Loans Receivable And The Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Loans Receivable And The Allowance For Loan Losses [Abstract]

Loans Receivable And The Allowance For Loan Losses

Note 3. Loans Receivable and the Allowance for Loan Losses

Loan Portfolio Composition

One of the primary components of the Bank's loan portfolio is loans secured by first or second mortgages on residential and commercial real estate. These loans generally consist of short to mid-term commercial real estate loans, construction and development loans and residential real estate loans (including home equity and second mortgage loans). Interest rates may be fixed or adjustable and the Bank frequently charges an origination fee. The Bank seeks to manage credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio at origination, established by independent appraisals, does not exceed 80%. In addition, the Bank generally requires personal guarantees of the principal owners of the property. The loan-to-value ratio at origination for first and second mortgage loans generally does not exceed 80%, and for construction loans, generally does not exceed 75% of cost. The Bank employs a reappraisal policy to routinely monitor real estate collateral values on real estate loans where the repayment is dependent on sale of the collateral. In addition, in an effort to control interest rate risk, long term residential mortgages are not originated for the Bank's portfolio.

The Bank does not make long term (more than 15 years) mortgage loans to be held in its portfolio, and does not offer loans with negative amortization features or long-term interest only features, or loans with loan to collateral value ratios in excess of 100% at the time the loan is made. The Bank does offer loan products with features that can increase credit risk during periods of declining economic conditions, such as adjustable rate loans, short-term interest-only loans, and loans with amortization periods that differ from the maturity date (i.e., balloon payment loans). However, the Bank evaluates each customer's creditworthiness based on the customer's individual circumstances, and current and expected economic conditions, and underwrites and monitors each loan for associated risks. Loans made with exceptions to internal loan guidelines and those with loan-to-value ratios in excess of regulatory loan-to-value guidelines are monitored and reported to the Board of Directors on a monthly basis. The regulatory loan-to-value guidelines permit exceptions to the guidelines up to a maximum of 30% of total capital for commercial loans and exceptions for all types of real estate loans up to a maximum of 100% of total capital. As of September 30, 2011, the Bank had $3.0 million of loans which exceeded the regulatory loan to value guidelines. This amount is within the maximum allowable exceptions to the guidelines. Of the $3.0 million of loans with exceptions to the regulatory loan to value guidelines, $2.5 million, or approximately 80%, were not exceptions at the time the loans were made, but became exceptions upon reappraisal. Management routinely reappraises real estate collateral based on specific criteria and circumstances. If additional collateral is available, the Bank may require the borrower to commit additional collateral to the loan or take other actions to mitigate the Bank's risk.

The following table summarizes the composition of our loan portfolio by portfolio segment.

	September 30, 2011		December 31, 2010
	Amount	% of Loans	Amount	% of Loans
Loans secured by real estate – construction	$  31,041,233	31.5%	$  41,855,338	34.9%
Loans secured by real estate – single family (1)	15,048,907	15.3	19,604,943	16.3
Loans secured by real estate –nonfarm, nonresidential	39,927,435	40.6	43,080,225	36.0
Loans secured by real estate –Multifamily	1,744,755	1.8	1,793,400	1.5
Commercial and industrial	9,965,881	10.1	12,580,841	10.5
Consumer loans	721,679	.7	999,453	.8
Total Loans	98,449,890	100.0%	119,914,200	100.0%
Less allowance for loan losses	(2,151,685)		(2,703,430)
Net Loans	$   96,298,205		$ 117,210,770

(1)Includes HELOC loans.Portfolio Segment MethodologyThe Bank segments its loan portfolio into groups of loans that mirror the regulatory reporting segments for loans, which are based on specific definitions in the Code of Federal Regulations. Those categories are presented in the table above and are the same categories used by management to analyze credit quality and the adequacy of the allowance for loan losses.  The Bank has been, and will continue to be, reliant on loans with real estate collateral. Under the regulatory guidelines loans with real estate collateral are reported based on various additional sub-categories, such as construction loans, loans collateralized by single family homes, including home equity lines of credit ("HELOC"), and non-residential properties.

Allowance for loan losses

The provision for loan losses charged to operating expenses reflects the amount deemed appropriate by management to establish an adequate reserve to meet the probable loan losses incurred in the current loan portfolio. Management's judgment is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, delinquency trends, and prevailing economic conditions. To estimate the amount of allowance necessary the Company separates the portfolio into segments. The portfolio is first separated into groups according to the internal loan rating assigned by management. Loans rated "Special Mention", "Substandard" "Doubtful" or "Loss," as defined in the Bank's loan policy, are evaluated individually for impairment. The Company uses regulatory call report codes to stratify the remaining portfolio and tracks the Bank's own charge-offs and those of peer banks using FDIC Call Report data. The Bank's own charge-off ratios by call report code are used to project potential loan losses in the future on loans that are rated "Satisfactory" or better. Charge-off ratios may be increased or decreased based on other environmental factors which may need to be considered, such as unemployment rates and volatility of real estate values. While management uses the best information available to it to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is also subject to periodic evaluation by various regulatory authorities and may be subject to adjustment upon their examination. See also "Balance Sheet Review-Loans" in Management's Discussion and Analysis of Financial Condition and Results of Operation.

Credit Quality Indicators

Loans on the Bank's watch list (including loans rated Special Mention, Substandard, Doubtful or Loss as defined below and in the Bank's loan policy) are evaluated individually for impairment and are shown in the table below. Loans rated doubtful or loss are generally charged-off, unless specific circumstances warrant the loan's remaining in the portfolio, even with a grade of doubtful or loss. Loans rated Satisfactory are also summarized in the table below.

	September 30, 2011
	Special Mention	Substandard	Doubtful/ Loss	Satisfactory
Loans secured by real estate – construction	$  2,202,813	$ 9,889,263	$                -	$ 18,949,157
Loans secured by real estate – single family (1)	724,752	1,171,801	-	13,152,354
Loans secured by real estate – multi-family	-	696,138		1,048,617
Loans secured by real estate –nonfarm, nonresidential	3,963,450	3,212,210	-	32,751,775
Commercial and industrial loans	393,758	149,256	-	9,422,867
Consumer loans	-	279	-	721,400
Total	$ 7,284,773	$ 15,118,947	$               -	$ 76,046,170
	December 31, 2010
	Special Mention	Substandard	Doubtful/Loss	Satisfactory
Loans secured by real estate – construction	$   2,217,173	$ 10,608,496	$                -	$ 29,029,669
Loans secured by real estate – single family (1)	1,389,483	2,894,266	-	15,321,194
Loans secured by real estate – multi-family	-	-	-	1,793,400
Loans secured by real estate –nonfarm, nonresidential	1,439,121	661,532	-	40,979,572
Commercial and industrial loans (2)	79,744	86,379	992,027	11,422,691
Consumer loans	1,796	1,869	-	995,788
Total	$  5,127,317	$ 14,252,542	$     992,027	$ 99,542,314

(1)Includes HELOC loans.

(2)The total loans classified as doubtful as of December 31, 2010 were repaid in full in 2011 (with no loss to the principal balance for the Company). They were classified as doubtful as of December 31, 2010 because of the possibility that legal proceedings would lengthen the collection time significantly.

A loan classified as Special Mention has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may affect the likelihood of repayment for the loan or result in deterioration of the bank's credit position at some future date. The Substandard rating is applicable to loans having a well-defined weakness in the liquidity or net worth of the borrower or the collateral that could jeopardize the liquidation of the debt. Well-defined weaknesses could include deterioration in the borrower's financial condition or cash flows, significant changes in the value of underlying collateral, or other indicators of weakness. A loan classified as Doubtful has all the weaknesses inherent in one classified 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 classified Loss are considered uncollectible 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 asset even though partial recovery may be affected in the future.

Loans in all of the above categories (special mention, substandard, doubtful, and loss) are reviewed individually for impairment (see table below) and to determine which category they will be placed in for purposes of the calculation of the allowance for loan losses. Additional assets may also be individually evaluated for impairment.

Delinquent loans and loans on non-accrual are presented by portfolio segment in the table below.

	September 30, 2011		December 31, 2010
	Past due 30-89 Days	Nonaccrual or Past due over 90 Days	Past due 30-89 Days	Nonaccrual or Past due over 90 Days
Loans secured by real estate – construction	$  2,513,408	$  3,670,699	$     891,035	$  7,218,012
Loans secured by real estate – single family (1)	305,900	404,087	1,977,519	1,522,290
Loans secured by real estate –nonfarm, nonresidential	457,784	2,463,076	-	-
Commercial and industrial loans	18,258	-	-	992,027
Consumer loans	-	-	-	-
Total	$  3,295,350	$  6,537,862	$ 2,868,554	$  9,732,329

(1)Includes HELOC loans.

Management closely monitors delinquent loans. Construction loans past due 30 to 89 days as of September 30, 2011 increased from December 31, 2010 primarily due to one relationship. As of September 30, 2011 management has evaluated the relationship and believes that a plan is in place to resolve the issues involved. However, management has also evaluated the collateral supporting the loan and believes that sufficient collateral exists to cover the Company's investment in the related loans if foreclosure is ultimately required. The decrease in loans on nonaccrual since December 31, 2010 is primarily due to completion of the foreclosure process for various relationships, net of new loans entering foreclosure.

The table below details amounts of loans collectively or individually evaluated for impairment by portfolio segment.

	September 30, 2011		December 31, 2010
	Collectively reviewed for impairment	Individually reviewed for impairment	Collectively reviewed for impairment	Individually reviewed for impairment
Loans secured by real estate – construction	$ 18,949,157	$ 12,092,076	$ 29,029,669	$ 12,825,669
Loans secured by real estate – single family (1)	13,152,354	1,896,553	15,321,194	4,283,749
Loans secured by real estate –nonfarm, nonresidential	32,604,147	7,323,288	40,979,572	2,100,653
Loans secured by real estate – multifamily	1,048,617	696,138	1,793,400	-
Commercial and industrial loans	9,422,867	543,014	11,422,691	1,158,150
Consumer loans	721,400	279	995,788	3,665
Total	$ 75,898,542	$ 22,551,348	$ 99,542,314	$ 20,371,886

(1)Includes HELOC loans.

Impaired loans by portfolio segment, the majority of which are included in the table above, as of the dates indicated, were as follows:

	September 30, 2011				December 31, 2010
		Impaired Loans	% of Total	Related Specific Reserves		Impaired  Loans	% of Total	Related Specific Reserves
Loans secured by real estate – construction		$  5,661,109	63.6%	$    64,144		$   7,218,013	67.8%	$    51,280
Loans secured by real estate – single family		410,874	4.6	12,707		2,137,335	20.1	3,287
Loans secured by real estate –nonfarm, nonresidential		2,774,434	31.2	96,327		152,310	1.4	-
Commercial and industrial		58,107	.6	-		1,129,662	10.6	292,000
Consumer loans		-	-	-		1,869	.1	1,869
Total impaired loans (1)		$  8,904,524	100.0%	$  173,178		10,639,189	100.0%	$ 348,436
Less related allowance for              loan losses		(173,178)				(348,436)
Net nonperforming loans		$  8,731,346				$ 10,290,753

(1)Includes loans on nonaccrual.

Reappraisals are routinely ordered when a loan is collateral dependent and showing signs of weakness. Specifically, the Company's reappraisal policy states that collateral for single family construction loans will be reappraised if the home is complete and remains unsold for twelve months, or if the original loan has been outstanding for eighteen months. For development loans, if lot absorption varies from the original appraiser's estimates by 25% or more, the collateral will be reappraised. Additionally, the Company's guidelines require that real property be appraised prior to renewal, modification, or extension of the loan. Collateral will also be reappraised if there is any indication that the collateral may have decreased significantly in value. An evaluation, rather than a full, certified appraisal, may or may not be used after consideration of the risk involved with the transaction, and the need to remain within safe and sound banking practices. If the value of collateral decreases significantly upon reappraisal, the Company may take any one or a combination of steps to protect its position. Possible actions include requesting additional collateral from the borrower, requiring the borrower to make principal reductions on the loan, or charge-off of a portion of the loan balance.

The Bank accounts for impaired loans in accordance with a financial accounting standard that requires all lenders to value a loan at the loan's fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis taking into consideration all the circumstances of the loan and the borrower, including the length of the delay, reasons for the delay, the borrower's payment record and the amount of the shortfall in relation to the principal and interest owed. The fair value of an impaired loan may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. The Bank's loan portfolio is largely dependent on collateral for repayment if the borrower's financial position deteriorates. Therefore, the most common type of valuation is to determine collateral value less disposal costs in order to determine carrying values for loans deemed impaired.

Troubled Debt Restructurings

Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as "troubled debt restructurings" or "TDR's"). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance. The Company identified no loans as TDRs for which the allowance for loan losses had previously been measured under a general allowance methodology.

During the nine months ended September 30, 2011, the Bank modified four loans that were considered to be troubled debt restructurings.   We extended the terms for three of these loans and the interest rate was lowered for one of these loans. The table below summarizes loans designated as TDR's during the nine and three months ended September 30, 2011.

	For the nine months ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment (1)
Real estate- construction	2	$  1,993,166	$ 1,993,166
Real estate- nonfarm, nonresidential	2	489,248	489,248
Total	4	$  2,482,414	$ 2,482,414
	For the three months ended September 30, 2011
Troubled Debt Restructurings	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment (1)
Real estate- construction	1	$ 1,700,000	$ 1,700,000
Real estate- nonfarm, nonresidential	1	163,730	163,730
Total	2	$ 1,863,730	$ 1,863,730

(1)Principal payments received are reflected in the Post-modification outstanding recorded investment on certain loans.

	For the nine months ended September 30, 2011
Troubled Debt Restructurings that subsequently defaulted during the period:		Number of Contracts	Recorded Investment
Real estate-nonfarm, nonresidential		1	$  325,446
Commercial and industrial		1	72,041
Total		2	$  397,487
	For the three months ended September 30, 2011
Troubled Debt Restructurings that subsequently defaulted during the period:		Number of Contracts	Recorded Investment
Real estate-nonfarm, nonresidential		1	$  325,446
Commercial and industrial		1	72,041
Total		2	$  397,487

Nonperforming Loans

Nonperforming loans include nonaccrual loans or loans which are 90 days or more delinquent as to principal or interest payments. As of September 30, 2011, the Bank had nonaccrual loans of $6.5 million representing 10 loans, a decrease of $3.2 million from December 31, 2010. All of these loans are secured by real estate. In addition to loans on nonaccrual, as of September 30, 2011, management considers another $2.4 million of loans impaired, all of which are TDR's. Management routinely assesses the collateral and other circumstances associated with impaired loans in an effort to determine the amount of potential impairment. These loans are currently being carried at management's best estimate of net realizable value, although no assurance can be given that no further losses will be incurred on these loans until the collateral has been acquired and liquidated or other arrangements can be made. The foreclosure process is lengthy (generally a minimum of six months and often much longer), so loans may be on nonaccrual status for a significant time period prior to moving to other real estate owned. As soon as the amount of impairment is estimable, the amount of principal impairment is generally charged against the allowance for loan losses. However, until losses and selling costs can be estimated via appraisal or other means, a portion of the allowance may be allocated to specific impaired loans. The timing of the appraisal varies from loan to loan depending on the Bank's ability to access the property. As of September 30, 2011 the allowance for loan losses included approximately $173,178 of reserves specifically related to impaired loans. Of that amount, a portion is related to selling costs.

Management's estimates of net realizable value or fair value of real estate collateral are obtained (on a nonrecurring basis) using independent appraisals, less estimated selling costs. Estimates of net realizable value for equipment and other types of personal property collateral are estimated based on input from equipment dealers and other professionals. If an appraisal is not available or management determines that fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as determined by Level 3 inputs as defined by FASB ASC 820, "Fair Value Measurements and Disclosures."

Potential Problem Loans

Management identifies and maintains a list of potential problem loans. These are loans that are not included in nonaccrual status or impaired loans. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of borrowers that causes serious doubts as to the ability of such borrowers to comply with the current loan repayment terms. These loans are designated as such in order to be monitored more closely than other credits in the Bank's portfolio. There were loans in the amount of $4.7 million that have been determined by management to be potential problem loans at September 30, 2011. These loans are generally secured by various types of real estate, but may also be secured with other types of collateral. Should potential problem loans become impaired, management will charge-off any impairment amount as soon as the amount of impairment can be determined.