Note 4. Loans and Allowances for Loan Losses

The Bank and Southland provide mortgage, consumer, and commercial lending services to individuals and businesses primarily in the East Tennessee area.

The Company’s loans consist of the following at March 31, 2013 and December 31, 2012.


			March 31, 2013		December 31, 2012

Mortgage loans on real estate:
Residential 1-4 family			$ 83,072,535		$ 83,159,454
Residential multifamily (5 or more units)			21,967,532		21,783,855
Commercial			53,325,344		54,969,090
Construction and land			22,912,108		21,998,286

			181,277,519		181,910,685
Commercial loans			12,197,323		12,591,324
Consumer and equity lines of credit			27,116,940		27,992,762

Total loans			220,591,782		222,494,771
Less:	Allowance for loan losses	(4,550,036)		(4,475,302 )
	Unearned interest and fees	(439,105)		(447,656 )
	Net deferred loan origination fees	(304,324)		(297,196 )

Loans, net			$ 215,298,317		$ 217,274,617

The following presents activity in the allowance for loan losses for the three months ended March 31, 2013 and the year ended December 31, 2012.


	March 31, 2013	December 31, 2012


Beginning balance	$ 4,475,302	$ 4,166,468
Provision for loan losses	135,449	1,080,277
Loans charged-off	(226,611)	(908,963 )
Recoveries	165,896	137,520


Ending balance	$ 4,550,036	$ 4,475,302

Loan impairment and any related valuation allowance is determined under the provisions established by ASC Topic 310. For all periods presented above, impaired loans without a valuation allowance represent loans for which management believes that the collateral value of the loan is higher than the carrying value of that loan.

The allocation of the allowance for loan losses and recorded investment in loans by portfolio segment are as follows:


	March 31, 2013

	Commercial	Residential 1-4 Family	Commercial Real Estate and Multi- Family	Construction and Land	Consumer and Other	Unallocated	Total

Specified reserves- impaired loans	$ 603,413	$ 702,220	$ 108,093	$ 258,608	$ 46,520	$ -	$ 1,718,854
General reserves	224,584	715,576	950,445	457,695	477,377	5,505	2,831,182

Total reserves	$ 827,997	$ 1,417,796	$ 1,058,538	$ 716,303	$ 523,897	$ 5,505	$ 4,550,036

Loans individually evaluated for impairment	$ 1,866,051	$ 6,261,583	$ 1,409,572	$ 1,911,210	$ 305,357	$ -	$ 11,753,773
Loans collectively evaluated for impairment	10,331,272	76,810,952	73,883,304	21,000,898	26,811,583	-	208,838,009

Total	$ 12,197,323	$ 83,072,535	$ 75,292,876	$ 22,912,108	$ 27,116,940	$ -	$ 220,591,782


	December 31, 2012

	Commercial	Residential 1-4 Family	Commercial Real Estate and Multi- Family	Construction and Land	Consumer and Other	Unallocated	Total

Specified reserves- impaired loans	$ 454,620	$ 739,943	$ 109,659	$ 361,470	$ 56,094	$ -	$ 1,721,786
General reserves	231,445	608,979	965,336	457,514	489,382	860	2,753,516

Total reserves	$ 686,065	$ 1,348,922	$ 1,074,995	$ 818,984	$ 545,476	$ 860	$ 4,475,302

Loans individually evaluated for impairment	$ 1,870,266	$ 6,327,833	$ 1,421,168	$ 1,978,395	$ 281,195	$ -	$ 11,878,857
Loans collectively evaluated for impairment	10,721,058	76,831,621	75,331,777	20,019,891	27,711,567	-	210,615,914

Total	$ 12,591,324	$ 83,159,454	$ 76,752,945	$ 21,998,286	$ 27,992,762	$ -	$ 222,494,771

The following table details the changes in the allowance for loan losses from December 31, 2011 to March 31, 2013 by class of loan:


	Commercial	Residential 1-4 Family	Commercial Real Estate and Multi- Family	Construction and Land	Consumer and Other	Unallocated	Total

Balance, December 31, 2011	$ 564,853	$ 1,344,604	$ 1,006,036	$ 681,871	$ 541,458	$ 27,646	$ 4,166,468
Provision for loan losses	127,298	656,567	68,959	64,938	189,301	(26,786)	1,080,277
Loans charged-off	(16,034)	(663,729)	-	-	(229,200)	-	(908,963)
Recoveries	9,948	11,480	-	72,175	43,917	-	137,520

Balance, December 31, 2012	$ 686,065	$ 1,348,922	$ 1,074,995	$ 818,984	$ 545,476	$ 860	$ 4,475,302

Provision for loan losses	(4,394)	138,491	(16,457)	(5,181)	18,345	4,645	135,449
Loans charged-off	-	(70,962)	-	(97,500)	(58,149)	-	(226,611)
Recoveries	146,326	1,345	-	-	18,225	-	165,896

Balance, March 31, 2013	$ 827,997	$ 1,417,796	$ 1,058,538	$ 716,303	$ 523,897	$ 5,505	$ 4,550,036

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012:


	March 31, 2013

	Commercial	Residential 1-4 Family	Commercial Real Estate and Multi- Family	Construction and Land	Consumer and Other	Total

Loans individually evaluated for impairment:
Without a valuation allowance	$ 34,885	$ 2,282,712	$ 1,052,738	$ 799,101	$ 144,633	$ 4,314,069
With a valuation allowance	1,831,166	3,978,871	356,834	1,112,109	160,724	7,439,704

Recorded investment in impaired loans	$ 1,866,051	$ 6,261,583	$ 1,409,572	$ 1,911,210	$ 305,357	$ 11,753,773

Unpaid principal balance of impaired loans	$ 1,905,898	$ 6,683,915	$ 1,409,572	$ 2,848,313	$ 306,027	$ 13,153,725

Valuation allowance related to impaired loans	$ 603,413	$ 702,220	$ 108,093	$ 258,608	$ 46,520	$ 1,718,854

Average investment in impaired loans	$ 1,867,990	$ 6,271,502	$ 1,415,754	$ 1,960,471	$ 285,607	$ 11,801,324

Interest income recognized on impaired loans	$ 23,959	$ 27,043	$ 16,703	$ 1,467	$ 2,785	$ 71,957


	December 31, 2012

	Commercial	Residential 1-4 Family	Commercial Real Estate and Multi- Family	Construction and Land	Consumer and Other	Total

Loans individually evaluated for impairment:
Without a valuation allowance	$ 34,885	$ 2,112,736	$ 1,061,923	$ 768,424	$ 73,927	$ 4,051,895
With a valuation allowance	1,835,381	4,215,097	359,245	1,209,971	207,268	7,826,962

Recorded investment in impaired loans	$ 1,870,266	$ 6,327,833	$ 1,421,168	$ 1,978,395	$ 281,195	$ 11,878,857

Unpaid principal balance of impaired loans	$ 1,910,113	$ 6,719,860	$ 1,421,168	$ 2,817,998	$ 281,865	$ 13,151,004

Valuation allowance related to impaired loans	$ 454,620	$ 739,943	$ 109,659	$ 361,470	$ 56,094	$ 1,721,786

Average investment in impaired loans	$ 2,254,699	$ 5,750,530	$ 2,117,175	$ 2,031,800	$ 506,201	$ 12,660,405

Interest income recognized on impaired loans	$ 114,732	$ 333,710	$ 104,273	$ 29,077	$ 35,663	$ 617,455

The following presents an aged analysis of past due loans as of the following:


	March 31, 2013

	30-89 Days Past Due	Greater Than 90 Days Past Due And Non-accrual	Total Past Due	Current Loans	Total Loans	Recorded Investment  90 Days and Accruing

Residential 1-4 family	$ 225,808	$ 2,181,764	$ 2,407,572	$ 80,664,963	$ 83,072,535	$ -
Commercial real estate and multifamily	-	-	-	75,292,876	75,292,876	-
Construction and land	24,608	1,491,037	1,515,645	21,396,463	22,912,108	-
Commercial	3,226	-	3,226	12,194,097	12,197,323	-
Consumer and other	249,797	85,508	335,305	26,781,635	27,116,940	29,517

Total	$ 503,439	$ 3,758,309	$ 4,261,748	$216,330,034	$ 220,591,782	$ 29,517


	December 31, 2012

	30-89 Days Past Due	Greater Than 90 Days Past Due and Non-Accrual	Total Past Due	Current Loans	Total Loans	Recorded Investment  90 Days and Accruing

Residential 1-4 family	$ 107,603	$ 2,298,290	$ 2,405,893	$ 80,753,561	$ 83,159,454	$ 10,237
Commercial real estate and multifamily	99,229	-	99,229	76,653,716	76,752,945	-
Construction and land	1,704,110	1,555,346	3,259,456	18,738,830	21,998,286	-
Commercial	-	-	-	12,591,324	12,591,324	-
Consumer and other	183,383	44,962	228,345	27,764,417	27,992,762	18,160

Total	$ 2,094,325	$ 3,898,598	$ 5,992,923	$ 216,501,848	$ 222,494,771	$ 28,397

Credit quality indicators:

Federal regulations require us to review and classify our assets on a regular basis. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When we classify an asset as substandard or doubtful, we may establish a specific allowance for loan losses.

The following outlines the amount of each loan classification and the amount categorized into each risk rating class as of the following:


	March 31, 2013

	Pass	Special Mention	Substandard	Doubtful	Loss	Total

Residential 1-4 family	$ 71,522,261	$ 5,288,691	$ 6,261,583	$ -	$ -	$ 83,072,535
Commercial real estate and multifamily	73,752,460	130,844	1,409,572	-	-	75,292,876
Construction and land	20,944,873	56,025	1,911,210	-	-	22,912,108
Commercial	10,331,272	-	1,866,051	-	-	12,197,323
Consumer and other	26,586,337	225,246	305,357	-	-	27,116,940

Total	$ 203,137,203	$ 5,700,806	$ 11,753,773	$ -	$ -	$ 220,591,782


	December 31, 2012

	Pass	Special Mention	Substandard	Doubtful	Loss	Total

Residential 1-4 family	$ 75,378,535	$ 1,453,086	$ 6,327,833	$ -	$ -	$ 83,159,454
Commercial real estate and multifamily	75,200,270	131,507	1,421,168	-	-	76,752,945
Construction and land	19,962,200	57,691	1,978,395	-	-	21,998,286
Commercial	10,721,058	-	1,870,266	-	-	12,591,324
Consumer and other	27,546,270	165,297	281,195	-	-	27,992,762

Total	$ 208,808,333	$ 1,807,581	$ 11,878,857	$ -	$ -	$ 222,494,771

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. By granting the concession, the Company expects to increase the probability of collection by more than would be expected by not granting the concession. The Company’s determination of whether a modification is a TDR considers the facts and circumstances surrounding each respective modification.

The following presents information related to loans modified in a TDR as of the following:


	Three Months Ended March 31, 2013

	Number Of Loans	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment

Residential 1-4 family	-	$ -	$ -
Commercial real estate and multifamily	-	-	-
Construction and land	-	-	-
Commercial	-	-	-
Consumer and other	6	21,708	21,708

	6	$ 21,708	$ 21,708


	Three Months Ended March 31, 2012

	Number Of Loans	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment

Residential 1-4 family	-	$ -	$ -
Commercial real estate and multifamily	-	-	-
Construction and land	-	-	-
Commercial	-	-	-
Consumer and other	5	16,922	16,922

	5	$ 16,922	$ 16,922

The following sets forth loans modified in a TDR from April 1 through March 31, for each respective period, that subsequently defaulted (i.e., 60 days or more past due following a modification) during the following:


	Three Months Ended March 31, 2013

	Number Of Loans	Outstanding Recorded Investment at Default

Residential 1-4 family	1	$ 137,578
Commercial real estate and multifamily	1	99,216
Construction and land	1	5,353
Commercial	-	-
Consumer and other	2	39,620

	5	$ 281,767


	Three Months Ended March 31, 2012

	Number Of Loans	Outstanding Recorded Investment at Default

Residential 1-4 family	-	$ -
Commercial real estate and multifamily	-	-
Construction and land	-	-
Commercial	-	-
Consumer and other	1	2,769

	1	$ 2,769