Loans and Leases

9 Months Ended

Sep. 30, 2012

Loans and Leases [Abstract]

LOANS AND LEASES

NOTE 3 - LOANS AND LEASES

Loans outstanding at September 30, 2012 and December 31, 2011, are as follows:

	(Expressed in Thousands)
	September 30, 2012		December 31, 2011
Commercial and Other Loans:
Commercial	$	4,754	$	4,354
Non-rated industrial development obligations		10,475		11,508
Other loans		20		76
Total Commercial and Other Loans		15,249		15,938
Commercial Real Estate:
Non-farm, non-residential		42,381		49,146
Multifamily (5 or more) residential properties		6,919		7,222
Total Commercial Real Estate		49,300		56,368
Consumer Real Estate:
Construction		1,765		295
Farmland		247		213
Residential 1-4 Family		23,395		24,961
Home Equity Loans		2,124		2,380
Home Equity Lines of Credit		2,949		2,303
Total Consumer Real Estate		30,480		30,152
Consumer Loans:
Installment and other loans to individuals		5,252		6,484
Credit Cards		534		606
Total Consumer Loans		5,786		7,090
Total loans	$	100,815	$	109,548
Less unearned interest and deferred fees		89		119
Net loans	$	100,726	$	109,429

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. These policies and procedures are reviewed by management and approved by the Board of Directors on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company originates direct and indirect consumer loans including principally residential real estate, home equity lines and loans, credit cards, and indirect vehicle loans using a credit analysis as part of the underwriting process. Each loan type has a separate underwriting criteria, which consists of several factors including debt to income, type of collateral, credit history and customer relationship with the Company.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards are designed to promote relationship banking rather than transactional banking. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of the borrower, however, may not be as expected and the collateral securing the loan may fluctuate in value. Minimum standards and underwriting guidelines have been established for commercial loan types.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by the general economy or conditions specific to the real estate market such as geography and/or property type.

Non-accrual loans amounted to $3,748,768 and $4,045,937 at September 30, 2012 and December 31, 2011, respectively. The amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $49,774 and $40,890 for the three months ended September 30,2012 and September 30, 2011, respectively. For nine months ended September 30, 2012 and 2011 and for the year ended December 31, 2011, the amount of interest income that would have been recognized had the loans performed in accordance with their original terms was $176,820, $227,335 and $353,340, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):

	September 30, 2012
	Current			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past Due		Total Past Due		Total Loans			90 Days or more Past Due and Accruing
Commercial and Other Loans	$	15,181		$	45	$	—	$	23	$	68	$	15,249		$	—
Commercial real estate		46,122			148		—		3,030		3,178		49,300			—
Consumer real estate		30,240			123		—		117		240		30,480			32
Consumer		5,757			22		5		2		29		5,786			—
Unearned interest and deferred fees		(89	)		—		—		—		—		(89	)		—
Total loans	$	97,211		$	338	$	5	$	3,172	$	3,515	$	100,726		$	32
Non-accrual loans included above are as follows:
Commercial and Other Loans	$	10		$	—	$	—	$	23	$	23	$	33		$	—
Commercial real estate		266			—		—		3,030		3,030		3,296			—
Consumer real estate		198			115		—		85		200		398			—
Consumer		13			4		3		2		9		22			—
Total non-accrual loans	$	487		$	119	$	3	$	3,140	$	3,262	$	3,749		$	—

	December 31, 2011
	Current			30-59 Days Past Due		60-89 Days Past Due		90 Days or more Past  Due		Total Past Due		Total Loans			90 Days or more Past Due and Accruing
Commercial and Other Loans	$	15,655		$	257	$	—	$	26	$	283	$	15,938		$	—
Commercial real estate		52,727			409		36		3,196		3,641		56,368			—
Consumer real estate		29,681			221		140		110		471		30,152			—
Consumer		7,040			9		17		24		50		7,090			—
Unearned interest and deferred fees		(119	)		—		—		—		—		(119	)		—
Total loans	$	104,984		$	896	$	193	$	3,356	$	4,445	$	109,429		$	—
Non-accrual loans included above are as follows:
Commercial and Other Loans	$	13		$	—	$	—	$	26	$	26	$	39		$	—
Commercial real estate		253			84		—		3,196		3,280		3,533			—
Consumer real estate		232			105		—		110		215		447			—
Consumer		—			—		3		24		27		27			—
Total non-accrual loans	$	498		$	189	$	3	$	3,356	$	3,548	$	4,046		$	—

The Company utilizes an internal asset classification system for commercial loans as a means of reporting problem and potential problem loans. Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention”, “Substandard”, and “Doubtful.” Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention. Risk ratings are updated any time the situation warrants. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

The following tables present the risk category of loans based on the most recent analysis performed and the contractual aging as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and Other	$	15,210	$	—	$	39	$	—	$	15,249
Commercial Real Estate		39,846		2,398		7,056		—		49,300
Construction and Land Development		1,066		946		—		—		2,012
Total	$	56,122	$	3,344	$	7,095	$	—	$	66,561
Current	$	56,077	$	3,344	$	3,651	$	—	$	63,072
Past Due 30-59 days		45		—		148		—		193
Past Due 60-89 days		—		—		—		—		—
Past Due 90 days or more		—		—		—		—		—
Non-accrual		—		—		3,296		—		3,296
Total	$	56,122	$	3,344	$	7,095	$	—	$	66,561

December 31, 2011	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and Other	$	15,882	$	—	$	56	$	—	$	15,938
Commercial Real Estate		43,067		5,807		6,786		708		56,368
Construction and Land Development		508		—		—		—		508
Total	$	59,457	$	5,807	$	6,842	$	708	$	72,814
Current	$	59,164	$	5,807	$	3,653	$	—	$	68,624
Past Due 30-59 days		257		—		325		—		582
Past Due 60-89 days		36		—		—		—		36
Past Due 90 days or more		—		—		—		—		—
Non-accrual		—		—		2,864		708		3,572
Total	$	59,457	$	5,807	$	6,842	$	708	$	72,814

For consumer and consumer real estate loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2012 and December 31, 2011 (in thousands):

September 30, 2012	Performing		Non-performing		Total
Consumer	$	5,764	$	22	$	5,786
Consumer Real Estate		30,050		430		30,480
Total	$	35,814	$	452	$	36,266

December 31, 2011	Performing		Non-performing		Total
Consumer	$	7,063	$	27	$	7,090
Consumer Real Estate		29,705		447		30,152
Total	$	36,768	$	474	$	37,242

The Company also evaluates problem loans for impairment. A loan is considered to be impaired if it is probable that the Company will not be able to collect the payments for principal and interest when due according to the contractual terms of the loan agreement. Impaired loans generally include all non-accrual loans and Troubled Debt Restructurings (TDR’s).

Impaired loans at September 30, 2012 and December 31, 2011 are set forth in the following tables (in thousands):

	September 30, 2012
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial and Other Loans	$	34	$	10	$	24	$	34	$	24
Commercial real estate		3,296		572		2,724		3,296		795
Consumer real estate		234		234		—		234		—
Total	$	3,564	$	816	$	2,748	$	3,564	$	819

	December 31, 2011
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
Commercial and Other Loans	$	46	$	39	$	7	$	46	$	7
Commercial real estate		3,533		1,056		2,477		3,533		829
Consumer real estate		312		312		—		312		—
Total	$	3,891	$	1,407	$	2,484	$	3,891	$	836

The average recorded investment in impaired loans are set forth below in the following table. No interest income was recognized on impaired loans subsequent to their classification as impaired (in thousands):

	Average Recorded Investment
	For the three months ended				For the nine months ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Commercial and Other Loans		33		42		32		44
Commercial real estate		3,105		3,688		3,088		3,883
Consumer real estate		528		330		525		347
Total	$	3,666	$	4,060	$	3,645	$	4,274

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonaccrual at the time of restructure and may only be returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDR’s on accrual status may remain in accrual status after they have been restructured as long as they continue to perform in accordance with their modified terms. There were no TDR’s in accrual status at September 30, 2012 and December 31, 2011.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The Company did not have any new TDR’s originate during the three and nine month periods ended September 30, 2012 and 2011. One loan which was previously identified as a TDR was modified during the third quarter of 2012. There were no TDR’s that defaulted during the three and nine month periods ended September 30, 2012 and 2011.

No additional funds are committed to be advanced to customers whose loans were classified as TDR’s