NOTE E - LOANS

Loans typically provide higher yields than the other types of earning assets, and thus one of the Company's goals is for loans to be the largest category of the Company's earning assets. At December 31, 2011 and December 31, 2010, respectively, loans accounted for 62.4% and 72.1% of earning assets. The Company controls and mitigates the inherent credit and liquidity risks through the composition of its loan portfolio.

The following table shows the composition of the loan portfolio by category:

	December 31, 2011						December 31, 2010
	Amount			Percent of Total			Amount			Percent of Total
	(Dollars in thousands)
Mortgage loans held for sale	$	2,906			0.7	%	$	2,938			0.9	%
Commercial, financial and agricultural		48,385			12.5			48,427			14.6
Real Estate:
Mortgage-commercial		138,943			35.8			109,073			32.8
Mortgage-residential		117,692			30.3			102,425			30.8
Construction		63,357			16.3			58,962			17.7
Consumer and other		16,645			4.4			10,748			3.2
Total loans		387,928			100	%		332,573			100	%
Allowance for loan losses		(4,511	)					(4,617	)
Net loans	$	383,417					$	327,956

In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. The Company follows the common practice of financial institutions in the Company’s market area of obtaining a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. Generally, the Company limits its loan-to-value ratio to 80%. Management attempts to maintain a conservative philosophy regarding its underwriting guidelines and believes it will reduce the risk elements of its loan portfolio through strategies that diversify the lending mix.

Loans held for sale consist of mortgage loans originated by the Bank and sold into the secondary market. Commitments from investors to purchase the loans are obtained upon origination.

Activity in the allowance for loan losses for December 31, 2011 and 2010 is as follows:

(In thousands)

	2011			2010

Balance at beginning of period	$	4,617		$	4,762
Loans charged-off:
Real Estate		(1,569	)		(815	)
Installment and Other		(97	)		(188	)
Commercial, Financial and Agriculture		(321	)		(367	)
Total		(1,987	)		(1,370	)
Recoveries on loans previously charged-off:
Real Estate		311			65
Installment and Other		73			106
Commercial, Financial and Agriculture		29			71
Total		413			242
Net Charge-offs		(1,574	)		(1,128	)
Provision for Loan Losses		1,468			983
Balance at end of period	$	4,511		$	4,617

The following tables represent how the allowance for loan losses is allocated to a particular loan type as well as the percentage of the category to total loans at December 31, 2011 and December 31, 2010.

Allocation of the Allowance for Loan Losses

	December 31, 2011
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	397		16.3	%
Commercial Real Estate		3,356		63.8
Consumer Real Estate		680		15.7
Consumer		78		4.2
Unallocated		—		—
Total	$	4,511		100	%

	December 31, 2010
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	757		15.9	%
Commercial Real Estate		2,817		62.2
Consumer Real Estate		902		18.0
Consumer		140		2.9
Unallocated		1		1.0
Total	$	4,185		100	%

The following table represents the Company’s impaired loans at December 31, 2011 and December 31, 2010. This table excludes performing troubled debt restructurings.

	December 31,		December 31,
	2011		2010
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	2,791	$	2,406
Impaired loans with a valuation allowance		2,334		2,123
Total impaired loans	$	5,125	$	4,529
Allowance for loan losses on impaired loans at period end		738		738
Total nonaccrual loans		5,125		4,212

Past due 90 days or more and still accruing		496		1,071
Average investment in impaired loans		4,185		14,486

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans for December 31, 2011 and December 31, 2010:

	2011		2010

Average of individually impaired loans during period	$	4,827	$	4,286
Interest income recognized during impairment		-		-
Cash-basis interest income recognized		287		158

The gross interest income that would have been recorded in the period that ended if the nonaccrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the twelve months for December 31, 2011 and 2010, was $112,000 and $96,000, respectively. The Company had no loan commitments to borrowers in non-accrual status at December 31, 2011 and 2010.

The following tables provide the ending balances in the Company's loans (excluding mortgage loans held for sale) and allowance for loan losses, broken down by portfolio segment as of December 31, 2011 and December 31, 2010. The tables also provide additional detail as to the amount of our loans and allowance that correspond to individual versus collective impairment evaluation. The impairment evaluation corresponds to the Company's systematic methodology for estimating its Allowance for Loan Losses.

December 31, 2011

			Installment		Commercial,
	Real Estate		and Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,841	$	38	$	246	$	5,125
Collectively evaluated		301,271		16,107		62,519		379,897
Total	$	306,112	$	16,145	$	62,765	$	385,022

Allowance for Loan Losses
Individually evaluated	$	662	$	13	$	63	$	738
Collectively evaluated		3,375		64		334		3,773
Total	$	4,037	$	77	$	397	$	4,511

December 31, 2010

			Installment		Commercial,
	Real Estate		And Other		Financial and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,091	$	48	$	390	$	4,529
Collectively evaluated		266,504		9,083		49,519		325,106
Total	$	270,595	$	9,131	$	49,909	$	329,635

Allowance for Loan Losses
Individually evaluated	$	464	$	10	$	264	$	738
Collectively evaluated		3,254		132		493		3,879
Total	$	3,718	$	142	$	757	$	4,617

The following tables provide additional detail of impaired loans broken out according to class as of December 31, 2011 and 2010. The recorded investment included in the following table represents customer balances net of any partial charge-offs recognized on the loans, net of any deferred fees and costs. As nearly all of our impaired loans at December 31, 2011 are on nonaccrual status, recorded investment excludes any insignificant amount of accrued interest receivable on loans 90-days or more past due and still accruing. The unpaid balance represents the recorded balance prior to any partial charge-offs.

December 31, 2011

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	121	$	121	$	-	$	69	$	5
Commercial real estate		2,420		2,420		-		1,457		85
Consumer real estate		241		241		-		288		3
Consumer installment		9		9		-		11		-
Total	$	2,791	$	2,791	$	-	$	1,825	$	93

Impaired loans with a related allowance:
Commercial installment	$	125	$	125	$	63	$	128	$	-
Commercial real estate		1,533		1,533		574		1,463		23
Consumer real estate		647		647		88		740		12
Consumer installment		29		29		13		29		6
Total	$	2,334	$	2,334	$	738	$	2,360	$	41

Total Impaired Loans:
Commercial installment	$	246	$	246	$	63	$	197	$	5
Commercial real estate		3,953		3,953		571		2,920		108
Consumer real estate		888		888		91		1,028		15
Consumer installment		38		38		13		40		6
Total Impaired Loans	$	5,125	$	5,125	$	738	$	4,185	$	134

December 31, 2010

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)

Impaired loans with no related allowance:
Commercial installment	$	12	$	12	$	-	$	387	$	1
Commercial real estate		2,230		2,230		-		7,884		72
Consumer real estate		147		149		-		2,185		8
Consumer installment		15		15		-		183		1
Total	$	2,404	$	2,406	$	-	$	10,639	$	82

Impaired loans with a related allowance:
Commercial installment	$	113	$	377	$	264	$	481	$	17
Commercial real estate		966		1,370		401		2,421		89
Consumer real estate		280		343		63		796		20
Consumer installment		23		33		10		149		-
Total	$	1,382	$	2,123	$	738	$	3,847	$	126

Total Impaired Loans:
Commercial installment	$	125	$	389	$	264	$	868	$	18
Commercial real estate		3,196		3,600		401		10,305		161
Consumer real estate		427		492		63		2,981		28
Consumer installment		38		48		10		332		1
Total Impaired Loans	$	3,786	$	4,529	$	738	$	14,486	$	208

The following tables provide additional detail of troubled debt restructurings at December 31, 2011.

	Outstanding Recorded		Outstanding Recorded				Interest
	Investment Pre-Modification		Investment Post-Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)

Commercial installment	$	14	$	10		1	$	1
Commercial real estate		1,214		1,842		3		86
Consumer real estate		2,970		3,112		2		193
Consumer installment		22		18		2		1
Total	$	4,220	$	4,982		8	$	281

The balance of troubled debt restructurings at December 31, 2011 was $4.9 million, calculated for regulatory reporting purpose. Of these amounts, $4.2 million were performing in accordance with the modified terms. The remaining $.7 million are on non-accrual. There was no allocation in specific reserves established with respect to these loans as of December 31, 2011. As of December 31, 2011, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

The recorded investment in loans for which the allowance for loan losses was previously measured under a general allowance for loan losses methodology and are now impaired under Section 310-10-35 was $4,201,000. The allowance for loan losses associated with those loans on the basis of a current evaluation of loss was $-. All loans were performing as agreed with modified terms.

During the twelve month period ending December 31, 2011, the terms of 8 loans were modified as TDRs. The modifications included one of the following or a combination of the following: maturity date extensions, interest only payments, amortizations were extended beyond what would be available on similar type loans, and payment waiver. No interest rate concessions were given on these nor were any of these loans written down.

The following tables summarize by class our loans classified as past due in excess of 30 days or more in addition to those loans classified as non-accrual:

	December 31, 2011
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans

Real Estate-construction	$	70	$	22	$	945	$	1,037	$	63,357
Real Estate-mortgage		2,189		311		984		3,484		117,692
Real Estate-non farm nonresidential		1,662		144		2,877		4,683		138,943
Commercial		138		19		246		403		48,385
Consumer		214		-		73		287		16,645
Total	$	4,273	$	496	$	5,125	$	9,894	$	385,022

	December 31, 2010
	(In thousands)
	Past Due 30 to 89 Days		Past Due 90 Days or More and Still Accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans

Real Estate-construction	$	593	$	1	$	1,433	$	2,027	$	58,962
Real Estate-mortgage		3,673		153		893		4,719		102,426
Real Estate-non farm nonresidential		438		737		1,452		2,627		109,073
Commercial		740		144		386		1,270		48,427
Consumer		262		36		48		346		10,747
Total	$	5,706	$	1,071	$	4,212	$	10,989	$	329,635

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 uses the following definitions for risk ratings, which are consistent with the definitions used in supervisory guidance:

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 Company’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying 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 not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of December 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans (excluding mortgage loans held for sale) was as follows:

(In thousands)

December 31, 2011

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	223,692	$	57,835	$	16,004	$	60,741	$	358,272
Special Mention		5,169		71		45		3		5,288
Substandard		16,815		2,553		99		1,846		21,313
Doubtful		-		104		-		175		279
Subtotal		245,676		60,563		16,148		62,765		385,152
Less:
Unearned Discount		94		34		-		2		130
Loans, net of unearned discount	$	245,582	$	60,529	$	16,148	$	62,763	$	385,022

December 31, 2010

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total

Pass	$	187,657	$	53,776	$	8,764	$	47,500	$	297,697
Special Mention		5,154		125		70		14		5,363
Substandard		17,820		6,130		297		2,215		26,462
Doubtful		-		-		-		180		180
Subtotal		210,631		60,031		9,131		49,909		329,702
Less:
Unearned Discount		67		-		-		-		67
Loans, net of unearned discount	$	210,564	$	60,031	$	9,131	$	49,909	$	329,635