LOANS

6 Months Ended

Jun. 30, 2011

LOANS

LOANS

3. LOANS

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

		June 30,		December 31,
		2011		2010
Commercial, financial, and agricultural		$	27,477	$	17,986
Installment		7,126		7,538
Real estate - commercial		117,139		117,022
Real estate - residential		37,580		39,536
Real estate - construction		4,886		13,248
Other		1,518		1,036
	Loans receivable	195,726		196,366
Less:	Net deferred loan fees	194		184
	Allowance for loan losses	2,687		4,188
	Loans receivable, net	$	192,845	$	191,994

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

	For the Three Month Period Ended June 30, 2011
	Commercial			Commercial Real Estate			Single-family Residential			Construction & Development			Consumer			Other		Unallocated		Total
Beginning balance	$	362		$	2,485		$	273		$	279		$	442		$	—	$	—	$	3,841
Provision for loan losses	17			517			181			70			(54		)	—		—		731
Loans charged-off	(15		)	(1,380		)	(124		)	(322		)	(83		)	—		—		(1,924		)
Recoveries on loans charged-off	1			—			3			—			35			—		—		39
Ending Balance	$	365		$	1,622		$	333		$	27		$	340		$	—	$	—	$	2,687
	For the Six Month Period Ended June 30, 2011
	Commercial			Commercial Real Estate			Single-family Residential			Consruction & Development			Consumer			Other		Unallocated		Total
Beginning balance	$	361		$	2,647		$	441		$	279		$	460		$	—	$	—	$	4,188
Provision for loan losses	17			992			181			70			(54		)	—		—		1,206
Loans charged-off	(15		)	(2,018		)	(295		)	(322		)	(133		)	—		—		(2,783		)
Recoveries on loans charged-off	2			1			6			—			67			—		—		76
Ending Balance	$	365		$	1,622		$	333		$	27		$	340		$	—	$	—	$	2,687
	For the Year Ended December, 2010
	Commercial			Commercial Real Estate			Single-family Residential			Consruction & Development			Consumer			Other		Unallocated		Total
Beginning balance	$	358		$	2,654		$	440		$	290		$	352		$	—	$	—	$	4,094
Provision for loan losses	99			844			269			759			494			—		—		2,465
Loans charged-off	(100		)	(866		)	(282		)	(770		)	(504		)	—		—		(2,522		)
Recoveries on loans charged-off	4			15			14			—			118			—		—		151
Ending Balance	$	361		$	2,647		$	441		$	279		$	460		$	—	$	—	$	4,188

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 the second quarter of 2011, the Company began charging-off the specific allowance for loan losses allocated to collateral dependent impaired loans to bring them to their fair value.  At June 30, 2011, $1.6 million of the allowance for loan losses that was specifically allocated for collateral dependent impaired loans was charged-off.

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology.  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.

	At June 30, 2011
	Commercial		Commercial Real Estate		Single-family Residential		Construction & Development		Consumer		Other		Unallocated		Total
Specific Reserves:
Impaired loans	$	100	$	633	$	—	$	—	$	—	$	—	$	—	$	733
Total specific reserves	100		633		—		—		—		—		—		733
General reserves	265		989		333		27		340		—		—		1,954
Total	$	365	$	1,622	$	333	$	27	$	340	$	—	$	—	$	2,687
Loans individually evaluated for impairment	$	681	$	14,167	$	—	$	1,690	$	—	$	—	$	—	$	16,538
Loans collectively evaluated for impairment	26,796		102,778		37,580		3,196		7,126		1,518		—		178,994
Total	$	27,477	$	116,945	$	37,580	$	4,886	$	7,126	$	1,518	$	—	$	195,532

	At December 31, 2010
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development			Consumer		Other		Unallocated		Total
Specific Reserves:
Impaired loans	$	257	$	2,129	$	—	$	301		$	—	$	—	$	—	$	2,687
Total specific reserves	257		2,129		—		301			—		—		—		2,687
General reserves	104		518		441		(22		)	460		—		—		1,501
Total	$	361	$	2,647	$	441	$	279		$	460	$	—	$	—	$	4,188
Loans individually evaluated for impairment	$	257	$	28,645	$	—	$	1,649		$	—	$	—	$	—	$	30,551
Loans collectively evaluated for impairment	17,729		88,193		39,536		11,599			7,538		1,036		—		165,631
Total	$	17,986	$	116,838	$	39,536	$	13,248		$	7,538	$	1,036	$	—	$	196,182

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

	At June 30, 2011
							Impaired Loans - With
	Impaired Loans - With Allowance						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	—		—		—		433		433		446		10
Unsecured	247		247		100		—		—		—		—
Commercial Real Estate:
Owner occupied	6,290		6,194		185		—		—		6,752		2
Non-owner occupied	7,949		7,949		448		—		—		8,031		653
Multi-family	120		25		—		—		—		82		24
Construction and Development:													.
Construction	—		—		—		1,584		1,341		1,366		28
Improved Land	—		—		—		709		349		636		17
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—				—		—		—		—
Total	$	14,606	$	14,415	$	733	$	2,726	$	2,123	$	17,313	$	734

	At December 31, 2010
							Impaired Loans - With
	Impaired Loans - With Allowance						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	257		257		257		—		—		301		18
Commercial Real Estate:
Owner occupied	4,097		4,097		509		11,903		11,781		14,456		1,419
Non-owner occupied	10,484		10,484		1,620		2,634		1,872		11,726		110
Multi-family	—		—		—		412		412		311		181
Construction and Development													.
Construction	1,649		1,649		301		—		—		1,564		95
Improved Land	—		—		—		—		—		—		—
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—				—		—		—		—
Total	$	16,487	$	16,487	$	2,687	$	14,949	$	14,065	$	28,358	$	1,823

Included in the tables above, there were 30 and 37 loans restructured or otherwise impaired totaling $7,149,000 and $9,799,000 with a valuation allowance of $131,000 and $271,000 at June 30, 2011 and December 31, 2010, respectively.

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

	At June 30, 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	$	—	$	339	$	2,259	$	2,598	$	26,113	$	28,711	$	—	$	3,983
HELOC’s and equity	169		68		364		601		8,268		8,869		—		364
Commercial:
Secured	17		—		283		300		26,030		26,330		—		283
Unsecured	—		—		—		—		1,147		1,147		—		—
Commercial Real Estate:
Owner occupied	427		617		3,430		4,474		78,274		82,748		—		3,430
Non-owner occupied	—		—		—		—		28,126		28,126		—		1,268
Multi-family	—		—		25		25		6,046		6,071		—		25
Construction and Development:
Construction	—		—		1,341		1,341		1,996		3,337		—		1,341
Improved Land	—		—		—		—		1,549		1,549		—		—
Unimproved Land	—		—		—		—		—		—		—		—
Consumer and Other	22		12		285		319		8,325		8,644		—		285
Total	$	635	$	1,036	$	7,987	$	9,658	$	185,874	$	195,532	$	—	$	10,979

	At December 31, 2010
	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	$	4,243	$	1,325	$	2,234	$	7,802	$	22,123	$	29,925	$	—	$	3,185
HELOC’s and equity	227		26		88		341		9,270		9,611		—		648
Commercial:
Secured	—		—		—		—		16,664		16,664		—		142
Unsecured	—		—		15		15		1,307		1,322		—		—
Commercial Real Estate:
Owner occupied	1,119		2,661		5,356		9,136		91,712		100,848		—		6,235
Non-owner occupied	4,503		326		2,268		7,097		2,741		9,838		—		2,268
Multi-family	—		—		397		397		5,755		6,152		—		397
Construction and Development:
Construction	—		—		—		—		11,760		11,760		—		—
Improved Land	—		146		136		282		1,206		1,488		—		136
Unimproved Land	—		—		—		—		—		—		—		—
Consumer and Other	117		48		455		620		7,954		8,574		—		229
Total	$	10,209	$	4,532	$	10,949	$	25,690	$	170,492	$	196,182	$	—	$	13,240

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.

Installment—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.

Real estate commercial loans—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.

Real estate 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 2008-2010 within the banking industry.

Real estate construction—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.

Other—Other loans are non-commercial loans evaluated for factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral we also evaluate the likely value of that collateral. Common risks to other loans include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to other loans.

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 June 30, 2011
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	28,711	$	26,113	$	—	$	2,598	$	—
HELOC’s and equity	8,869		7,578		137		1,154		—
Commercial:
Secured	26,330		25,847		81		402		—
Unsecured	1,147		900		—		247		—
Commercial Real Estate:
Owner occupied	82,748		72,978		—		9,770		—
Non-owner occupied	28,126		19,476		1,268		6,114		1,268
Multi-family	6,071		5,636		410		25		—
Construction and Development:
Construction	3,337		1,996		—		1,341		—
Improved Land	1,549		1,271		—		278		—
Unimproved Land	—		—		—		—		—
Consumer and Other	8,644		8,319		—		315		10
Total	$	195,532	$	170,114	$	1,896	$	22,244	$	1,278

	At December 31, 2010
	Total		Pass Credits		Special Mention		Substandard		Doubtful
Residential:
First mortgages	$	29,925	$	26,066	$	234	$	3,625	$	—
HELOC’s and equity	9,611		8,008		41		1,562		—
Commercial:
Secured	16,664		15,902		336		426		—
Unsecured	1,322		1,000		—		322		—
Commercial Real Estate:
Owner occupied	100,847		87,221		4,861		8,765		—
Non-owner occupied	9,839		—		184		9,655		—
Multi-family	6,152		5,741		411		—		—
Construction and Development:
Construction	11,760		6,723		—		5,037		—
Improved Land	1,488		1,480		—		8		—
Unimproved Land	—		—		—		—		—
Consumer and Other	8,574		8,174		27		373		—
Total	$	196,182	$	160,315	$	6,094	$	29,773	$	—