Note 3.

Loans

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


	(in thousands)
	September 30, 2013		December 31, 2012
Real estate loans:
Construction and land development	$	34,404	$	43,524
Secured by 1-4 family residential		142,446		134,964
Other real estate loans		156,691		176,573
Commercial and industrial loans		21,316		20,718
Consumer and other loans		11,970		7,815

Total loans	$	366,827	$	383,594
Allowance for loan losses		11,875		13,075

Loans, net	$	354,952	$	370,519

Consumer and other loans included $187 thousand and $153 thousand of demand deposit overdrafts at September 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 or other factors 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 likely 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 September 30, 2013 and December 31, 2012:


	September 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	$	1,196	$	—	$	3,374	$	4,570	$	29,834	$	34,404	$	1,560	$	1,834
1-4 family residential		1,047		250		108		1,405		141,041		142,446		947		—
Other real estate loans		3,728		519		1,117		5,364		151,327		156,691		5,403		277
Commercial and industrial		2		119		119		240		21,076		21,316		89		39
Consumer and other loans		17		—		—		17		11,953		11,970		1		—

Total	$	5,990	$	888	$	4,718	$	11,596	$	355,231	$	366,827	$	8,000	$	2,150


	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 September 30, 2013 and December 31, 2012:


	September 30, 2013 (in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Real estate loans:
Construction and land development	$	21,157	$	2,190	$	11,057	$	—	$	34,404
Secured by 1-4 family residential		131,597		4,692		6,157		—		142,446
Other real estate loans		119,862		15,638		21,191		—		156,691
Commercial and industrial		19,917		706		693		—		21,316
Consumer and other loans		11,970		—		—		—		11,970

Total	$	304,503	$	23,226	$	39,098	$	—	$	366,827


	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