Note 4: Loans and Allowance for Loan Losses

The Bank's loan portfolio includes commercial, consumer, agricultural and residential loans originated primarily in its markets in central and north Mississippi, southwest Tennessee, central Alabama and the Florida panhandle. The following is a summary of the Bank's loans held for investment, net of unearned income of $2.095 million at June 30, 2011 and $2.439 million at December 31, 2010:

(Dollars in thousands)	June 30		December 31
	2011		2010

Construction and land development loans	$	87,826	$	89,093
Other commercial real estate loans		533,720		557,638
Asset-based loans		40,017		28,132
Other commercial loans		112,046		105,094
Home equity loans		38,891		40,305
Other 1-4 family residential loans		187,932		195,184
Consumer loans		44,163		44,700

Total loans	$	1,044,595	$	1,060,146

The Bank uses loans as collateral for borrowings at the Federal Reserve Bank and a Federal Home Loan Bank. Approximately $16.605 million and $15.658 million of commercial and consumer loans were pledged to a line of credit with the Federal Reserve Bank at June 30, 2011 and December 31, 2010 respectively. Approximately $230.961 million and $247.422 million of individual real estate-secured loans were pledged to the Federal Home Loan Bank at June 30, 2011 and December 31, 2010, respectively.

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at June 30, 2011:

(Dollars in thousands)													Total
	30-59		60-89		Greater		Total				Total		Loans > 90
	Days		Days		Than		Past				Loans		Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing
Construction and land development loans	$	1,000	$	1,387	$	8,871	$	11,258	$	76,568	$	87,826	$	307
Other commercial real estate loans		707		3,039		17,379		21,125		512,595		533,720		67
Asset based loans		-		-		-		-		40,017		40,017		-
Other commercial loans		759		17		1,046		1,822		110,224		112,046		108
Home equity loans		44		349		392		785		38,106		38,891		6
Other 1-4 family residential loans		2,130		203		2,169		4,502		183,430		187,932		279
Consumer loans		149		55		140		344		43,819		44,163		17
Total	$	4,789	$	5,050	$	29,997	$	39,836	$	1,004,759	$	1,044,595	$	784

The following table presents a summary of the past due status of all loans, including nonaccrual loans, by type at December 31, 2010:

(Dollars in thousands)													Total
	30-59		60-89		Greater		Total				Total		Loans > 90
	Days		Days		Than		Past				Loans		Days and
	Past Due		Past Due		90 Days		Due		Current		Receivable		Accruing
Construction and land development loans	$	1,295	$	388	$	11,190	$	12,873	$	76,220	$	89,093	$	274
Other commercial real estate loans		997		1,453		11,632		14,082		543,556		557,638		-
Asset based loans		-		-		-		-		28,132		28,132		-
Other commercial loans		873		48		2,028		2,949		102,145		105,094		99
Home equity loans		453		-		220		673		39,632		40,305		-
Other 1-4 family residential loans		2,396		452		2,549		5,397		189,787		195,184		564
Consumer loans		315		147		46		508		44,192		44,700		14
Total	$	6,329	$	2,488	$	27,665	$	36,482	$	1,023,664	$	1,060,146	$	951

The following table presents a summary of the nonaccrual status of loans by type at June 30, 2011 and December 31, 2010 and other nonperforming assets:

(Dollars in thousands)	June 30, 2011		December 31, 2010
Construction and land development loans	$	9,735	$	13,993
Other commercial real estate loans		18,506		13,027
Asset based loans		-		-
Other commercial loans		1,141		2,151
Home equity loans		639		303
Other 1-4 family residential loans		2,633		3,560
Consumer loans		146		93
Total nonaccrual loans	$	32,800	$	33,127
Other real estate owned		30,650		31,125

Total nonperforming credit-related assets	$	63,450	$	64,252

The following table presents a summary of the past due and nonaccrual status of troubled debt restructurings by type at June 30, 2011 and December 31, 2010:

	June 30, 2011
(Dollars in thousands)			Accruing
			30-59
			Days
	Current		Past Due		Nonaccrual		Total
Construction and land development loans	$	3,835	$	-	$	1,520	$	5,355
Other commercial real estate loans		15,908		145		6,352		22,405
Other commercial loans		1,926		-		52		1,978
Other 1-4 family residential loans		1,175		-		307		1,482
Total restructured loans	$	22,844	$	145	$	8,231	$	31,220

	December 31, 2010
(Dollars in thousands)			Accruing
			30-59
			Days
	Current		Past Due		Nonaccrual		Total
Construction and land development loans	$	2,135	$	-	$	-	$	2,135
Other commercial real estate loans		14,419		-		-		14,419
Other commercial loans		-		153		57		210
Other 1-4 family residential loans		1,346		-		-		1,346
Total restructured loans	$	17,900	$	153	$	57	$	18,110

The Company applies internal risk ratings to all loans. The risk ratings range from 10, which is the highest quality rating, to 70, which indicates an impending charge-off. The following definitions apply to the internal risk ratings:

Risk rating 10 – Excellent:

Commercial – Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

Consumer – This grade is reserved for loans secured by cash collateral on deposit at the Bank with no risk of principal deterioration.

Risk rating 20 – Strong:

Commercial and Consumer – This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

Risk rating 30 – Good:

Commercial – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and they: (1) conform to Bank policy, (2) conform to underwriting standards and (3) conform to product guidelines.

Risk rating 31 – Moderate:

Commercial – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions – any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors, (2) documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Consumer loans exhibiting this grade may have up to two mitigated guideline tolerances or exceptions.

Risk rating 32 – Fair:

Commercial – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics: (1) additional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank – although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors, (2) unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time – repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance and (3) marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Consumer – This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Consumer loans exhibiting this grade generally have three or more mitigated guideline tolerances or exceptions.

Risk rating 40 – Special Mention:

Commercial – Special Mention loans include the following characteristics: (1) loans with underwriting guideline tolerances and/or exceptions and with no mitigating factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Consumer - Special Mention loans include the following characteristics: (1) loans with guideline tolerances or exceptions of any kind that have not been mitigated by other economic or credit factors, (2) extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date – potential weaknesses are the result of deviations from prudent lending practices, and (3) loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Risk rating 50 – Substandard:

Commercial and Consumer – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must 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. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower’s declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

Risk rating 60 – Doubtful:

Commercial and Consumer – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus 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. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: (1) injection of capital, (2) alternative financing and (3) liquidation of assets or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been considered for nonaccrual status, and the repayment schedule is questionable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

Risk rating 70 – Loss:

Commercial and Consumer – Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets should be charged against the Reserve for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

The following table presents a summary of loans by credit risk rating at June 30, 2011.

(Dollars in thousands)			Other Commercial
	Construction		Real Estate		Asset-Based		Other Commercial
10 and 20	$	-	$	-	$	-	$	15,895
30-32		52,739		445,395		31,488		90,319
40		7,294		37,766		7,474		1,712
50		20,846		50,559		1,055		3,399
60		6,947		-		-		721
Total	$	87,826	$	533,720	$	40,017	$	112,046

(Dollars in thousands)
	Home Equity		Other 1-4 Family		Consumer		Total
10 and 20	$	-	$	124	$	13,949	$	29,968
30-32		37,690		173,330		29,440		860,401
40		480		8,447		268		63,441
50		721		5,938		503		83,021
60		-		93		3		7,764
Total	$	38,891	$	187,932	$	44,163	$	1,044,595

The following table presents a summary of loans by credit risk rating at December 31, 2010.

(Dollars in thousands)			Other Commercial
	Construction		Real Estate		Asset-Based		Other Commercial
10 and 20	$	-	$	-	$	-	$	13,141
30-32		51,077		472,614		19,162		79,856
40		4,111		30,696		7,947		3,771
50		26,978		54,178		1,023		7,565
60		6,927		150		-		761
Total	$	89,093	$	557,638	$	28,132	$	105,094

(Dollars in thousands)
	Home Equity		Other 1-4 Family		Consumer		Total
10 and 20	$	-	$	170	$	14,516	$	27,827
30-32		39,478		179,501		29,288		870,976
40		274		8,514		292		55,605
50		508		6,810		600		97,662
60		45		189		4		8,076
Total	$	40,305	$	195,184	$	44,700	$	1,060,146

The following table summarizes loans that were individually reviewed for impairment allowances at June 30, 2011:

(Dollars in thousands)
			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	13,493	$	18,319	$	-
Other commercial real estate loans		34,100		36,754		-
Asset based loans		-		-		-
Other commercial loans		728		754		-
Home equity loans		721		721		-
Other 1-4 family residential loans		2,835		2,836		-
Consumer loans		452		462		-

Loans with a specific valuation allowance:
Construction and land development loans	$	14,209	$	18,046	$	3,333
Other commercial real estate loans		16,459		18,129		2,658
Asset based loans		-		-		-
Other commercial loans		3,393		3,545		1,341
Home equity loans		-		-		-
Other 1-4 family residential loans		3,286		3,307		1,261
Consumer loans		54		54		40

Total:
Construction and land development loans	$	27,702	$	36,365	$	3,333
Other commercial real estate loans		50,559		54,883		2,658
Asset based loans		-		-		-
Other commercial loans		4,121		4,299		1,341
Home equity loans		721		721		-
Other 1-4 family residential loans		6,121		6,143		1,261
Consumer loans		506		516		40

The following table summarizes loans that were individually reviewed for impairment allowances at June 30, 2011:

(Dollars in thousands)	Average		Interest		Average		Interest
	Investment		Income		Investment		Income
	In Impaired Loans		Recognized		In Impaired Loans		Recognized
	Quarter-to-Date		Quarter-to-Date		Year-to-Date		Year-to-Date
Loans without a specific valuation allowance:
Construction and land development loans	$	9,294	$	115	$	14,894	$	247
Other commercial real estate loans		19,933		290		34,179		774
Asset based loans		-		-		-		-
Other commercial loans		-		-		3,156		79
Home equity loans		730		4		719		4
Other 1-4 family residential loans		2,905		31		3,000		65
Consumer loans		416		7		471		14

Loans with a specific valuation allowance:
Construction and land development loans	$	16,583	$	97	$	14,700	$	193
Other commercial real estate loans		23,563		1		16,656		47
Asset based loans		-		-		-		-
Other commercial loans		5,490		53		3,413		62
Home equity loans		-		-		-		-
Other 1-4 family residential loans		3,725		40		3,291		44
Consumer loans		7		1		56		1

Total:
Construction and land development loans	$	25,877	$	212	$	29,594	$	440
Other commercial real estate loans		43,496		291		50,835		821
Asset based loans		-		-		-		-
Other commercial loans		5,490		53		6,569		141
Home equity loans		730		4		719		4
Other 1-4 family residential loans		6,630		71		6,291		109
Consumer loans		423		8		527		15

The following table summarizes loans that were individually reviewed for impairment allowances at December 31, 2010:

(Dollars in thousands)
			Unpaid
	Recorded		Principal		Specific
	Balance		Balance		Allowance
Loans without a specific valuation allowance:
Construction and land development loans	$	20,531	$	29,004	$	-
Other commercial real estate loans		45,611		49,868		-
Asset based loans		-		-		-
Other commercial loans		7,028		8,049		-
Home equity loans		508		508		-
Other 1-4 family residential loans		4,695		4,961		-
Consumer loans		474		485		-

Loans with a specific valuation allowance:
Construction and land development loans	$	12,900	$	13,921	$	2,871
Other commercial real estate loans		8,716		8,716		1,582
Asset based loans		-		-		-
Other commercial loans		1,268		1,419		809
Home equity loans		45		45		45
Other 1-4 family residential loans		2,304		2,304		765
Consumer loans		129		129		60

Total:
Construction and land development loans	$	33,431	$	42,925	$	2,871
Other commercial real estate loans		54,327		58,584		1,582
Asset based loans		-		-		-
Other commercial loans		8,296		9,468		809
Home equity loans		553		553		45
Other 1-4 family residential loans		6,999		7,265		765
Consumer loans		603		614		60

The following table summarizes activity in the allowance for loan losses for the six months ended June 30, 2011 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	3,942		$	2,763		$	4,442		$	3,701		$	1,177		$	-	$	16,025
Provision charged to expense		127			2,092			1,798			566			277			-		4,860
Losses charged off		(331	)		(1,017	)		(1,095	)		(706	)		(440	)		-		(3,589	)
Recoveries		882			264			137			121			105			-		1,509
Balance, end of period	$	4,620		$	4,102		$	5,282		$	3,682		$	1,119		$	-	$	18,805
Ending balance:
individually evaluated for impairment	$	3,333		$	2,658		$	1,341		$	1,261		$	40		$	-	$	8,633
Ending balance:
collectively evaluated for impairment	$	1,287		$	1,444		$	3,941		$	2,421		$	1,079		$	-	$	10,172
Ending balance:
loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-	$	-

Loans:
Ending balance	$	87,826		$	533,720		$	152,063		$	226,823		$	44,163		$	-	$	1,044,595
Ending balance:
individually evaluated for impairment	$	27,702		$	50,559		$	4,121		$	6,842		$	506		$	-	$	89,730
Ending balance:
collectively evaluated for impairment	$	60,124		$	483,161		$	147,942		$	219,981		$	43,657		$	-	$	954,865
Ending balance:
loans acquired with deteriorated credit quality	$	-		$	-		$	-		$	-		$	-		$	-	$	-

The following table summarizes activity in the allowance for loan losses for the three months ended June 30, 2011 by loan category:

(Dollars in thousands)
	Construction			Other CRE			Commercial			Residential			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of period	$	4,124		$	3,165		$	5,023		$	3,606		$	1,125		$	-	$	17,043
Provision charged to expense		13			1,295			421			366			185			-		2,280
Losses charged off		(111	)		(515	)		(255	)		(326	)		(235	)		-		(1,442	)
Recoveries		594			157			93			36			44			-		924
Balance, end of period	$	4,620		$	4,102		$	5,282		$	3,682		$	1,119		$	-	$	18,805

The following table is a summary of the activity in the allowance for loan losses for the second quarter and year-to-date periods ending June 30, 2011 and 2010.

(Dollars in thousands)	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011			2010
Beginning balance	$	17,043		$	21,115		$	16,025		$	24,014

Loans charged off		(1,442	)		(5,706	)		(3,589	)		(11,309	)
Charge offs resulting from write-downs of loans transferred to held for sale status		-			-			-			(325	)
Recoveries		924			512			1,509			1,261
Net charge-offs		(518	)		(5,194	)		(2,080	)		(10,373	)

Provision for loan losses		2,280			2,380			4,860			4,660

Ending balance	$	18,805		$	18,301		$	18,805		$	18,301

The following table summarizes the balance in the allowance for loan losses at December 31, 2010 by loan category:

(Dollars in thousands)
	Construction		Other CRE		Commercial		Residential		Consumer		Unallocated		Total
Ending balance	$	3,942	$	2,763	$	4,442	$	3,701	$	1,177	$	-	$	16,025
Ending balance:
individually evaluated for impairment	$	2,871	$	1,582	$	809	$	810	$	60	$	-	$	6,132
Ending balance:
collectively evaluated for impairment	$	1,071	$	1,181	$	3,633	$	2,891	$	1,117	$	-	$	9,893
Ending balance:
loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans:
Ending balance	$	89,093	$	557,638	$	133,226	$	235,489	$	44,700	$	-	$	1,060,146
Ending balance:
individually evaluated for impairment	$	33,431	$	54,327	$	8,296	$	7,552	$	603	$	-	$	104,209
Ending balance:
collectively evaluated for impairment	$	55,662	$	503,311	$	124,930	$	227,937	$	44,097	$	-	$	955,937
Ending balance:
loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Restructured loans are considered to be impaired loans. A troubled debt restructuring occurs when a 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. That concession either stems from an agreement between the creditor and the debtor or is imposed by law or a court. The following table presents information about the Company’s restructured loans as of June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011				December 31, 2010
	Recorded				Recorded
	Balance		Allowance		Balance		Allowance
Restructured loans with an allowance:
Construction and land development loans	$	3,655	$	650	$	2,135	$	450
Other commercial real estate loans		7,667		685		2,086		160
Other commercial loans		1,849		68		210		175
Other 1-4 family residential loans		1,175		531		1,179		512

Restructured loans without an allowance:
Construction and land development loans		1,700		-		-		-
Other commercial real estate loans		14,738		-		12,333		-
Other commercial loans		129		-		-		-
Other 1-4 family residential loans		307		-		167		-

Total restructured loans	$	31,220	$	1,934	$	18,110	$	1,279

At June 30, 2011, there were $411 thousand in available credit commitments for construction and land development restructured loans. At December 31, 2010, there were no available credit commitments for any restructured loans.