$	2,070	$	842	$	3,277	$	105	$	1,636	$	313	$	354	$	9,952


Loans individually evaluated for impairment	$	7,425	$	-	$	3,634	$	7,347	$	30,435	$	-	$	1,482	$	-	$	-	$	50,323
Loans collectively evaluated for impairment	$	57,906	$	11,075	$	88,545	$	10,467	$	245,419	$	17,282	$	73,723	$	23,536	$	-	$	527,953
Loans at March 31, 2012 (before unearned income)	$	65,331	$	11,075	$	92,179	$	17,814	$	275,854	$	17,282	$	75,205	$	23,536	$	-	$	578,276
Unearned income																				(988	)
Total loans net of unearned income																			$	577,288

	As of December 31, 2011
	Real Estate Loans:										Non-Real Estate Loans:
(in thousands)	Construction and Land Development		Farmland		1-4 Family		Multi-family		Non-farm non-residential		Agricultural		Commercial and Industrial		Consumer and other		Unallocated		Total
Allowance individually evaluated for impairment	$	139	$	-	$	392	$	701	$	1,224	$	-	$	-	$	-	$	-	$	2,456
Allowance collectively evaluated for impairment	$	863	$	65	$	1,525	$	79	$	1,756	$	125	$	1,407	$	314	$	289	$	6,423
Allowance at December 31, 2011	$	1,002	$	65	$	1,917	$	780	$	2,980	$	125	$	1,407	$	314	$	289	$	8,879


Loans individually evaluated for impairment	$	7,998	$	-	$	3,591	$	7,369	$	31,397	$	-	$	738	$	-	$	-	$	51,093
Loans collectively evaluated for impairment	$	70,616	$	11,577	$	85,611	$	9,545	$	237,221	$	17,338	$	67,287	$	23,455	$	-	$	522,650
Loans at December 31, 2011 (before unearned income)	$	78,614	$	11,577	$	89,202	$	16,914	$	268,618	$	17,338	$	68,025	$	23,455	$	-	$	573,743
Unearned income																				(643	)
Total loans net of unearned income																			$	573,100

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price or the fair value of the collateral if the loan is collateral dependent. As an administrative matter, this process is only applied to impaired loans or relationships in excess of $250,000.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures, unless such loans are the subject of a restructuring agreement.

The following is a summary of impaired loans by class:

	As of March 31, 2012
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real estate:
Construction & land development	$	900	$	949	$	-	$	925	$	17	$	26
Farmland		-		-		-		-		-		-
1 - 4 family		1,693		1,693		-		858		40		22
Multifamily		-		-		-		-		-		-
Non-farm non-residential		7,583		10,257		-		9,141		228		162
Total Real Estate	$	10,176	$	12,899	$	-	$	10,924	$	285	$	210
Non-Real Estate:
Agricultural	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		1,482		501		-		265		16		1
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate	$	1,482	$	501	$	-	$	265	$	16	$	1
Total Impaired Loans with no related allowance	$	11,658	$	13,400	$	-	$	11,189	$	301	$	211

Impaired Loans with an allowance recorded:
Real estate:
Construction & land development	$	6,525	$	6,525	$	495	$	6,716	$	419	$	423
Farmland		-		-		-		-		-		-
1 - 4 family		1,940		2,272		401		2,995		85		71
Multifamily		7,346		7,345		667		7,356		412		407
Non-farm non-residential		22,852		22,991		1,190		22,731		1,096		1,045
Total real estate	$	38,663	$	39,133	$	2,753	$	39,798	$	2,012	$	1,946
Non-Real Estate:
Agricultural	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate	$	-	$	-	$	-	$	-	$	-	$	-
Total Impaired Loans with an allowance recorded	$	38,664	$	39,133	$	2,753	$	39,798	$	2,012	$	1,946

Total Impaired Loans	$	50,321	$	52,533	$	2,753	$	50,987	$	2,313	$	2,157

The following is a summary of impaired loans by class:

	As of December 31, 2011
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Interest Income Cash Basis
Impaired Loans with no related allowance:
Real estate:
Construction & land development	$	937	$	960	$	-	$	634	$	91	$	64
Farmland		-		-		-		-		-		-
1 - 4 family		858		1,192		-		2,388		218		32
Multifamily		-		-		-		-		-		-
Non-farm non-residential		8,710		10,708		-		11,549		824		409
Total Real Estate	$	10,505	$	12,860	$	-	$	14,571	$	1,133	$	505
Non-Real Estate:
Agricultural	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		738		1,737		-		2,986		238		102
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate	$	738	$	1,737	$	-	$	2,986	$	238	$	102
Total Impaired Loans with no related allowance	$	11,243	$	14,597	$	-	$	17,557	$	1,371	$	607

Impaired Loans with an allowance recorded:
Real estate:
Construction & land development	$	7,061	$	7,061	$	139	$	7,243	$	477	$	376
Farmland		-		-		-		-		-		-
1 - 4 family		2,733		2,870		392		1,127		57		56
Multifamily		7,369		7,369		701		6,347		288		333
Non-farm non-residential		22,687		23,637		1,224		21,180		1,261		815
Total real estate	$	39,850	$	40,937	$	2,456	$	35,897	$	2,083	$	1,580
Non-Real Estate:
Agricultural	$	-	$	-	$	-	$	-	$	-	$	-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate	$	-	$	-	$	-	$	-	$	-	$	-
Total Impaired Loans with an allowance recorded	$	39,850	$	40,937	$	2,456	$	35,897	$	2,083	$	1,580

Total Impaired Loans	$	51,093	$	55,534	$	2,456	$	53,454	$	3,454	$	2,187

A Troubled Debt Restructuring ("TDR") is considered such if the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider. The modifications to the Company's TDRs were concessions on the interest rate charged. The effect of the modifications to the Company was a reduction in interest income. These loans still have an allocated reserve in the Company's reserve for loan losses. The following table identifies the Troubled Debt Restructurings as of March 31, 2012 and December 31, 2011:

Troubled Debt Restructurings	March 31, 2012						December 31, 2011
(in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
Construction & land development		5	$	2,840	$	2,840		5	$	2,840	$	2,840
Farmland		-		-		-		-		-		-
1-4 Family		1		1,694		1,694		1		1,694		1,694
Multifamily		1		5,993		5,993		1		6,015		6,015
Non-farm non residential		3		6,805		6,805		4		6,998		6,998
Total real estate		10	$	17,332	$	17,332		11	$	17,547	$	17,547
Non-Real Estate:
Agricultural		-	$	-	$	-		-	$	-	$	-
Commercial and industrial		-		-		-		-		-		-
Consumer and other		-		-		-		-		-		-
Total Non-Real Estate		-	$	-	$	-		-	$	-	$	-
Total		10	$	17,332	$	17,332		11	$	17,547	$	17,547

The following is a summary of the loans that subsequently defaulted after the debt was restructured:

Troubled Debt Restructurings that subsequently defaulted	March 31, 2012				December 31, 2011
(in thousands)	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Real Estate:
Construction & land development		-	$	-		-	$	-
Farmland		-		-		-		-
1-4 Family		1		1,694		-		-
Multifamily		-		-		-		-
Non-farm non residential		-		-		-		-
Total real estate		1	$	1,694		-	$	-
Non-Real Estate:
Agricultural		-	$	-		-	$	-
Commercial and industrial		-		-		-		-
Consumer and other		-		-		-		-
Total Non-Real Estate		-	$	-		-	$	-
Total		1	$	1,694		-	$	-