Loans Receivable

6 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Loans Receivable

Major classifications of loans receivable at June 30, 2011 and December 31, 2010 are summarized as follows:

	2011		2010
Real estate – construction	$	17,849,848	$	23,068,291
Real estate –commercial		62,979,689		61,412,742
Real estate – residential		44,714,723		43,561,911
Commercial and industrial		19,200,488		19,350,893
Consumer and other		26,337,708		895,675
Total gross loans	$	171,082,456	$	148,289,512

As of June 30, 2011 and December 31, 2010, loans individually evaluated and considered impaired were as follows:

	2011		2010
Total loans considered impaired at period end	$	23,010,371	$	14,338,761
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance		12,970,442		11,489,267
Related allowance established		2,751,937		2,783,404
Loans considered impaired for which no related allowance for loan loss was established		10,039,929		2,849,495
Average annual investment in impaired loans		25,238,771		14,370,750
Interest income recognized on impaired loans during the period of impairment cash basis	$	383,782	$	219,029

The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of June 30, 2011:

	Real Estate
	Construction		Commercial		Residential		Commercial & Industrial		Consumer		Total
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	357,937	$	1,130,368	$	1,163,504	$	100,128	$	-	$	2,751,937
Loans:
Loans individually evaluated for impairment	$	5,722,180	$	10,067,876	$	6,351,088	$	846,209	$	23,018	$	23,010,371
Loans collectively evaluated for impairment	$	12,127,668	$	52,911,813	$	38,363,635	$	18,354,279	$	26,314,690	$	148,072,085

As of June 30, 2011 and December 31, 2010, loans in nonaccrual status were approximately $12,882,000 and $10,257,000, respectively.  Loans ninety days or more past due and still accruing interest as of June 30, 2011 and December 31, 2010 were approximately $1,550,000 and $1,869,000 respectively.

The following table represents the balance in the allowance for loan losses and recorded investment in loans by portfolio segment on impairment method as of December 31, 2010:

	Real Estate
	Construction		Commercial		Residential		Commercial & Industrial		Consumer		Total
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	823,975	$	637,723	$	878,725	$	442,981	$	-	$	2,783,404
Loans:
Loans individually evaluated for impairment	$	5,048,519	$	3,540,487	$	4,331,447	$	1,418,308	$	-	$	14,338,761
Loans collectively evaluated for impairment	$	18,019,772	$	57,872,255	$	39,230,464	$	17,932,585	$	895,675	$	133,950,751

The following table presents loans individually evaluated for impairment as of June 30, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	97,467	$	97,467	$	-	$	97,670	$	-
Real estate:
Construction		3,236,210		3,236,210		-		3,280,740		-
Consumer		23,018		23,018		-		26,095		-
Mortgage – residential		710,543		710,543		-		719,974		-
Mortgage – commercial		5,972,691		5,972,691		-		6,972,025		-
With an allowance recorded:
Commercial, and industrial		748,742		748,742		100,128		752,804		17,549
Real estate:
Construction		2,485,970		2,485,970		357,937		2,770,879		91,728
Consumer		-		-		-		-		955
Mortgage – residential		5,651,183		5,640,545		1,163,504		6,405,559		60,556
Mortgage – commercial		4,095,185		4,095,185		1,130,368		4,217,025		212,994
Total	$	23,021,009	$	23,010,371	$	2,751,937	$	25,216,676	$	383,782

Transactions in the allowance for loan losses for the six months ended June 30, 2011 are summarized as follows:

	Real Estate
	Construction			Commercial			Residential			Commercial and Industrial			Consumer			Unallocated			Total
Balance, beginning of year	$	1,133,180		$	1,532,386		$	1,690,850		$	636,627		$	6,676		$	226,195		$	5,225,914
Provision (recovery) charged to  operations		(634,496	)		(130,616	)		(122,465	)		1,171,211			14,091			(59,865	)		237,860
Recoveries		-			-			-			15,789			57,470			-			73,259
Charge-offs		-			(52,397	)		(59,547	)		(1,226,768	)		(72,180	)		-			(1,410,892	)
Balance, end of year	$	498,684		$	1,349,373		$	1,508,838		$	596,859		$	6,057		$	166,330		$	4,126,141

The following table depicts the activity in the allowance for loan losses for the six months ended June 30, 2011:

	June 30, 2011			June 30, 2010
Balance, January 1	$	5,225,914		$	2,408,990
Provision for loan losses for the period		237,860			436,528
Net loans (charged-off) recovered during the period		(1,337,633	)		(305,255	)
Balance,  June 30,	$	4,126,141		$	2,540,263
Gross loans outstanding, June 30,	$	171,082,456		$	134,699,893
Allowance for loan losses to loans outstanding		2.41	%		1.89	%

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of June 30, 2011:

	Nonaccrual		Accruing loans delinquent for 90 days or more
Commercial and industrial	$	394,307	$	-
Real estate:
Construction		2,724,681		-
Mortgage – residential		5,190,987		-
Mortgage – commercial		4,561,714		1,550,003
Consumer		9,948		-
Total	$	12,881,637	$	1,550,003

The following table presents the investment in nonaccrual and accruing loans delinquent for 90 days or more as of December 31, 2010:

	Nonaccrual		Accruing loans delinquent for 90 days or more
Commercial and industrial	$	1,207,596	$	433,325
Real estate:
Construction		1,285,564		24,575
Mortgage – residential		4,223,726		1,056,621
Mortgage – commercial		3,540,488		349,867
Consumer		-		4,963
Total	$	10,257,374	$	1,869,351

The following table presents the aging of the recorded investment in past due loans and leases as of June 30, 2011:

	30 – 89 Days Past Due		Greater than 90 Days Past Due		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	3,312	$	-	$	394,307	$	397,619	$	18,802,869	$	19,200,488
Real estate:
Construction		2,316,225		-		2,724,681		5,040,906		12,808,942		17,849,848
Mortgage - residential		388,195		-		5,190,987		5,579,182		39,135,541		44,714,723
Mortgage - commercial		1,736,928		1,550,003		4,561,714		7,848,645		55,131,044		62,979,689
Consumer		11,422		-		9,948		21,370		26,316,338		26,337,708
Total	$	4,456,082	$	1,550,003	$	12,881,637	$	18,887,722	$	152,194,734	$	171,082,456

The following table presents the aging of the recorded investment in past due loans and leases as of December 31, 2010:

	30 – 89 Days Past Due		Greater than 90 Days Past Due		Nonaccrual Loans		Total Past Due		Loans Not Past Due		Total
Commercial and industrial	$	148,926	$	433,325	$	1,207,596	$	1,789,847	$	14,561,046	$	19,350,893
Real estate:
Construction		2,469,828		24,575		1,285,564		3,779,967		19,288,324		23,068,291
Mortgage - residential		837,087		1,056,621		4,223,726		6,117,434		37,444,477		43,561,911
Mortgage - commercial		642,994		349,867		3,540,488		4,533,349		56,879,393		61,412,742
Consumer		22,326		4,963		-		27,289		868,386		895,675
Total	$	4,121,161	$	1,869,351	$	10,257,374	$	16,247,886	$	132,041,626	$	148,289,512

Restructured loans included in nonperforming assets at June 30, 2011 consisted of 7 commercial real estate loans with a combined principal balance of $2,019,865. Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to a weakening of the borrowers’ financial condition. The principal balances on these restructured loans were matured and/or in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $7,376,226 of restructured loans still accruing interest at June 30, 2011. This total consisted of $4,123,850 in 10 construction and/or commercial real estate loans less than 30 days delinquent and $1,702,373 in 1 commercial real estate loan that was 30-59 days delinquent, and $1,550,003 in 1 commercial real estate land that was more than 90 days delinquent.

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 analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $0.5 million or $1.0 million, depending on loan type, and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis with the most recent analysis performed at June 30, 2011. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank 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 orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss. Loans classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not  mean  the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. As of June 30, 2011 and December 31, 2010, the risk category of loans and leases is as follows:

June 30, 2011

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and industrial	$	15,756,096	$	2,607,028	$	762,364	$	75,000	$	-	$	19,200,488
Real estate:
Construction		11,629,498		2,207,315		3,751,538		261,497		-		17,849,848
Mortgage - residential		33,549,673		4,940,054		5,293,826		931,170		-		44,714,723
Mortgage - commercial		47,178,425		5,733,392		8,409,793		1,658,079		-		62,979,689
Consumer		26,269,239		36,673		31,796		-		-		26,337,708
Total	$	134,382,931	$	15,524,462	$	18,249,317	$	2,925,746	$	-	$	171,082,456

December 31, 2010

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
Commercial and industrial	$	17,317,162	$	624,237	$	524,303	$	885,191	$	-	$	19,350,893
Real estate:
Construction		16,578,691		2,395,478		3,618,125		475,997		-		23,068,291
Mortgage - residential		33,862,736		2,269,002		6,269,672		1,160,501		-		43,561,911
Mortgage - commercial		49,470,261		3,367,398		8,575,083		-		-		61,412,742
Consumer		871,691		15,138		8,846		-		-		895,675
Total	$	118,100,541	$	8,671,253	$	18,996,029	$	2,521,689	$	-	$	148,289,512

At June 30, 2011, there were no loans defined as subprime.