3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans outstanding, by classification, are summarized as follows (amounts in thousands):

	December 31,

	2012		2011
Commercial, financial, and agricultural	$	23,510	$	22,706
Commercial Real Estate		125,239		126,675
Single-Family Residential		34,523		37,539
Construction and Development		1,813		5,377
Consumer		5,913		7,090

		190,998		199,387
Allowance for loan losses		3,509		3,956

	$	187,489	$	195,431

Concentrations—The Company's concentrations of credit risk are as follows:

A substantial portion of the Company's loan portfolio is collateralized by real estate in metropolitan Atlanta and Birmingham markets. Accordingly, the ultimate collectibility of a substantial portion of the Company's loan portfolio is susceptible to changes in market conditions in the metropolitan Atlanta and Birmingham areas.

•

The Company's loans to area churches were approximately $49.5 million and $44.5 million at December 31, 2012 and 2011, respectively, which are generally secured by real estate.

•

The Company's loans to area convenience stores were approximately $9.3 million and $10.6 million at December 31, 2012 and 2011, respectively. Loans to convenience stores are generally secured by real estate.

•

The Company's loans to area hotels were approximately $24.8 million and $29.0 million at December 31, 2012 and 2011, respectively, which are generally secured by real estate.

Allowance for Loan Losses—Activity in the allowance for loan losses is summarized as follows:

	Years Ended December 31,

	2012			2011			2010
Balance at beginning of year	$	3,955,731		$	4,188,022		$	4,094,258
Provision for loan losses		2,400,000			3,882,409			2,465,000
Loans charged off		(3,068,905	)		(4,301,629	)		(2,521,994	)
Recoveries on loans previously charged off		222,541			186,929			150,758

Balance—end of year	$	3,509,367		$	3,955,731		$	4,188,022

Activity in the allowance for loan losses by portfolio segment is summarized as follows (in thousands):

	For the Year Ended December, 2012

	Commercial			Commercial Real Estate			Single- family Residential			Construction & Development			Consumer			Total
Beginning balance	$	394		$	2,206		$	696		$	449		$	211		$	3,956
Provision for loan losses		27			1,761			646			(140	)		106			2,400
Loans charged-off		(21	)		(2,138	)		(625	)		(136	)		(149	)		(3,069	)
Recoveries on loans charged-off		33			24			86			4			75			222

Ending Balance	$	433		$	1,853		$	803		$	177		$	243		$	3,509

	For the Year Ended December, 2011

	Commercial			Commercial Real Estate			Single- family Residential			Construction & Development			Consumer			Total
Beginning balance	$	365		$	2,616		$	376		$	290		$	541		$	4,188
Provision for loan losses		262			1,852			1,049			932			(212	)		3,883
Loans charged-off		(262	)		(2,302	)		(749	)		(773	)		(216	)		(4,302	)
Recoveries on loans charged-off		29			40			20			—			98			187

Ending Balance	$	394		$	2,206		$	696		$	449		$	211		$	3,956

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off.

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. At December 31, 2012 and 2011, substantially all of the total impaired loans were evaluated based on the fair value of the underlying collateral. General reserves are determined using historical loss trends measured over a rolling four quarter average for consumer loans, and a three year average loss factor for commercial loans which is applied to risk rated loans grouped by Federal Financial Examination Council ("FFIEC") call code. For commercial loans, the general reserves are calculated by applying the appropriate historical loss factor to the loan pool. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our total allowance for loan losses.

The allocation of the allowance for loan losses by portfolio segment was as follows (in thousands):

	At December 31, 2012

	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	319	$	1	$	—	$	—	$	320

Total specific reserves		—		319		1		—		—		320
General reserves		433		1,534		802		177		243		3,189

Total	$	433	$	1,853	$	803	$	177	$	243	$	3,509

Loans individually evaluated for impairment	$	—	$	17,248	$	516	$	278	$	—	$	18,042
Loans collectively evaluated for impairment		23,510		107,991		34,007		1,535		5,913		172,956

Total	$	23,510	$	125,239	$	34,523	$	1,813	$	5,913	$	190,998

	At December 31, 2011

	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	732	$	—	$	20	$	—	$	752

Total specific reserves		—		732		—		20		—		752
General reserves		394		1,474		696		429		211		3,204

Total	$	394	$	2,206	$	696	$	449	$	211	$	3,956

Loans individually evaluated for impairment	$	—	$	15,506	$	—	$	634	$	—	$	16,140
Loans collectively evaluated for impairment		22,706		111,169		37,539		4,743		7,090		183,247

Total	$	22,706	$	126,675	$	37,539	$	5,377	$	7,090	$	199,387

The following table presents impaired loans by class of loan (in thousands):

	At December 31, 2012

	Impaired Loans-With Allowance
	Impaired Loans-With Allowance						Impaired Loans- With no Allowance
					Allowance for Loan Losses Allocated		Impaired Loans- With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	234	$	230	$	231	$	—
HELOC's and equity		77		77		1		261		209		210		44
Commercial
Secured		—		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		2,856		2,856		293		7,199		7,199		10,116		480
Non-owner occupied		492		319		24		7,056		5,770		6,420		673
Multi-family		388		388		2		716		716		1,053		103
Construction and Development:												.
Construction		—		—		—		120		121		122		55
Improved Land		—		—		—		418		157		169		6
Unimproved Land		—		—		—		—		—		—		—
Consumer and Other		—		—				—		—		—		—

Total	$	3,813	$	3,640	$	320	$	16,004	$	14,402	$	18,321	$	1,361

	At December 31, 2011

	Impaired Loans-With Allowance
	Impaired Loans-With Allowance						Impaired Loans- With no Allowance
					Allowance for Loan Losses Allocated		Impaired Loans- With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—	$	—	$	—
HELOC's and equity		—		—		—		—		—		—		—
Commercial
Secured		—		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		1,712		1,712		161		2,810		2,810		4,596		52
Non-owner occupied		6,398		6,398		522		5,075		4,184		11,107		873
Multi-family		402		402		49		—		—		407		40
Construction and Development														.
Construction		—		—		—		479		291		327		35
Improved Land		557		276		20		151		67		384		15
Unimproved Land		—		—		—		—		—		—		—
Consumer and Other		—		—				—		—		—		—

Total	$	9,069	$	8,788	$	752	$	8,515	$	7,352	$	16,821	$	1,015

The following table is an aging analysis of our loan portfolio (in thousands):

	At December 31, 2012

	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing		Nonaccrual
Residential:
First mortgages	$	1,550	$	957	$	3,116	$	5,623	$	20,106	$	25,729	$	—	$	3,721
HELOC's and equity		218		32		291		541		8,253		8,794		—		321
Commercial:
Secured		24		—		5		29		16,827		16,856		—		5
Unsecured		5		—		—		5		6,649		6,654		—		—
Commercial Real Estate:
Owner occupied		1,463		188		394		2,045		55,603		57,648		—		2,029
Non-owner occupied		353		634		3,613		4,600		50,486		55,086		—		4,355
Multi-family		—		—		—		—		12,505		12,505		—		—
Construction and Development:
Construction		767		—		—		767		222		989		—		—
Improved Land		—		—		120		120		331		451		—		120
Unimproved Land		—		—		157		157		216		373		—		157
Consumer and Other		49		43		87		179		5,734		5,913		—		87

Total	$	4,429	$	1,854	$	7,783	$	14,066	$	176,932	$	190,998	$	—	$	10,795

	At December 31, 2011

	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Recorded Investment > 90 Days and Accruing		Nonaccrual
Residential:
First mortgages	$	1,691	$	800	$	3,550	$	6,041	$	22,121	$	28,162	$	—	$	4,546
HELOC's and equity		261		—		931		1,192		8,185		9,377		—		932
Commercial:
Secured		13		—		6		19		17,653		17,672		—		6
Unsecured		—		—		—		—		5,034		5,034		—		—
Commercial Real Estate:
Owner occupied		1,095		546		1,904		3,545		55,834		59,379		—		2,087
Non-owner occupied		6,330		1,788		1,957		10,075		48,343		58,418		—		4,793
Multi-family		—		—		—		—		8,878		8,878		—		—
Construction and Development:
Construction		291		—		—		291		3,107		3,398		—		—
Improved Land		—		—		247		247		1,278		1,525		—		247
Unimproved Land		—		—		207		207		247		454		—		206
Consumer and Other		55		1		126		182		6,908		7,090		—		135

Total	$	9,736	$	3,135	$	8,928	$	21,799	$	177,588	$	199,387	$	—	$	12,952

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

Commercial, financial and agricultural loans—We centrally underwrite each of our commercial loans based primarily upon the customer's ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We endeavor to gain a complete understanding of our borrower's businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, we gain an understanding of the likely value of the collateral and what level of strength the collateral brings to the loan transaction. To the extent that the principals or other parties provide personal guarantees, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of our collateral. Due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Consumer—The installment loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

Commercial Real Estate—Real estate commercial loans consist of loans secured by multifamily housing, commercial non-owner and owner occupied and other commercial real estate loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. Commercial owner-occupied and other commercial real estate loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer's business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. These loans are primarily secured by real property and can include other collateral such as personal guarantees, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Also, due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Single-Family Residential—Real estate residential loans are to individuals and are secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses during 2008-2012 within the banking industry.

Construction and Development—Real estate construction loans are highly dependent on the supply and demand for residential and commercial real estate in the markets we serve as well as the demand for newly constructed commercial space and residential homes and lots that our customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers. Real estate construction loans can experience delays in completion and cost overruns that exceed the borrower's financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.

Risk categories—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. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if appropriately classified and impairment, if any. All other loan relationships greater than $750,000 are reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

- 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 of the institution'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 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 weaknesses 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 following table presents our loan portfolio by risk rating (in thousands):

	At December 31, 2012

	Total		Pass Credits		Special Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	25,729	$	21,656	$	—	$	4,073	$	—
HELOC's and equity		8,794		7,745		583		466		—
Commercial, financial, and agricultural:
Secured		16,856		16,788		37		31		—
Unsecured		6,654		5,456		1,185		13		—
Commercial Real Estate:
Owner occupied		57,648		44,252		9,551		3,845		—
Non-owner occupied		55,086		45,127		3,248		6,711		—
Multi-family		12,505		10,636		1,413		456		—
Construction and Development:
Construction		989		869		120		—		—
Improved Land		451		245		—		206		—
Unimproved Land		373		—		—		373		—
Consumer		5,913		5,801		—		87		25

Total	$	190,998	$	158,575	$	16,137	$	16,261	$	25

	At December 31, 2011

	Total		Pass Credits		Special Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	28,162	$	23,747	$	—	$	4,350	$	65
HELOC's and equity		9,377		8,173		112		1,092		—
Commercial, financial, and agricultural:
Secured		17,672		17,503		13		156		—
Unsecured		5,034		5,034		—		—		—
Commercial Real Estate:
Owner occupied		59,379		53,748		36		5,595		—
Non-owner occupied		58,418		42,186		6,120		8,872		1,240
Multi-family		8,878		8,475		403		—		—
Construction and Development:
Construction		3,398		3,107		—		291		—
Improved Land		1,525		1,182		—		343		—
Unimproved Land		454		247		—		207		—
Consumer		7,090		6,934		19		129		8

Total	$	199,387	$	170,336	$	6,703	$	21,035	$	1,313

As a result of adopting the amendments in ASU 2011-02, the Bank reassessed all restructurings that occurred on or after the beginning of the year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Bank identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Bank identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. As of December 31, 2012, the Company did not identify any loans as TDRs under the amended guidance for which the loan was previously measured under a general allowance methodology.

During the year ended December 31, 2012, the Bank modified 8 loans that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on 8 loans (dollar in thousands).

	December 31, 2012

	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
Residential mortgages		2	$	412	$	424
HELOC's and equity		—		—		—
Commercial Real Estate:
Owner occupied		5		4,442		4,428
Non-owner occupied		1		114		113
Consumer and Other		—		—		—

Total		8	$	4,968	$	4,965

During the year ended December 31, 2011, the Bank modified 12 loans that were considered to be troubled debt restructurings. We extended the terms on 4 loans, decreased the interest rate on 1 loan, and extended the terms and decreased the interest rate on 7 loans (dollar in thousands).

	December 31, 2011

	Number of Loans		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
Residential mortgages		5	$	597	$	613
HELOC's and equity		1		21		21
Commercial Real Estate:
Owner occupied		3		1,274		1,282
Non-owner occupied		1		958		958
Consumer and Other		2		18		18

Total		12	$	2,868	$	2,892

During 2012 and 2011, no loans that had previously been restructured within the previous twelve months were in default.

In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by performing the usual process for all loans in determining the allowance for loan loss. The Company considers a default as failure to comply with the restructured loan agreement. This would include the restructured loan being past due greater than 90 days, failure to comply with financial covenants, or failure to maintain current insurance coverage or real estate taxes after the loan restructured date.