Note 3.

Loans

Loans at March 31, 2012 and December 31, 2011 are summarized as follows:


	(in thousands)
	March 31, 2012		December 31, 2011
Real estate loans:
Construction and land development	$	49,893	$	48,363
Secured by 1-4 family residential		125,628		122,339
Other real estate loans		175,738		181,141
Commercial and industrial loans		29,449		29,446
Consumer and other loans		9,686		11,151

Total loans	$	390,394	$	392,440
Allowance for loan losses		13,636		12,937

Loans, net	$	376,758	$	379,503

Consumer loans included $100 thousand and $325 thousand of demand deposit overdrafts at March 31, 2012 and December 31, 2011, respectively.

The Company considers the following risk characteristics of each loan portfolio class:

•

Residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

•

Real estate construction loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

•

Commercial real estate and commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

•

Consumer loans carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral, i.e. rapidly depreciating assets such as automobiles, or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy, or other changes in circumstances.

The following table provides a summary of loan classes and an aging of past due loans as of March 31, 2012 and December 31, 2011:


	March 31, 2012
	(in thousands)
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing

Real estate loans:
Construction and land development	$	1,610	$	206	$	26	$	1,842	$	48,051	$	49,893	$	661	$	—
1-4 family residential		1,216		599		605		2,420		123,537		125,628		2,007		238
Other real estate loans		2,928		1,187		3,181		7,296		168,442		175,738		7,540		131
Commercial and industrial		194		251		158		603		28,846		29,449		162		—
Consumer and other loans		64		—		—		64		9,622		9,686		—		—

Total	$	6,012	$	2,243	$	3,970	$	12,225	$	378,498	$	390,394	$	10,370	$	369


	December 31, 2011
	(in thousands)
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing

Real estate loans:
Construction and land development	$	2,267	$	1,029	$	235	$	3,531	$	44,832	$	48,363	$	235	$	—
1-4 family residential		4,179		471		688		5,338		117,001		122,339		3,043		98
Other real estate loans		3,863		562		722		5,147		175,994		181,141		8,367		361
Commercial and industrial		950		93		5		1,048		28,398		29,446		163		—
Consumer and other loans		94		19		14		127		11,024		11,151		33		—

Total	$	11,353	$	2,174	$	1,664	$	15,191	$	377,249	$	392,440	$	11,841	$	459

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the Company's loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans.

The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank's Credit Administration department reviews risk grades for accuracy on a quarterly basis and as delinquency issues arise. In addition, a certain amount of loans are reviewed each year through the Company's internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

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 the Bank's credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment 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 in full 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 weakness 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. The Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

The following tables provide an analysis of the credit risk profile of each loan class as of March 31, 2012 and December 31, 2011:


	March 31, 2012 (in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	26,414	$	5,490	$	17,989	$	—	$	49,893
Secured by 1-4 family residential		111,006		4,057		10,377		188		125,628
Other real estate loans		133,705		16,956		25,077		—		175,738
Commercial and industrial		23,403		1,039		4,937		70		29,449
Consumer and other loans		9,606		80		—		—		9,686

Total	$	304,134	$	27,622	$	58,380	$	258	$	390,394


	December 31, 2011 (in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	23,172	$	7,504	$	17,452	$	235	$	48,363
Secured by 1-4 family residential		108,240		5,645		8,266		188		122,339
Other real estate loans		138,255		17,123		22,348		3,415		181,141
Commercial and industrial		23,451		949		4,976		70		29,446
Consumer and other loans		11,058		79		—		14		11,151

Total	$	304,176	$	31,300	$	53,042	$	3,922	$	392,440