Note 4. Loans, Leases and Other Real Estate Owned

A summary of loans and leases follows:


	September 30,			December 31,
	2012			2011
	(Dollars in thousands)
Commercial, financial and agricultural:
Commercial and industrial	$	266,015		$	278,032
Agricultural		1,223			1,028
Equipment leases		9,541			12,814
Total commercial, financial and agricultural		276,779			291,874

Commercial real estate:
Commercial construction, land and land development		228,220			250,859
Other commercial real estate		391,197			424,690
Total commercial real estate		619,417			675,549

Residential real estate:
Residential construction		13,624			13,509
Residential mortgage		228,588			245,180
Total residential real estate		242,212			258,689

Consumer, installment and single pay:
Consumer		41,151			44,713
Other		4,583			6,265
Total consumer, installment and single pay		45,734			50,978

Total loans and leases		1,184,142			1,277,090
Less unearned discount leases		(725	)		(1,173	)
Less deferred cost (unearned loan fees), net		1,024			1,132
Total loans and leases, net	$	1,184,441		$	1,277,049

Loans include loans held for sale of $2.708 million at September 30, 2012 and $2.021 million at December 31, 2011 which are accounted for at the lower of cost or market value, in the aggregate.

The following section describes the composition of the various categories in our loan and lease portfolio and discusses management of risk in these categories.

Commercial and Industrial loans, or C and I loans, include loans to commercial customers for use in business to finance working capital needs, equipment purchases, or other expansion projects. These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment, or receivables, or secured in whole or in part by real estate unrelated to the principal purpose of the loan, and are generally guaranteed by the principals of the borrower. Variable rate loans in this portfolio have interest rates that are periodically adjusted. Risk is minimized in this portfolio by requiring adequate cash flow to service the debt and the personal guaranties of principals of the borrowers. The portfolio of C and I loans decreased $12.017 million, or 4.3 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns primarily in the south Alabama region.

Agricultural loans include loans to fund seasonal production and longer term investments in land, buildings, equipment, and breeding stock. The repayment of agricultural loans is dependent on the successful production and marketing of a product. Risk is minimized in this portfolio by performing a review of the borrower’s financial data and cash flow to service the debt, and by obtaining personal guaranties of principals of the borrower. This type of lending represents $1.223 million, or less than one percent, of the total loan portfolio. The portfolio of agricultural loans increased $195 thousand, or 19.0 percent, from December 31, 2011 to September 30, 2012, as a result of new loan activity primarily in the south Alabama region.

Equipment Leases include leases that were acquired during the acquisition of The Peoples Bank and Trust Company. BankTrust is not actively engaged in equipment leasing. These leases paid down $3.273 million from December 31, 2011 to September 30, 2012. Management does not believe this portfolio represents a significant credit risk, since these loans are secured by the equipment being leased, and the lessees continue to maintain a strong level of creditworthiness.

Commercial Real Estate loans include commercial construction loans, land and land development loans, and other commercial real estate loans.

Commercial construction, land, and land development loans include loans for the development of residential housing projects, loans for the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower. The Bank’s lenders work to cultivate long-term relationships with established developers. The Bank disburses funds for construction projects as pre-specified stages of construction are completed. The portfolio of commercial construction loans decreased $22.639 million, or 9.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns and charge-offs.

Other commercial real estate loans include loans secured by commercial and industrial properties, apartment buildings, office or mixed-use facilities, strip shopping centers, and other commercial property. These loans are generally guaranteed by the principals of the borrower. The portfolio of commercial real estate loans decreased $33.493 million, or 7.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns.

Risk is minimized in this portfolio by requiring a review of the borrower’s financial data and verification of the borrower’s income prior to making a commitment to fund the loan. Personal guaranties are obtained for substantially all construction loans to builders. Personal financial statements of guarantors are obtained as part of the loan underwriting process. For construction loans, regular site inspections are performed upon completion of each construction phase, prior to advancing additional funds for additional phases. Commercial construction and commercial real estate lending has been curtailed over the past three years as a result of a combination of factors, including a decline in demand, lack of qualified borrowers and regulatory pressures on all banks to curtail lending in the commercial real estate market.

Residential Construction loans include loans to individuals for the construction of their residences, either primary or secondary, where the borrower is the owner and independently engages the builder. Residential construction loans also include loans to builders for the construction of one-to-four family residences for which the collateral, a proposed one-to-four family dwelling, is the primary source of repayment. These loans are made to builders to finance the construction of homes that are either pre-sold or those that are built on a speculative basis, although speculative lending in this category has been strictly limited and controlled over the past three years. Loan proceeds are to be disbursed incrementally as construction is completed. The portfolio of residential construction loans increased $115 thousand, or 0.9 percent, from December 31, 2011 to September 30, 2012, primarily as a result of increased loan activity with local builders in the northwest Florida region.

Residential Mortgage loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary residence, vacation home, or investment property. We sell the majority of our residential mortgage loans originated with terms to maturity of 15 years or greater in the secondary market. We generally originate fixed and adjustable rate residential mortgage loans using secondary market underwriting and documentation standards. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Risk is minimized in this portfolio by reviewing the borrower’s financial data and ability to meet both existing financial obligations and the proposed loan obligation, and by verification of the borrower’s income. The portfolio of residential mortgage loans decreased $16.592 million, or 6.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns, charge-offs, and foreclosures.

Consumer loans include a variety of secured and unsecured personal loans including automobile loans, marine loans, loans for household and personal purpose, and all other direct consumer installment loans. Risk is minimized in this portfolio by reviewing the borrower’s financial data, ability to meet existing obligations and the proposed loan obligation, and verification of the borrower’s income. The portfolio of consumer loans decreased $3.562 million, or 8.0 percent, from December 31, 2011 to September 30, 2012, primarily as a result of paydowns. Repossessions and charge-offs have been minimal in this portfolio since December 31, 2011.

Other loans comprise primarily loans to municipalities to fund operating expenses during periods prior to revenue collection and to fund capital projects. The portfolio of other loans decreased $1.682 million, or 26.8 percent, from December 31, 2011 to September 30, 2012, as a result of paydowns.

Non-Accrual Loans

At September 30, 2012 and December 31, 2011, non-accrual loans totaled $143.877 million and $96.592 million, respectively, which included non-accruing restructured loans of $3.738 million and $5.296 million, respectively. The allowance for loan and lease losses allocated to restructured loans at September 30, 2012 and December 31, 2011 was $2.195 million and $392 thousand, respectively. The amount of interest income that would have been recorded during the first nine months of 2012, if all non-accrual loans had been current in accordance with their original terms, was $5.864 million. The amount of interest income actually recognized on these loans during the first nine months of 2012 was $1.209 million. At September 30, 2012 and December 31, 2011, performing restructured loans totaled $8.611 million and $7.253 million, respectively. There was no material effect on interest income recognition as a result of the modification of these loans.

Non-accrual loans at September 30, 2012 and December 31, 2011, segregated by class of loans, were as follows:

LOANS ON NON-ACCRUAL

	September 30,		December 31,
	2012		2011
	(Dollars in thousands)
Non-accrual loans:
Commercial, financial and agricultural	$	7,644	$	2,372
Commercial real estate:
Construction, land and land development		102,176		59,382
Other		17,230		15,275
Consumer		659		651
Residential:
Construction		484		497
Mortgage		15,684		18,415
Total non-accrual loans	$	143,877	$	96,592

An age analysis of past due loans, segregated by class of loans, as of September 30, 2012 and December 31, 2011, was as follows:

AGE ANALYSIS OF PAST DUE LOANS

September 30, 2012

(Dollars in thousands)
	30-89 days past due		90 days or more past due		Total past due		Current		Total loans		Loans 90 days or more past due and accruing
Loans:
Commercial, financial and agricultural	$	3,543	$	7,644	$	11,187	$	265,592	$	276,779	$	0
Commercial real estate:
Construction, land and land development		5,787		102,176		107,963		120,257		228,220		0
Other		6,010		17,230		23,240		367,957		391,197		0
Consumer		618		659		1,277		44,457		45,734		0
Residential
Construction		337		484		821		12,803		13,624		0
Mortgage		10,011		15,696		25,707		202,881		228,588		12
Total	$	26,306	$	143,889	$	170,195	$	1,013,947	$	1,184,142	$	12

December 31, 2011

(Dollars in thousands)
	30-89 days past due		90 days or more past due		Total past due		Current		Total loans		Loans 90 days or more past due and accruing
Loans:
Commercial, financial and agricultural	$	2,288	$	2,372	$	4,660	$	287,214	$	291,874	$	0
Commercial real estate:
Construction, land and land development		1,493		59,382		60,875		189,984		250,859		0
Other		3,687		15,275		18,962		405,728		424,690		0
Consumer		546		651		1,197		49,781		50,978		0
Residential
Construction		0		497		497		13,012		13,509		0
Mortgage		5,954		18,663		24,617		220,563		245,180		248
Total	$	13,968	$	96,840	$	110,808	$	1,166,282	$	1,277,090	$	248

Impaired Loans

Loans are considered impaired when, based on current information, it is probable that all amounts contractually due, including scheduled principal and interest payments, are not likely to be collected. Factors considered by Management in determining if a loan is impaired include payment status, probability of collecting scheduled principal and interest payments when due and value of collateral for collateral dependent loans. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All loans placed on non-accrual status are considered to be impaired. If a loan is impaired, a specific valuation allowance is allocated, if necessary, based on the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if repayment is expected solely from the collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

IMPAIRED LOANS September 30, 2012									Nine Months Ended September 30, 2012
(Dollars in thousands)
	Unpaid Principal Balance		Partial Charge-offs to Date		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans:

With no related allowance recorded:
Commercial, financial and agricultural	$	831	$	360	$	471	$	0	$	561	$	0
Commercial real estate construction, land and land development		45,511		13,410		32,101		0		39,071		79
Commercial real estate other		12,527		618		11,909		0		14,396		53
Consumer		0		0		0		0		0		0
Residential construction		114		0		114		0		122		0
Residential mortgage		6,312		707		5,605		0		8,141		12
Total		65,295		15,095		50,200		0		62,291		144

With a related allowance recorded:
Commercial, financial and agricultural		6,461		695		5,766		1,625		2,800		77
Commercial real estate construction, land and land development		79,433		9,527		69,906		26,083		40,921		819
Commercial real estate other		10,218		117		10,101		2,925		5,893		65
Consumer		119		0		119		60		123		0
Residential construction		370		0		370		120		369		0
Residential mortgage		8,847		437		8,410		2,943		6,364		50
Total		105,448		10,776		94,672		33,756		56,470		1,011

Total commercial		154,981		24,727		130,254		30,633		103,642		1,093
Total consumer		119		0		119		60		123		0
Total residential		15,643		1,144		14,499		3,063		14,996		62
Total Impaired Loans	$	170,743		25,871	$	144,872	$	33,756	$	118,761	$	1,155

IMPAIRED LOANS September 30, 2012	Three Months Ended September 30, 2012
(Dollars in thousands)
	Average Recorded Investment		Interest Income Recognized
Impaired Loans:

With no related allowance recorded:
Commercial, financial and agricultural	$	471	$	0
Commercial real estate construction, land and land development		28,370		19
Commercial real estate other		11,656		45
Consumer		0		0
Residential construction		118		0
Residential mortgage		6,215		9
Total		46,830		73

With a related allowance recorded:
Commercial, financial and agricultural		3,627		77
Commercial real estate construction, land and land development		57,076		799
Commercial real estate other		8,994		46
Consumer		120		0
Residential construction		370		0
Residential mortgage		8,300		39
Total		78,487		961

Total commercial		110,194		986
Total consumer		120		0
Total residential		15,003		48
Total Impaired Loans	$	125,317	$	1,034

IMPAIRED LOANS December 31, 2011									Year Ended December 31, 2011
(Dollars in thousands)
	Unpaid Principal Balance		Partial Charge-offs to Date		Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired Loans:

With no related allowance recorded:
Commercial, financial and agricultural	$	831	$	360	$	471	$	0	$	652	$	7
Commercial real estate construction, land and land development		60,974		21,233		39,741		0		28,959		200
Commercial real estate other		18,073		2,235		15,838		0		11,180		372
Consumer		0		0		0		0		0		0
Residential construction		128		0		128		0		790		0
Residential mortgage		11,492		1,796		9,696		0		8,645		59
Total		91,498		25,624		65,874		0		50,226		638

With a related allowance recorded:
Commercial, financial and agricultural		1,618		696		922		206		1,252		5
Commercial real estate construction, land and land development		23,668		2,488		21,180		4,446		41,023		156
Commercial real estate other		2,798		0		2,798		333		4,562		68
Consumer		125		6		119		60		183		0
Residential construction		369		0		369		11		441		0
Residential mortgage		5,255		94		5,161		2,259		6,185		36
Total		33,833		3,284		30,549		7,315		53,646		265

Total commercial		107,962		27,012		80,950		4,985		87,628		808
Total consumer		125		6		119		60		183		0
Total residential		17,244		1,890		15,354		2,270		16,061		95
Total Impaired Loans	$	125,331	$	28,908	$	96,423	$	7,315	$	103,872	$	903

Credit Quality Indicators

A risk grading matrix is utilized to assign a risk grade to each loan. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades follows:

●

Grades 1 and 2 – These grades include “excellent” loans which are virtually risk-free and are secured by cash-equivalent instruments or readily marketable collateral, or are within guidelines to borrowers with liquid financial statements. These loans have excellent sources of repayment with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and regulations.

●

Grade 3 – This grade includes “guideline” loans that have excellent sources of repayment, with no significant identifiable risk of collection, and that conform to Bank policy, guidelines, underwriting standards, and regulations. These loans have documented historical cash flow that meets or exceeds minimum guidelines and have adequate secondary sources to repay the debt.

●

Grade 4 – This grade includes “satisfactory” loans that have adequate sources of repayment with little identifiable risk of collection. These loans generally conform to Bank policy, guidelines, and underwriting standards with limited exceptions that have been adequately mitigated by other factors, and they have documented historical cash flow that meets or exceeds minimum guidelines and adequate secondary sources to repay the debt.

●

Grade 5 – This grade includes “low satisfactory” loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. These loans have additional exceptions to Bank policy, guidelines, or underwriting standards that have been properly mitigated by other factors, unproved or insufficient primary sources of repayment that appear sufficient to service the debt at the time, or marginal or unproven secondary sources to repay the debt.

Consumer loans with grades 1 through 5 are identified as “Pass.”

●

Grade 6 – This grade includes “special mention” loans that are currently protected but are potentially weak. These loans have potential or actual weaknesses that may weaken the asset or inadequately protect the Bank’s credit position at some future date. These loans may have well-defined weaknesses in the primary repayment source but are protected by the secondary source of repayment.

●

Grade 7 – This grade includes “substandard” loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●

Grade 8 – This grade includes “doubtful” loans that have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

●

Grade 9 – This grade includes “loss” loans that are considered uncollectible and of such little value that their continued reporting as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be realized in the future.

The Bank did not have any loss (grade 9) loans at September 30, 2012 or December 31, 2011.

The tables below set forth credit exposure for the commercial and consumer residential portfolio based on internally assigned grades, and the consumer portfolio based on payment activity at September 30, 2012 and December 31, 2011. These tables reflect continuing issues with credit quality in the construction, land and land development portfolio.

COMMERCIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE



	Commercial, Financial and Agricultural				Commercial Real Estate- Construction, Land and Land Development				Commercial Real Estate- Other
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2012		2011		2012		2011		2012		2011
	(Dollars in thousands)
Grade:
Excellent	$	5,992	$	6,299	$	265	$	281	$	1,305	$	1,520
Guideline		60,480		72,836		16,195		18,346		89,503		99,354
Satisfactory		78,851		74,984		21,569		21,721		96,581		116,696
Low satisfactory		93,285		110,891		65,457		83,910		157,529		164,826
Special mention		24,456		14,833		6,503		9,107		14,876		12,996
Substandard		13,715		12,031		118,231		117,494		31,403		29,298
Doubtful		0		0		0		0		0		0
Loss		0		0		0		0		0		0
Total	$	276,779	$	291,874	$	228,220	$	250,859	$	391,197	$	424,690

CONSUMER RESIDENTIAL CREDIT EXPOSURE

CREDIT RISK PROFILE BY INTERNALLY ASSIGNED GRADE



	Residential - Construction				Residential - Prime
	September 30,		December 31,		September 30,		December 31,
	2012		2011		2012		2011
	(Dollars in thousands)
Grade:
Pass	$	11,632	$	13,012	$	191,330	$	205,700
Special mention		1,218		0		9,832		8,841
Substandard		774		497		27,268		30,452
Doubtful		0		0		158		187
Total	$	13,624	$	13,509	$	228,588	$	245,180

CONSUMER CREDIT EXPOSURE

CREDIT RISK PROFILE BASED ON PAYMENT ACTIVITY



	Consumer
	September 30,		December 31,
	2012		2011
	(Dollars in thousands)
Grade:
Performing	$	45,075	$	50,327
Non-performing		659		651
Total	$	45,734	$	50,978

The following table sets forth certain information with respect to the Company’s recorded investment in loans and the allocation of the Company’s allowance for loan and lease losses, charge-offs and recoveries by loan category as of September 30, 2012 and December 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The Company continues to experience the adverse effects of a severe downturn in the real estate markets in which it operates, and this has led to a significant increase in defaults by borrowers compared to historical periods, a significant increase in loans charged-off, and a reduction in the value of real estate serving as collateral for some of the Company's loans.

ALLOWANCE FOR LOAN AND LEASE LOSSES AND RECORDED INVESTMENT IN LOANS

For the Three Months Ended September 30, 2012
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated		Total

Allowance for loan and lease losses -
Balance at beginning of period	$	4,591		$	37,960		$	8,168		$	420		$	1,414	$	52,553
Charge-offs		(305	)		(3,857	)		(483	)		(111	)		0		(4,756	)
Recoveries		57			19			29			33			0		138
Provision charged to operating expense		1,117			5,769			924			10			1,680		9,500
Balance at end of period	$	5,460		$	39,891		$	8,638		$	352		$	3,094	$	57,435

For the Nine Months Ended September 30, 2012
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total

Allowance for loan and lease losses -
Balance at beginning of period	$	5,151		$	23,280		$	7,713		$	584		$	5,428		$	42,156
Charge-offs		(1,354	)		(7,227	)		(3,195	)		(246	)		0			(12,022	)
Recoveries		108			49			254			90			0			501
Provision charged to operating expense		1,555			23,789			3,866			(76	)		(2,334	)		26,800
Balance at end of period	$	5,460		$	39,891		$	8,638		$	352		$	3,094		$	57,435

Period-end amount allocated to:
Loans individually evaluated for impairment	$	1,625	$	29,008	$	3,063	$	60	$	0	$	33,756
Other loans not individually evaluated		3,835		10,883		5,575		292		3,094		23,679
Ending balance	$	5,460	$	39,891	$	8,638	$	352	$	3,094	$	57,435

Loans -
Loans individually evaluated for impairment	$	6,237	$	124,017	$	14,499	$	119	$	0	$	144,872
Other loans not individually evaluated		270,542		495,400		227,713		45,615		0		1,039,270
Ending balance	$	276,779	$	619,417	$	242,212	$	45,734	$	0	$	1,184,142

For the Three Months Ended September 30, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total

Allowance for loan and lease losses -
Balance at beginning of period	$	4,569		$	26,298		$	6,430		$	887		$	2,095		$	40,279
Charge-offs		(35	)		(3,033	)		(328	)		(48	)		0			(3,444	)
Recoveries		158			48			33			43			0			282
Provision charged to operating expense		591			4,623			991			(3	)		(202	)		6,000
Balance at end of period	$	5,283		$	27,936		$	7,126		$	879		$	1,893		$	43,117

For the Nine Months Ended September 30, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural			Commercial Real Estate			Residential			Consumer			Unallocated			Total

Allowance for loan and lease losses -
Balance at beginning of period	$	5,429		$	31,431		$	6,669		$	890		$	3,512		$	47,931
Charge-offs		(2,271	)		(15,930	)		(1,902	)		(156	)		0			(20,259	)
Recoveries		229			520			79			117			0			945
Provision charged to operating expense		1,896			11,915			2,280			28			(1,619	)		14,500
Balance at end of period	$	5,283		$	27,936		$	7,126		$	879		$	1,893		$	43,117

Period-end amount allocated to:
Loans individually evaluated for impairment	$	208	$	11,273	$	1,835	$	325	$	0	$	13,641
Other loans not individually evaluated		5,075		16,663		5,291		554		1,893		29,476
Ending balance	$	5,283	$	27,936	$	7,126	$	879	$	1,893	$	43,117

Loans -
Loans individually evaluated for impairment	$	1,396	$	93,003	$	15,658	$	386	$	0	$	110,443
Other loans not individually evaluated		290,985		602,797		250,147		53,214		0		1,197,143
Ending balance	$	292,381	$	695,800	$	265,805	$	53,600	$	0	$	1,307,586


December 31, 2011
(Dollars in thousands)
	Commercial, Financial and Agricultural		Commercial Real Estate		Residential		Consumer		Unallocated		Total

Allowance for loan and lease losses -
Period-end amount allocated to:
Loans individually evaluated for impairment	$	206	$	4,779	$	2,270	$	60	$	0	$	7,315
Other loans not individually evaluated		4,945		18,501		5,444		523		5,428		34,841
Ending balance	$	5,151	$	23,280	$	7,714	$	583	$	5,428	$	42,156

Loans -
Loans individually evaluated for impairment	$	1,393	$	79,557	$	15,354	$	119	$	0	$	96,423
Other loans not individually evaluated		290,481		595,992		243,335		50,859		0		1,180,667
Ending balance	$	291,874	$	675,549	$	258,689	$	50,978	$	0	$	1,277,090

Troubled Debt Restructurings

The following table presents a breakdown of troubled debt restructurings that occurred during the three- and nine-month periods ended September 30, 2012 by loan class and whether the loan remains on accrual or nonaccrual status. All of the troubled debt restructurings that occurred during the time period presented below included concessions relating to extended payment terms. No concessions were made to lower interest rates to a below market rate.

(Dollars in thousands)	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment

Accruing Loans
Commercial, financial and agricultural		0	$	0	$	0		1	$	19	$	19
Commercial construction, land and land development		0		0		0		1		237		237
Other commercial real estate		1		2,900		2,900		1		2,900		2,900
Total		1	$	2,900	$	2,900		3	$	3,156	$	3,156
Nonaccrual Loans
Consumer		0	$	0	$	0		1	$	11	$	11
Total		0	$	0	$	0		1	$	11	$	11

Total
Commercial, financial and agricultural		0	$	0	$	0		1	$	19	$	19
Commercial construction, land and land development		0		0		0		1		237		237
Other commercial real estate		1		2,900		2,900		1		2,900		2,900
Consumer		0		0		0		1		11		11
Total		1	$	2,900	$	2,900		4	$	3,167	$	3,167

No troubled debt restructurings made within the previous twelve months defaulted during the three or nine months ended September 30, 2012. Once a loan has been modified as a troubled debt restructuring, it is considered an impaired loan. A specific valuation allowance is allocated to that loan in the allowance for loan and lease losses, if necessary, based on the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if repayment is expected solely from the collateral.

Other Real Estate Owned

A summary of other real estate owned follows:

	September 30,		December 31,
	2012		2011
	(Dollars in thousands)

Construction, land development, lots and other land	$	39,351	$	46,565
1-4 family residential properties		3,688		4,118
Multi-family residential properties		2,910		1,817
Non-farm non-residential properties		7,801		4,887
Total other real estate owned	$	53,750	$	57,387

The Company carries its other real estate owned at the estimated fair value less any cost to dispose. Since 2007, there has been a substantial slowdown in the real estate markets across the U.S., including in the markets where the Company does business. This slowdown, together with other factors (as discussed in Note 1), has resulted in a substantial decrease in the value of the Company’s other real estate owned. This decrease in value has materially and adversely affected the Company’s earnings and capital. If real estate values in the Company’s markets remain depressed or decline further, the Company could experience further adverse effects. Other real estate owned activity is summarized as follows:

	Nine Months Ended
	September 30,
	2012			2011
	(Dollars in thousands)
Balance at the beginning of the year	$	57,387		$	82,419
Loan foreclosures		8,546			12,883
Property sold		(8,719	)		(3,232	)
Losses on sale and write-downs		(3,464	)		(2,187	)
Balance at the end of the period	$	53,750		$	89,883