NOTE G — 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, 2013 and December 31, 2012, loans accounted for 66.3% and 63.6% of earning assets, respectively. 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

	September 30, 2013				December 31, 2012
	Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)

Mortgage loans held for sale	$	1,399	.2	%	$	5,586	1.4	%
Commercial, financial and agricultural		79,094	13.8			53,234	12.9
Real Estate:
Mortgage-commercial		198,123	34.6			142,046	34.3
Mortgage-residential		211,494	36.9			140,703	34.0
Construction		66,745	11.7			57,529	13.9
Consumer and other		15,658	2.8			14,600	3.5
Total loans		572,513	100	%		413,698	100	%
Allowance for loan losses		(5,672)				(4,727)
Net loans	$	566,841			$	408,971

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 consists 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, 2013		Sept. 30, 2013

Balance at beginning of period	$	5,393	$	4,727
Loans charged-off:
Real Estate		(50)		(356)
Installment and Other		(41)		(171)
Commercial, Financial and Agriculture		(35)		(105)
Total		(126)		(632)
Recoveries on loans previously charged-off:
Real Estate		27		492
Installment and Other		12		51
Commercial, Financial and Agriculture		6		14
Total		45		557
Net charge-offs		(81)		(75)
Provision for Loan Losses		360		1,020
Balance at end of period	$	5,672	$	5,672

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, 2013 and December 31, 2012.

Allocation of the Allowance for Loan Losses

	September 30, 2013
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	504	13.7	%
Commercial Real Estate		3,339	57.5
Consumer Real Estate		1,238	25.3
Consumer		198	3.5
Unallocated		393	-
Total	$	5,672	100	%

	December 31, 2012
	(Dollars in thousands)
	Amount		% of loans in each category to total loans

Commercial Non Real Estate	$	420	13.3	%
Commercial Real Estate		3,338	63.7
Consumer Real Estate		810	19.0
Consumer		151	4.0
Unallocated		8	-
Total	$	4,727	100	%

The following table represents the Company’s impaired loans at September 30, 2013, and December 31, 2012.

	Sept. 30,		December 31,
	2013		2012
	(In thousands)
Impaired Loans:
Impaired loans without a valuation allowance	$	1,850	$	1,445
Impaired loans with a valuation allowance		2,501		2,144
Total impaired loans	$	4,351	$	3,589
Allowance for loan losses on impaired loans at period end		748		936

Total nonaccrual loans		2,681		3,401

Past due 90 days or more and still accruing		471		158
Average investment in impaired loans		3,554		2,979

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

	Three Months Ended Sept. 30, 2013		Nine Months Ended Sept. 30, 2013

Average of individually impaired loans during period	$	3,554	$	3,554
Interest income recognized during Impairment		43		98
Cash-basis interest income recognized		42		110

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, 2013, was $40,500 and $131,400, respectively. The Company had no loan commitments to borrowers in non-accrual status at September 30, 2013 and 2012.

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, 2013 and December 31, 2012. 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, 2013

					Commercial,
			Installment		Financial
	Real Estate		and Other		and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,218	$	41	$	92	$	4,351
Collectively evaluated		468,851		19,698		78,214		566,763
Total	$	473,069	$	19,739	$	78,306	$	571,114

Allowance for Loan Losses
Individually evaluated	$	680	$	36	$	32	$	748
Collectively evaluated		3,897		555		472		4,924
Total	$	4,577	$	591	$	504	$	5,672

December 31, 2012

					Commercial,
			Installment		Financial
	Real Estate		and Other		and Agriculture		Total
	(In thousands)
Loans
Individually evaluated	$	4,111	$	55	$	221	$	4,387
Collectively evaluated		333,299		16,401		54,025		403,725
Total	$	337,410	$	16,456	$	54,246	$	408,112

Allowance for Loan Losses
Individually evaluated	$	917	$	110	$	76	$	1,103
Collectively evaluated		3,231		49		344		3,624
Total	$	4,148	$	159	$	420	$	4,727

The following tables provide additional detail of impaired loans broken out according to class as of September 30, 2013 and December 31, 2012. 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, 2013, 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, 2013

							Average		Interest
							Recorded		Income
	Recorded		Unpaid		Related		Investment		Recognized
	Investment		Balance		Allowance		YTD		YTD
	(In thousands)
Impaired loans with no related allowance:
Commercial installment	$	4	$	4	$	-	$	50	$	-
Commercial real estate		1,715		1,773		-		1,129		56
Consumer real estate		126		126		-		145		2
Consumer installment		5		5		-		5		-
Total	$	1,850	$	1,908	$	-	$	1,329	$	58

Impaired loans with a related allowance:
Commercial installment	$	87	$	87	$	32	$	60	$	5
Commercial real estate		1,610		1,680		391		1,308		33
Consumer real estate		768		768		289		820		12
Consumer installment		36		36		36		37		2
Total	$	2,501	$	2,571	$	748	$	2,225	$	52

Total Impaired Loans:
Commercial installment	$	91	$	91	$	32	$	110	$	5
Commercial real estate		3,325		3,453		391		2,437		89
Consumer real estate		894		894		289		965		14
Consumer installment		41		41		36		42		2
Total Impaired Loans	$	4,351	$	4,479	$	748	$	3,554	$	110

December 31, 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	$	15	$	15	$	-	$	46	$	-
Commercial real estate		1,013		1,529		-		1,004		39
Consumer real estate		106		969		-		168		8
Consumer installment		311		311		-		156		1
Total	$	1,445	$	2,824	$	-	$	1,374	$	48

Impaired loans with a related allowance:
Commercial installment	$	203	$	203	$	73	$	173	$	8
Commercial real estate		1,549		1,549		747		1,546		38
Consumer real estate		44		44		44		72		4
Consumer installment		348		348		72		197		2
Total	$	2,144	$	2,144	$	936	$	1,988	$	52

Total Impaired Loans:
Commercial installment	$	218	$	218	$	73	$	219	$	8
Commercial real estate		2,562		3,078		747		2,550		77
Consumer real estate		150		1,013		44		240		12
Consumer installment		659		659		72		353		3
Total Impaired Loans	$	3,589	$	4,968	$	936	$	3,362	$	100

The following tables provide additional detail of troubled debt restructurings at September 30, 2013.

For the Three Months Ending September 30, 2013

			Outstanding
	Outstanding		Recorded
	Recorded		Investment				Interest
	Investment		Post-		Number of		Income
	Pre-Modification		Modification		Loans		Recognized

Commercial installment	$	-	$	-		-	$	-
Commercial real estate		858		858		3		24
Consumer real estate		-		-		-		-
Consumer installment		-		-		-		-
Total	$	858	$	858		3	$	24

For the Nine Months Ending September 30, 2013

			Outstanding
	Outstanding		Recorded
	Recorded		Investment			Interest
	Investment		Post-		Number of	Income
	Pre-Modification		Modification		Loans	Recognized
Commercial installment	$	-	$	-	-	$	-
Commercial real estate		858		858	3		41
Consumer real estate		66		66	1		1
Consumer installment		-		-	-		-
Total	$	924	$	924	4	$	42

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 $1.3 million. The allowance for credit losses associated with those receivables on the basis of a current evaluation of loss was $48,000. All loans were performing as agreed with modified terms.

During the three and nine month periods ending September 30, 2013, there were 3 loans and 4 loans, respectively, modified as TDR, and are considered non-performing.

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, 2013
	(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	$	276	$	-	$	210	$	486	$	66,745
Real Estate-mortgage		1,283		468		1,950		3,701		211,494
Real Estate-non farm non residential		935		-		511		1,446		198,123
Commercial		519		-		10		529		79,094
Consumer		64		3		-		67		15,658
Total	$	3,077	$	471	$	2,681	$	6,229	$	571,114

	December 31, 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	$	990	$	-	$	1,667	$	2,657	$	57,529
Real Estate-mortgage		3,045		147		986		4,178		140,703
Real Estate-non farm non residential		389		-		608		997		142,046
Commercial		88		-		135		223		53,234
Consumer		132		11		5		148		14,600
Total	$	4,644	$	158	$	3,401	$	8,203	$	408,112

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, 2013 and December 31, 2012, 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, 2013

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

Pass	$	310,903	$	143,200	$	19,699	$	76,800	$	550,602
Special Mention		6,338		33		-		1,278		7,649
Substandard		11,634		1,283		40		258		13,215
Doubtful		-		-		-		-		-
Subtotal		328,875		144,516		19,739		78,336		571,466
Less:
Unearned discount		228		94		-		30		352
Loans, net of unearned discount	$	328,647	$	144,422	$	19,739	$	78,306	$	571,114

December 31, 2012

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

Pass	$	241,927	$	76,206	$	16,426	$	53,880	$	388,439
Special Mention		5,653		144		17		-		5,814
Substandard		12,606		1,059		15		320		14,000
Doubtful		-		-		-		60		60
Subtotal		260,186		77,409		16,458		54,260		408,313
Less:
Unearned discount		91		94		2		14		201
Loans, net of unearned discount	$	260,095	$	77,315	$	16,456	$	54,246	$	408,112