LOANS

9 Months Ended

Sep. 30, 2011

LOANS

LOANS

3. LOANS

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

	September 30,		December 31,
	2011		2010
Commercial, financial, and agricultural	$	18,200	$	5,968
Installment	7,199		7,564
Real estate - commercial	130,611		131,083
Real estate - residential	37,574		40,148
Real estate - construction	3,074		11,603
Loans receivable	196,658		196,366
Less:    Net deferred loan fees	270		184
Allowance for loan losses	3,585		4,188
Loans receivable, net	$	192,803	$	191,994

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

	For the Three Month Period Ended September 30, 2011
							Single-			Construction
				Commercial			family			&
	Commercial			Real Estate			Residential			Development			Consumer			Total
Beginning balance	$	311		$	2,054		$	478		$	65		$	526		$	3,434
Provision for loan losses	25			368			71			187			129			780
Loans charged-off	(25		)	(369		)	(130		)	(69		)	(69		)	(662		)
Recoveries on loans charged-off	2			5			5			—			21			33
Ending Balance	$	313		$	2,058		$	424		$	183		$	607		$	3,585

	For the Nine Month Period Ended September 30, 2011
							Single-			Construction
				Commercial			family			&
	Commercial			Real Estate			Residential			Development			Consumer			Total
Beginning balance	$	365		$	2,616		$	376		$	290		$	541		$	4,188
Provision for loan losses	(19		)	1,696			549			330			176			2,732
Loans charged-off	(40		)	(2,261		)	(513		)	(437		)	(193		)	(3,444		)
Recoveries on loans charged-off	7			7			12			—			83			109
Ending Balance	$	313		$	2,058		$	424		$	183		$	607		$	3,585

	For the Year Ended December, 2010
							Single-			Construction
				Commercial			family			&
	Commercial			Real Estate			Residential			Development			Consumer			Total
Beginning balance	$	358		$	2,654		$	440		$	290		$	352		$	4,094
Provision for loan losses	99			886			616			371			493			2,465
Loans charged-off	(100		)	(935		)	(697		)	(371		)	(419		)	(2,522		)
Recoveries on loans charged-off	8			11			17			—			115			151
Ending Balance	$	365		$	2,616		$	376		$	290		$	541		$	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 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.

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

	At September 30, 2011
	Commercial		Commercial Real Estate		Single-family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	123	$	603	$	—	$	—	$	—	$	726
Total specific reserves	123		603		—		—		—		726
General reserves	190		1,455		424		183		607		2,859
Total	$	313	$	2,058	$	424	$	183	$	607	$	3,585
Loans individually evaluated for impairment	$	245	$	15,108	$	—	$	643	$	—	$	15,996
Loans collectively evaluated for impairment	17,857		115,108		37,574		2,431		7,422		180,392
Total	$	18,102	$	130,216	$	37,574	$	3,074	$	7,422	$	196,388

	At December 31, 2010
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development			Consumer		Total
Specific Reserves:
Impaired loans	$	257	$	2,129	$	—	$	301		$	—	$	2,687
Total specific reserves	257		2,129		—		301			—		2,687
General reserves	108		487		376		(11		)	541		1,501
Total	$	365	$	2,616	$	376	$	290		$	541	$	4,188
Loans individually evaluated for impairment	$	257	$	28,645	$	—	$	1,649		$	—	$	30,551
Loans collectively evaluated for impairment	5,777		102,166		40,148		9,954			7,586		165,631
Total	$	6,034	$	130,811	$	40,148	$	11,603		$	7,586	$	196,182

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

	At September 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	$	—	$	—	$	—	$	—	$	—	$	—	$	29
HELOC’s and equity	354		354		15		192		97		555		10
Commercial
Secured	—		—		—		—		—		—		14
Unsecured	245		245		123		—		—		253		—
Commercial Real Estate:
Owner occupied	634		634		31		1,085		1,085		1,769		4
Non-owner occupied	4,749		4,749		199		8,464		7,446		12,992		695
Multi-family	406		406		22		—		—		410		32
Construction and Development:
Construction	607		336		336		487		299		1,210		35
Improved Land	—		—		—		710		345		1,482		12
Unimproved Land	—		—		—		—		—		—		—
Consumer and Other	—		—				—		—		—		6
Total	$	6,995	$	6,724	$	726	$	10,938	$	9,272	$	18,671	$	837

	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 31 and 37 loans restructured totaling $7,835,000 and $9,799,000 with a valuation allowance of $40,000 and $271,000 at September 30, 2011 and December 31, 2010, respectively. Total impaired loans decreased by $14,556,000 to $15,996,000 at September 30, 2011 compared to $30,552,000 at December 31, 2011. This decline was due to the improved cashflow performance of approximately $7,004,000 in commercial real estate loans and, as a result, the loans were no longer considered impaired. The remaining decrease was due to foreclosures, write-down and principal paydowns.

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

	At September 30, 2011
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total Past				Loans		and
	Due		Due		Due		Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	—	$	543	$	2,714	$	3,257	$	24,914	$	28,171	$	—	$	4,191
HELOC’s and equity	75		83		366		524		8,879		9,403		—		366
Commercial:
Secured	115		—		7		122		15,807		15,929		—		7
Unsecured	—		245		—		245		1,928		2,173		—		245
Commercial Real Estate:
Owner occupied	1		—		274		275		15,646		15,921		—		458
Non-owner occupied	2,073		412		3,670		6,155		99,194		105,349		—		5,629
Multi-family	—		—		—		—		8,946		8,946		—		—
Construction and Development:
Construction	—		—		—		—		1,079		1,079		—		—
Improved Land	973		—		67		1,040		495		1,535		—		67
Unimproved Land	124		—		—		124		336		460		—		—
Consumer and Other	17		—		154		171		7,251		7,422		—		154
Total	$	3,378	$	1,283	$	7,252	$	11,913	$	184,475	$	196,388	$	—	$	11,117

	At December 31, 2010
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total Past				Loans		and
	Due		Due		Due		Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	4,243	$	1,325	$	2,234	$	7,802	$	22,123	$	29,925	$	—	$	3,135
HELOC’s and equity	260		218		788		1,266		8,957		10,223		—		788
Commercial:
Secured	—		—		—		—		3,609		3,624		—		80
Unsecured	—		—		15		15		2,410		2,410		—		—
Commercial Real Estate:
Owner occupied	179		212		62		453		16,656		17,109		—		62
Non-owner occupied	903		2,583		6,761		10,247		94,155		104,402		—		8,099
Multi-family	—		—		257		257		9,043		9,300		—		257
Construction and Development:
Construction	4,504		—		389		4,893		4,491		9,384		—		389
Improved Land	3		146		201		350		1,431		1,781		—		201
Unimproved Land	—		—		—		—		438		438		—		—
Consumer and Other	117		48		242		407		7,179		7,586		—		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 2008-2011 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 September 30, 2011
					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Residential:
First mortgages	$	28,171	$	24,872	$	—	$	3,299	$	—
HELOC's and equity	9,403		8,341		152		910		—
Commercial:
Secured	15,929		15,822		—		107		—
Unsecured	2,173		1,869		—		304		—
Commercial Real Estate:
Owner occupied	15,921		14,011		—		1,910		—
Non-owner occupied	105,349		89,723		232		15,394		—
Multi-family	8,946		8,540		—		406		—
Construction and Development:
Construction	1,079		780		—		299		—
Improved Land	1,535		1,190		—		345		—
Unimproved Land	460		460		—		—		—
Consumer and Other	7,422		7,255		—		167		—
Total	$	196,388	$	172,863	$	384	$	23,141	$	—

	At December 31, 2010
					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Residential:
First mortgages	$	29,925	$	26,066	$	234	$	3,625	$	—
HELOC's and equity	10,223		8,759		134		1,330		—
Commercial:
Secured	3,624		3,543		1		80		—
Unsecured	2,410		2,104		—		306		—
Commercial Real Estate:
Owner occupied	17,109		14,118		1,263		1,728		—
Non-owner occupied	104,402		83,495		4,024		16,883		—
Multi-family	9,300		8,758		411		131		—
Construction and Development:
Construction	9,384		4,517		—		4,867		—
Improved Land	1,781		1,220		—		561		—
Unimproved Land	438		438		—		—		—
Consumer and Other	7,586		7,297		27		262		—
Total	$	196,182	$	160,315	$	6,094	$	29,773	$	—

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. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $901,000, and there were no allowance associated with those loans, on the basis of a current evaluation of loss, due to sufficient collateral value.

	For Nine Months Period Ended September 30, 2011
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
HELOC’s and equity	3	$	114	$	116
Commercial Real Estate:
Owner occupied	2	382		386
Non-owner occupied	1	958		713
Total	6	$	1,454	$	1,215

	For Three Months Period Ended September 30, 2011
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings
Residential:
HELOC’s and equity	1	$	7	$	8
Commercial Real Estate:
Owner occupied	1	184		187
Non-owner occupied	1	958		713
Total	3	$	1,149	$	908

During the nine months ended September 30, 2011, the Company modified 6 loans that were considered to be troubled debt restructurings.  We extended the terms on one loan, decreased the interest rate on one loan and extended the terms and decreased the interest rate on four loans.

	For Nine Months Period Ended September 30, 2011
	Number of Loans	Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted During the Period:
Residential:
Residential mortgages	1	$	126
HELOC’s and equity	1	231
Total	2	$	357

	For Three Months Period Ended September 30, 2011
	Number of Loans	Recorded Investment
Troubled Debt Restructurings that Subsequently Defaulted During the Period:
Residential:
Residential mortgages	1	$	126
Total	1	$	126

During the nine months ended September 30, 2011, two loans that had previously been restructured, were in default, one of which went into default in the third quarter.  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.