LOANS

9 Months Ended

Sep. 30, 2012

Loans Receivable, Net [Abstract]

LOANS

NOTE H — 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 September 30, 2012 and December 31, 2011, respectively, loans accounted for 60.1% and 62.4% 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:

Composition of Loan Portfolio

	Sept. 30, 2012						December 31, 2011
				Percent						Percent
				of						of
	Amount			Total			Amount			Total
	(Dollars in thousands)
Mortgage loans held for sale	$	4,898			1.2	%	$	2,906			0.7	%
Commercial, financial and agricultural		51,616			13.1			48,385			12.5
Real Estate:
Mortgage-commercial		135,660			34.5			138,943			35.8
Mortgage-residential		129,149			32.9			117,692			30.3
Construction		56,761			14.4			63,357			16.3
Consumer and other		14,876			3.9			16,645			4.4
Total loans		392,960			100	%		387,928			100	%
Allowance for loan losses		(4,400	)					(4,511	)
Net loans	$	388,560					$	383,417

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 the period is as follows:

(In thousands)

	Three Months			Nine Months
	Ended			Ended
	Sept. 30, 2012			Sept. 30, 2012
Balance at beginning of period	$	4,468		$	4,511
Loans charged-off:
Real Estate		(314	)		(678	)
Installment and Other		(53	)		(151	)
Commercial, Financial and Agriculture		(114	)		(140	)
Total		(481	)		(969	)
Recoveries on loans previously charged-off:
Real Estate		26			40
Installment and Other		13			52
Commercial, Financial and Agriculture		3			22
Total		42			114
Net Charge-offs		(439	)		(855	)
Provision for Loan Losses		371			744
Balance at end of period	$	4,400		$	4,400

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 September 30, 2012 and December 31, 2011.

Allocation of the Allowance for Loan Losses

	September 30, 2012
	(Dollars in thousands)
	Amount		% of loans in each category to total loans
Commercial Non Real Estate	$	292		13.4	%
Commercial Real Estate		3,148		64.2
Consumer Real Estate		727		16.8
Consumer		137		5.6
Unallocated		96		-
Total	$	4,400		100	%

	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	%

The following table represents the Company’s impaired loans at September 30, 2012 and December 31, 2011. This table excludes performing troubled debt restructurings.

	Sept. 30,		December 31,
	2012		2011
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	1,302	$	2,791
Impaired loans with a valuation allowance		1,833		2,334
Total impaired loans	$	3,135	$	5,125
Allowance for loan losses on impaired loans at period end		771		738
Total nonaccrual loans		2,808		5,125
Past due 90 days or more and still accruing		878		496
Average investment in impaired loans		3,363		4,185

The following table is a summary of interest recognized and cash-basis interest earned on impaired loans:

	Three Months Ended Sept. 30, 2012		Nine Months Ended Sept. 30, 2012
Average of individually impaired loans during period	$	2,719	$	2,690
Interest income recognized during impairment		-		-
Cash-basis interest income recognized		5		39

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 three and nine months ended September 30, 2012, was $75,900 and $145,300, respectively. The Company had no loan commitments to borrowers in non-accrual status at September 30, 2012 and 2011.

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 September 30, 2012 and December 31, 2011. 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.

September 30, 2012

					Commercial,
			Installment		Financial
	Real Estate		and Other		and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	2,867	$	47	$	221	$	3,135
Collectively evaluated		311,588		21,637		51,702		384,927
Total	$	314,455	$	21,684	$	51,923	$	388,062
Allowance for Loan Losses
Individually evaluated	$	672	$	44	$	55	$	771
Collectively evaluated		3,202		190		237		3,629
Total	$	3,874	$	234	$	292	$	4,400

December 31, 2011

					Commercial,
			Installment		Financial
	Real Estate		and Other		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

The following tables provide additional detail of impaired loans broken out according to class as of September 30, 2012 and December 31, 2011. 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 September 30, 2012 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.

September 30, 2012

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	76	$	76	$	-	$	76	$	-
Commercial real estate		993		993		-		957		3
Consumer real estate		231		231		-		231		10
Consumer installment		2		2		-		2		-
Total	$	1,302	$	1,302	$	-	$	1,266	$	13
Impaired loans with a related allowance:
Commercial installment	$	145	$	145	$	55	$	164	$	5
Commercial real estate		1,544		1,544		637		1,079		18
Consumer real estate		99		99		35		175		2
Consumer installment		45		45		44		35		1
Total	$	1,833	$	1,833	$	771	$	1,453	$	26
Total Impaired Loans:
Commercial installment	$	221	$	221	$	55	$	240	$	5
Commercial real estate		2,537		2,537		637		2,036		21
Consumer real estate		330		330		35		406		12
Consumer installment		47		47		44		37		1
Total Impaired Loans	$	3,135	$	3,135	$	771	$	2,719	$	39

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		571		1,463		23
Consumer real estate		647		647		91		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

The following tables provide additional detail of troubled debt restructurings at September 30, 2012.

For the Three Months Ending September 30, 2012

			Outstanding
	Outstanding Recorded		Recorded Investment				Interest
	Investment Pre-Modification		Post - Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)
Commercial installment	$	-	$	-		-	$	-
Commercial real estate		107		107		1		7
Consumer real estate		-		-		-		-
Consumer installment		-		-		-		-
	$	107	$	107		1	$	7

For the Nine Months Ending September 30, 2012

			Outstanding
	Outstanding Recorded		Recorded Investment				Interest
	Investment Pre-Modification		Post - Modification		Number of Loans		Income Recognized
	(in thousands except number of loans)
Commercial installment	$	-	$	-		-	$	-
Commercial real estate		107		107		1		7
Consumer real estate		63		63		1		1
Consumer installment		42		42		1		1
	$	212	$	212		3	$	9

The balance of troubled debt restructurings at September 30, 2012 was $210,000. There was $53,000 allocated in specific reserves established with respect to these loans as of September 30, 2012. As of September 30, 2012, the Company had no additional amount committed on any loan classified as troubled debt restructuring.

The recorded investment in receivables for which the allowance for credit losses was previously measured under a general allowance for credit losses methodology and are now impaired under Section 310-10-35 was $210,000. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $53,000. All loans were performing as agreed with modified terms.

During the three and nine month period ending September 30, 2012, there were 1 and 3, respectively, loans modified as TDR.

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:

	September 30, 2012
	(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	$	222	$	67	$	1,615	$	1,904	$	56,761
Real Estate-mortgage		2,236		763		455		3,454		129,149
Real Estate-non farm non residential		509		-		596		1,105		135,660
Commercial		282		-		137		419		51,616
Consumer		146		48		5		199		14,876
Total	$	3,395	$	878	$	2,808	$	7,081	$	388,062

	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 non residential		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

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 September 30, 2012 and December 31, 2011, 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)

September 30, 2012

							Commercial,
	Real Estate Commercial		Real Estate Mortgage		Installment and Other		Financial and Agriculture		Total
Pass	$	230,865	$	64,411	$	21,603	$	51,532	$	368,411
Special Mention		6,356		148		27		-		6,531
Substandard		12,161		678		54		340		13,233
Doubtful		-		-		-		61		61
Subtotal		249,382		65,237		21,684		51,933		388,236
Less:
Unearned discount		93		71		-		10		174
Loans, net of unearned discount	$	249,289	$	65,166	$	21,684	$	51,923	$	388,062

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