Note 3. Loans

Loans at June 30, 2013 and December 31, 2012 are summarized as follows:


	(in thousands)
	June 30, 2013		December 31, 2012
Real estate loans:
Construction and land development	$	44,305	$	43,524
Secured by 1-4 family residential		145,628		134,964
Other real estate loans		159,834		176,573
Commercial and industrial loans		19,701		20,718
Consumer and other loans		8,045		7,815

Total loans	$	377,513	$	383,594
Allowance for loan losses		12,478		13,075

Loans, net	$	365,035	$	370,519

Consumer and other loans included $99 thousand and $153 thousand of demand deposit overdrafts at June 30, 2013 and December 31, 2012, respectively.

Risk characteristics of each loan portfolio class that are considered by the Company include:

•

1-4 family residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.

•

Real estate construction and land development loans carry risks that the project may not be finished according to schedule, the project may not be finished according to budget and the value of the collateral may, at any point in time, be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be a loan customer, may be unable to finish the construction project as planned because of financial pressure unrelated to the project.

•

Other real estate loans and commercial and industrial loans carry risks associated with the successful operation of a business or a real estate project, in addition to other risks associated with the ownership of real estate, because repayment of these loans may be dependent upon the profitability and cash flows of the business or project. In addition, there is risk associated with the value of collateral other than real estate which may depreciate over time and cannot be appraised with as much reliability.

•

Consumer and other loans carry risk associated with the continued credit-worthiness of the borrower and the value of the collateral, i.e. rapidly depreciating assets such as automobiles, or lack thereof. Consumer loans are more likely than real estate loans to be immediately adversely affected by job loss, divorce, illness or personal bankruptcy, or other changes in circumstances.

The following table provides a summary of loan classes and an aging of past due loans as of June 30, 2013 and December 31, 2012:


	June 30, 2013
	(in thousands)
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing

Real estate loans:
Construction and land development	$	1,873	$	—	$	4,546	$	6,419	$	37,886	$	44,305	$	2,678	$	1,889
1-4 family residential		1,731		445		89		2,265		143,363		145,628		1,577		—
Other real estate loans		1,173		1,415		74		2,662		157,172		159,834		4,745		—
Commercial and industrial		261		24		79		364		19,337		19,701		90		—
Consumer and other loans		77		3		—		80		7,965		8,045		2		—

Total	$	5,115	$	1,887	$	4,788	$	11,790	$	365,723	$	377,513	$	9,092	$	1,889


	December 31, 2012
	(in thousands)
	30-59 Days Past Due		60-89 Days Past Due		> 90 Days Past Due		Total Past Due		Current		Total Loans		Non-accrual Loans		90 Days or More Past Due and Accruing

Real estate loans:
Construction and land development	$	77	$	701	$	89	$	867	$	42,657	$	43,524	$	646	$	—
1-4 family residential		2,741		—		476		3,217		131,747		134,964		968		129
Other real estate loans		1,347		686		1,476		3,509		173,064		176,573		6,752		—
Commercial and industrial		428		408		99		935		19,783		20,718		14		99
Consumer and other loans		43		5		8		56		7,759		7,815		13		—

Total	$	4,636	$	1,800	$	2,148	$	8,584	$	375,010	$	383,594	$	8,393	$	228

Credit Quality Indicators

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk grading of specified classes of loans. The Company utilizes a risk grading matrix to assign a rating to each of its loans. The loan ratings are summarized into the following categories: pass, special mention, substandard, doubtful and loss. Pass rated loans include all risk rated credits other than those included in special mention, substandard or doubtful. Loans classified as loss are charged-off. Loan officers assign risk grades to loans at origination and as renewals arise. The Bank’s Credit Administration department reviews risk grades for accuracy on a quarterly basis and as credit issues arise. In addition, a certain amount of loans are reviewed each year through the Company’s internal and external loan review process. A description of the general characteristics of the loan grading categories is as follows:

Pass – Loans classified as pass exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.

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 the Bank’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 Company considers all doubtful loans to be impaired and places the loan on non-accrual status.

Loss – Loans classified as loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The following tables provide an analysis of the credit risk profile of each loan class as of June 30, 2013 and December 31, 2012:


	June 30, 2013 (in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	25,627	$	4,851	$	13,827	$	—	$	44,305
Secured by 1-4 family residential		130,940		6,461		8,227		—		145,628
Other real estate loans		122,778		14,259		22,797		—		159,834
Commercial and industrial		18,163		791		747		—		19,701
Consumer and other loans		7,975		70		—		—		8,045

Total	$	305,483	$	26,432	$	45,598	$	—	$	377,513


	December 31, 2012 (in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	22,384	$	5,176	$	15,964	$	—	$	43,524
Secured by 1-4 family residential		120,692		6,055		8,217		—		134,964
Other real estate loans		134,701		14,513		27,359		—		176,573
Commercial and industrial		18,831		798		1,089		—		20,718
Consumer and other loans		7,743		72		—		—		7,815

Total	$	304,351	$	26,614	$	52,629	$	—	$	383,594