Note 4 – Loans

The composition of loans portfolio is based on the purpose of the loan and is summarized as follows:


	December 31,
	2011			2010
Construction and land development	$	4,875,191		$	5,528,181
Real estate - mortgage		13,306,223			5,631,112
Real estate - other		29,685,774			10,721,143
Commercial and industrial		4,437,718			1,090,301
Consumer and other		334,491			329,949
Gross loans		52,639,397			23,300,686
Allowance for loan losses		(1,091,877	)		(432,750	)
Deferred loan fees, net		(132,311	)		(73,850	)
Total loans, net	$	51,415,209		$	22,794,086

Provision and Allowance for Loan Losses

An allowance for loan losses has been established through a provision for loan losses charged to expense on the consolidated statement of operations. The allowance for loan losses represents an amount management has determined is adequate to absorb probable losses on existing loans that may become uncollectible. Growth in the loan portfolio is the primary reason for additions to the allowance for loan losses. Additionally, provisions may be made for non-performing loans.

The first step in the process is to risk grade each loan in the portfolio based on one common set of parameters that include items like debt-to-worth ratio, liquidity of the borrower, net worth, experience of the borrower, and other factors. The general pool of performing loans is then segmented into categories based on FFIEC call codes, which segments loans into types such as commercial loans, construction loans, consumer loans, and so on based on the collateral that secures the loan. Segmenting the loan portfolio by collateral is necessary when determining the loan loss allowance, as collateral values often determine the final loss. The loss history of each loan type is measured and includes actual history experienced by the bank and the loss experiences of peer banks. The loss history results in a factor that is applied to each loan pool. Additionally, other factors are applied to represent known or expected changes to the loan portfolio resulting from economic and industry developments, the depth and knowledge of management, changes in policies and practices, and more. These environmental factors require judgment and estimates, and the eventual outcomes may differ from the estimates. The combined factors are applied to each loan category and result in the necessary allowance for the general performing loan pool.

Non-performing loans, including losses with loan grades of Substandard, Doubtful, or worse, and including past due loans and loans on non-accrual are evaluated separately. Impaired loans and non-performing loans can require higher loan loss reserves. If a loan is individually evaluated and identified as impaired, it is measured by using one of three methods; either the fair value of the collateral less costs to sell, present value of expected future cash flows discounted at the loans effective interest rate, or observable market price of the loan. Management chooses a method on a loan-by-loan basis depending on which information is available. Measuring impaired loans requires judgment and estimates and the eventual outcomes may differ from the estimates.

The following table sets forth certain information with respect to our allowance for loan losses and the composition of charge offs and recoveries at December 31, 2011 and 2010.

Loans are categorized differently in the allowance tables compared to the loan composition table above. The loan composition table reflects categories determined by the loan purpose, whereas the allowance table below reflects categories that are based on the collateral that secures the loan as defined by the FFIEC call codes. For example, a loan made for commercial purposes but secured by 1-4 family real estate will be reported as a Commercial Loan in the composition table, but is considered a Real Estate 1-4 Family in the allowance tables.


	Allowance for Loan Losses and Recorded Investment in Loans Receivable For the Year Ended December 31, 2011

	Construction and Land Development		Real Estate 1-4 Family		Real Estate Other		Commercial and Industrial		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning Balance	$	92,265	$	79,048	$	185,062	$	14,981	$	2,112	$	59,282	$	432,750
Charge-offs		-		-		-		-		-		-		-
Recoveries		-		-		-		-		-		-		-
Provisions		(28,095)		134,661		515,098		62,142		32,915		(57,594)		659,127

Ending Balance	$	64,170	$	213,709	$	700,160	$	77,123	$	35,027	$	1,688	$	1,091,877


Ending Balances:
Individually evaluated for impairment	$	6,784	$	21,446	$	137,282	$	-	$	21,787	$	-	$	187,299


Collectively evaluated for impairment	$	57,386	$	192,263	$	562,878	$	77,123	$	13,240	$	1,688	$	904,578


Loans receivable:
Ending balance - total	$	4,875,191	$	19,880,090	$	21,783,860	$	4,437,718	$	1,662,538			$	52,639,397


Ending Balances:
Individually evaluated for impairment	$	120,384	$	166,117	$	390,282	$	-	$	21,787			$	698,570

Collectively evaluated for impairment	$	4,754,807	$	19,713,973	$	21,393,578	$	4,437,718	$	1,640,751			$	51,940,827


	Allowance for Loan Losses and Recorded Investment in Loans Receivable For the Year Ended December 31, 2010

	Construction and Land Development		Real Estate Mortgage		Real Estate Other		Commercial and Industrial		Consumer		Unallocated		Total

Allowance for loan losses:
Beginning Balance	$	42,442	$	7,317	$	80,054	$	14,206	$	826	$	-	$	144,845
Charge-offs		-		-		(197,797)		-		(30)		-		(197,827)
Recoveries		-		-		-		-		30		-		30
Provisions		49,823		71,731		302,805		775		1,286		59,282		485,702

Ending Balance	$	92,265	$	79,048	$	185,062	$	14,981	$	2,112	$	59,282	$	432,750


Ending Balances:
Individually evaluated for impairment	$	17,466	$	-	$	152,287	$	-	$	232	$	-	$	169,985


Collectively evaluated for impairment	$	74,799	$	79,048	$	32,775	$	14,981	$	1,880	$	59,282	$	262,765


Loans receivable:
Ending balance - total	$	5,528,181	$	5,631,112	$	10,721,143	$	1,090,301	$	329,949			$	23,300,686


Ending Balances:
Individually evaluated for impairment	$	253,984	$	-	$	2,249,804	$	-	$	30,946			$	2,534,734

Collectively evaluated for impairment	$	5,274,197	$	5,631,112	$	8,471,339	$	1,090,301	$	299,003			$	20,765,952

The adequacy of the allowance for loan losses is reviewed on an ongoing basis. The amount of the allowance is adjusted to reflect changing circumstances. Recognized losses are charged to the allowance and recoveries are added back to the allowance. As of December 31, 2011, management considers the allowance for loan losses to be adequate to meet presently known and inherent losses in the loan portfolio. The underlying assumptions used in the analysis may be impacted in future periods by changes in economic conditions, the impact of changing regulations, and the discovery of new information with respect to borrowers not previously known to management. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required.

Credit Quality and Non-Performing Loans

Generally, the first indication of the non-performance of a loan is a missed payment. Thus, one of the adverse indicators used in monitoring the credit quality of a loan is the past due status of the loan payments. As of December 31, 2011, loans past due totaled $427,559, of which $37,277 was past due greater than 90 days. As of December 31, 2010, loans past due totaled $253,714, of which $137,277 was past due greater than 90 days.

Below are tables that present the past due status of loans receivable as of December 31, 2011 and 2010.


December 31, 2011
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Current on Nonaccrual		Current		Total Loans		Past Due > 90 Days and Accruing
Construction/Land development	$	-	$	-	$	37,277	$	83,107	$	4,754,807	$	4,875,191	$	-
Real estate - mortgage		-		-		-		166,117		13,140,106		13,306,223		-
Real estate - other		390,282		-		-		-		29,295,492		29,685,774		-
Commercial and industrial		-		-		-		-		4,437,718		4,437,718		-
Consumer and other		-		-		-		21,787		312,704		334,491		-
Total	$	390,282	$	-	$	37,277	$	271,011	$	51,940,827	$	52,639,397	$	-


December 31, 2010
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days		Current on Nonaccrual		Current		Total Loans		Past Due > 90 Days and Accruing
Construction/Land development	$	116,437	$	-	$	137,277	$	-	$	5,274,467	$	5,528,181	$	-
Real estate - mortgage		-		-		-		-		5,631,112		5,631,112		-
Real estate - other		-		-		-		-		10,721,143		10,721,143		-
Commercial and industrial		-		-		-		-		1,090,301		1,090,301		-
Consumer and other		-		-		-		-		329,949		329,949		-
Total	$	116,437	$	-	$	137,277	$	-	$	23,046,972	$	23,300,686	$	-

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. When a loan is placed on non-accrual, all previously accrued interest that has not been received is reversed against current income. The recognition of interest on a non-accrual loan is placed on a cash basis and can be recognized when and if a payment is received. Generally, payments received on non-accrual loans are applied directly to principal.

Below is a table presenting information regarding nonaccrual loans at December 31, 2011 and 2010.


Non-Accrual Loans
	December 31,
	2011		2010
Construction and land development	$	120,384	$	137,277
Real estate - mortgage		166,117		-
Real estate - other		390,282		-
Commercial and industrial		-		-
Consumer and other		21,787		-
Total	$	698,570	$	137,277

At December 31, 2011, the bank had five loans totaling $698,570 in non-accrual status. At December 31, 2010, the Bank had two loans in non-accrual status totaling $137,277. The Bank did not have any loans past due 90 days and still accruing as of December 31, 2011 and 2010.

Loans are assigned a credit risk grade upon their origination. Loans are monitored for non-performance and may be downgraded to reflect adverse conditions that might affect collectability. Heightened risk characteristics include a history of poor payment performance, poor financial performance, as well as the potential for adverse earnings impact from deteriorating collateral values. The Bank had $3,337,162 and $651,686 in loans classified as Substandard or worse as of December 31, 2011 and 2010, respectively.

General definitions for each credit risk level are as follows:

—

Prime credits present little to no risk as they are secured by cash and/or the borrowers have unquestionable strength with access to liquidity.

—

Good credits have average risk. Borrowers have sound primary and secondary repayment sources, strong debt capacity and coverage, and substantial liquidity and net worth. Commercial borrowers in this category work within industries exhibiting strong trends and the company exhibits favorable profitability, liquidity, and leverage trends with good management in key positions.

—

Acceptable credits are those that perform relatively close to expectations with adequate evidence the borrower is generating adequate cash flows to service the debt. Borrowers have good debt coverage and capacity, average liquidity and net worth, and operate in industries the exhibit good trends.

—

Acceptable with care credits may be borrowers who exhibit a limited asset base and liquidity, have debt capacity that is limited, or may be a start up venture that is dependent on guarantor strength. These borrowers have elements of risk the Bank chooses to closely monitor.

—

Special mention credits have a potential weakness that deserves close attention. If left uncorrected, these potential weaknesses may result in deterioration. Credits in this category are formally monitored on a recurring basis.

—

Substandard credits are inadequately protected by the worth and paying capacity of the borrower or of the collateral pledged. These credits exhibit a well-defined weakness that may jeopardize the liquidation of the debt. There is a possibility these credits may result in losses if the observed weakness is not corrected.

—

Doubtful credits have all the weaknesses of a substandard credit with the added characteristic that the weakness makes collection or liquidation in full improbable.

—

Loss assets are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. Losses should be taken in the period in which they surface as uncollectible.

Credit risk grades within the loan portfolio as of December 31, 2011 and 2010 are presented in the following three tables, separately for commercial loans, residential real estate loans, and consumer loans, with breakdowns provided for loan types within those categories.


Credit Risk Profile of Commercial Loans
	December 31, 2011						December 31, 2010
	Commercial		Commercial Real Estate Construction		Commercial Real Estate		Commercial		Commercial Real Estate Construction		Commercial Real Estate
Prime	$	425,000	$	-	$	-	$	260,000	$	-	$	-
Good		2,000,000		-		-		-		-		-
Acceptable		245,490		1,978,000		11,296,180		90,870		2,450,014		3,424,704
Acceptable with care		1,567,228		1,231,118		14,120,577		739,431		1,209,159		5,046,634
Special mention		-		-		1,400,143		-		-		1,851,832
Substandard assets		200,000		120,384		2,868,874		-		137,277		397,972
Doubtful assets		-		-		-		-		-		-
Loss assets		-		-		-		-		-		-
Total	$	4,437,718	$	3,329,502	$	29,685,774	$	1,090,301	$	3,796,450	$	10,721,142


Credit Risk Profile of Residential Loans
	December 31, 2011								December 31, 2010
	Residential - Prime				Residential - Subprime				Residential - Prime				Residential - Subprime
	Residential Mortgage		Residential Construction		Residential Mortgage		Residential Construction		Residential Mortgage		Residential Construction		Residential Mortgage		Residential Construction
Prime	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Good		174,479		-		-		-		45,808		-		-		-
Acceptable		11,983,976		1,545,689		-		-		5,004,637		1,577,794		-		-
Acceptable with care		798,489		-		-		-		580,667		37,500		-		-
Special mention		183,162		-		-		-		-		-		-		-
Substandard assets		166,117		-		-		-		-		116,437		-		-
Doubtful assets		-		-		-		-		-		-		-		-
Loss assets		-		-		-		-		-		-		-		-
Total	$	13,306,223	$	1,545,689	$	-	$	-	$	5,631,112	$	1,731,731	$	-	$	-


Credit Risk Profile of Consumer Loans
	December 31, 2011				December 31, 2010
	Consumer - Auto		Consumer - Other		Consumer - Auto		Consumer - Other
Prime	$	-	$	224,075	$	-	$	18,722
Good		20,795		-		-		-
Acceptable		27,013		19,456		65,008		204,045
Acceptable with care		-		6,791		-		11,228
Special mention		14,574		-		-		30,946
Substandard assets		-		21,787		-		-
Doubtful assets		-		-		-		-
Loss assets		-		-		-		-
Total	$	62,382	$	272,109	$	65,008	$	264,941

Impaired loans totaled $698,570 and $137,277 as of December 31, 2011 and 2010, respectively, and were represented by loans on non-accrual. The following table sets forth certain information regarding the type of impaired loans, their related allowances, and any interest income recognized on impaired loans during the years ended December 31, 2011 and 2010.

		$698,570		$698,570		$698,570		$698,570		$698,570
Impaired Loans For the Year Ended December 31, 2011
	Outstanding Principal Balance		Recorded Investment		Average Recorded Investment		Related Allowance		Interest Income Recognized
With no related allowance recorded:	$	-	$	-	$	-	$	-	$	-

With an allowance recorded:
Construction and land development		120,384		120,384		126,737		6,784		-
Real estate - mortgage		166,117		166,117		131,623		21,446		7,487
Real estate - other		390,282		390,282		390,283		137,282		-
Commercial and industrial		-		-		-		-		-
Consumer loans to individuals		21,787		21,787		23,741		21,787		-
Total:	$	698,570	$	698,570	$	672,384	$	187,299	$	7,487

Impaired Loans For the Year Ended December 31, 2010
	Outstanding Principal Balance		Recorded Investment		Average Recorded Investment		Related Allowance		Interest Income Recognized
With no related allowance recorded:	$	-	$	-	$	-	$	-	$	-

With an allowance recorded:
Construction and land development		137,277		137,277		137,630		-		-
Real estate - mortgage		-		-		-		-		-
Real estate - other		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer loans to individuals		-		-		-		-		-
Total:	$	137,277	$	137,277	$	137,630	$	-	$	-

If a loan is modified as a result of a customer’s inability to meet the original terms, and if the modification gives the customer more favorable terms that would not otherwise be granted, the loan is considered to be a troubled debt restructuring. As of December 31, 2011, the bank has four loans that qualify as troubled debt restructuring. The following table presents information regarding the Bank’s loans that qualify as a troubled debt restructuring as of December 31, 2011 and 2010.


December 31, 2011
	Number of Loans		Pre-modification Outstanding Balances		Post-modification Outstanding Balances		Number of Loans that Subsequently Defaulted		Balances of Loans that Subsequently Defaulted
Construction and land development		2	$	137,426	$	120,384		1	$	37,277
Real estate - mortgage		1		155,352		166,117		-		-
Real estate - other		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer and other		1		27,446		21,787		-		-
Total		4	$	320,224	$	308,288		1	$	37,277

December 31, 2010
	Number of Loans		Pre-modification Outstanding Balances		Post-modification Outstanding Balances		Number of Loans that Subsequently Defaulted		Balances of Loans that Subsequently Defaulted
Construction and land development		1	$	37,277	$	37,277		1	$	37,277
Real estate - mortgage		-		-		-		-		-
Real estate - other		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer and other		-		-		-		-		-
Total		1	$	37,277	$	37,277		1	$	37,277

As of December 31, 2011, management was not aware of any additional loans that were not already considered for impairment or categorized as impaired or non-accrual.