Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2015

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. Loans and Allowance for Loan Losses

At September 30, 2015 and December 31, 2014, loans are summarized as follows (in thousands):

	September 30, 2015						December 31, 2014
			All Other				PCI		All Other
	PCI Loans		Loans		Total		Loans		Loans		Total
Commercial real estate	$	21,667	$	343,940	$	365,607	$	3,102	$	190,349	$	193,451
Consumer real estate		13,408		148,682		162,090		4,380		77,034		81,414
Construction and land development		2,728		94,322		97,050		36		52,469		52,505
Commercial and industrial		4,084		77,023		81,107		3		33,716		33,719
Consumer and other		-		4,585		4,585		-		2,314		2,314
Total loans		41,887		668,552		710,439		7,521		355,882		363,403
Less: Allowance for loan losses		-		(3,828)		(3,828)		-		(3,880)		(3,880)

Loans, net	$	41,887	$	664,724	$	706,611	$	7,521	$	352,002	$	359,523

The following describe risk characteristics relevant to each of the portfolio segments:

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. One to four family first mortgage loans are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial, financial, and agricultural loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers' business operations.

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

Credit Risk Management:

The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.

Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Senior Credit Officer and the Directors Loan Committee.

The allowance for loan losses is a valuation reserve allowance established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment, general allocations for pools of homogeneous loans with similar risk characteristics and trends, and an unallocated component that reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The allowance for loan losses related to specific loans is based on management's estimate of potential losses on impaired loans as determined by ( 1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan's observable market price. The Company's homogeneous loan pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.

The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk and (7) effectiveness of the Company's loan policies, procedures and internal controls. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio and the total dollar amount of the loans in the pool.

SmartFinancial follows the loan impairment accounting guidance in ASC Topic 310. A loan is considered impaired when, based on current information and events, it is probable that SmartFinancial will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans and loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in interest rates, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collections.

The composition of loans by loan classification for impaired and performing loan status at September 30, 2015 and December 31, 2014, is summarized in the tables below (amounts in thousands):

	September 30, 2015
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Performing loans	$	341,966	$	145,030	$	93,284	$	76,554	$	4,585	$	661,419
Impaired loans		1,974		3,652		1,038		469		-		7,133
		343,940		148,682		94,322		77,023		4,585		668,552
PCI loans		21,667		13,408		2,728		4,084		-		41,887
Total	$	365,607	$	162,090	$	97,050	$	81,107	$	4,585	$	710,439

	December 31, 2014
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Performing loans	$	188,169	$	71,634	$	50,301	$	33,178	$	2,314	$	345,596
Impaired loans		2,180		5,400		2,168		538		-		10,286
		190,349		77,034		52,469		33,716		2,314		355,882
PCI loans		3,102		4,380		36		3		-		7,521
Total loans	$	193,451	$	81,414	$	52,505	$	33,719	$	2,314	$	363,403

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of September 30, 2015 and December 31, 2014 (amounts in thousands):

	September 30, 2015
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial And Industrial		Consumer and Other		Unallocated		Total
Performing loans	$	94	$	271	$	104	$	75	$	-	$	3,026	$	3,570
Impaired loans		-		-		-		258		-		-		258
Total	$	94	$	271	$	104	$	333	$	-	$	3,026	$	3,828

	December 31, 2014
					Construction		Commercial		Consumer
	Commercial		Consumer		and Land		And		and
	Real Estate		Real Estate		Development		Industrial		Other		Unallocated		Total
Performing loans	$	182	$	250	$	209	$	83	$	7	$	2,915	$	3,646
Impaired loans		-		3		60		171		-		-		234
Total	$	182	$	253	$	269	$	254	$	7	$	2,915	$	3,880

There was no allowance for PCI loans at September 30, 2015 or December 31, 2014.

The following tables detail the changes in the allowance for loan losses for the nine month period ending September 30, 2015 and year ending December 31, 2014, by loan classification (amounts in thousands):

	September 30, 2015
	Commercial		Consumer Real		Construction and Land		Commercial and		Consumer
	Real Estate		Estate		Development		Industrial		and Other		Unallocated		Total
Beginning balance	$	182	$	253	$	269	$	254	$	7	$	2,915	$	3,880
Loans charged off		(139)		-		(122)		-		(215)		-		(476)
Recoveries of loans charged off		1		6		25		22		14		-		68
Provision charged to operating expense		50		12		(68)		57		194		111		356
Ending balance	$	94	$	271	$	104	$	333	$	-	$	3,026	$	3,828

	December 31, 2014
			Consumer		Construction		Commercial
	Commercial Real Estate		Real Estate		and Land Development		and Industrial		Consumer and Other		Unallocated		Total
Beginning balance	$	319	$	380	$	430	$	224	$	236	$	2,547	$	4,136
Loans charged off		-		(623)		(7)		(118)		(65)		-		(813)
Recoveries of charge-offs		2		-		-		-		123		-		125
Provision charged to														-
operating expense		(139)		496		(154)		148		(287)		368		432
Ending balance	$	182	$	253	$	269	$	254	$	7	$	2,915	$	3,880

The following is an analysis of the impaired loan portfolio detailing the related allowance recorded as of September 30, 2015 and December 31, 2014 (amounts in thousands):

							For the nine month
	At September 30, 2015						September 30, 2015
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Non PCI Loans:
Commercial real estate	$	1,974	$	1,974	$	-	$	1,955	$	89
Consumer real estate		3,652		4,352		-		4,381		73
Construction and land development		1,038		1,038		-		1,058		39
Commercial and industrial		51		51		-		466		3
Consumer and other		-		-		-				-
		6,715		7,415				7,860		204

PCI loans: None in 2015

Impaired loans with a valuation allowance:
Non PCI Loans:
Commercial real estate		-		-		-		-		-
Consumer real estate		-		-		-		147		-
Construction and land development		-		-		-		694		-
Commercial and industrial		418		418		258		478		-
Consumer and other		-		-		-		-		-
		418		418		258		1,319		-
PCI loans: None in 2015
Total impaired loans	$	7,133	$	7,833	$	258	$	9,179	$	-

							For the year ended
	At December 31, 2014						December 31, 2014
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Non PCI Loans:
Commercial real estate	$	2,180	$	2,180	$	-	$	2,247	$	193
Consumer real estate		5,155		5,692		-		5.289		362
Construction and land development		1,086		1,090		-		1,257		54
Commercial and industrial		-		-		-		-		-
Consumer and other		-		-		-		-		-
		8,421		8,962		-		8,793		609

PCI loans: None in 2014

Impaired loans with a valuation allowance:
Non PCI Loans:
Commercial real estate		-		-		-		-		-
Consumer real estate		245		245		3		294		12
Construction and land development		1,082		1,082		60		1,101		82
Commercial and industrial		538		538		171		539		59
Consumer and other		-		-		-		-		-
		1,865		1,865		234		1,934		153
PCI loans: None in 2014
Total impaired loans	$	10,286	$	10,827	$	234	$	10,727	$	762

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Special Mention: Loans in this risk grade are the equivalent of the regulatory definition of "Other Assets Especially Mentioned" classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company's credit position.

Substandard: Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans within this category.

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of September 30, 2015 and December 31, 2014 (amounts in thousands):

Non PCI Loans

	September 30, 2015
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	342,411	$	144,942	$	92,289	$	75,815	$	4,557	$	660,014
Watch		-		424		1,184		-		28		1,636
Special mention		533		-		-		246		-		779
Substandard		996		3,316		849		962		-		6,123
Doubtful		-		-		-		-		-		-
Total	$	343,940	$	148,682	$	94,322	$	77,023	$	4,585	$	668,552

PCI Loans

	September 30, 2015
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	17,883	$	12,193	$	1,893	$	2,864	$	-	$	34,833
Watch		-		267		-		-		-		267
Special mention		2,126		-		621		547		-		3,294
Substandard		1,658		948		214		673		-		3,493
Doubtful		-		-		-		-				-
Total	$	21,667	$	13,408	$	2,728	$	4,084	$	-	$	41,887
Total loans	$	365,607	$	162,090	$	97,050	$	81,107	$	4,585	$	710,439

Non PCI Loans

	December 31, 2014
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	188,113	$	71,199	$	44,484	$	33,178	$	2,314	$	339,288
Watch		56		226		6,273		-		-		6,555
Special mention		-		-		-		-		-		-
Substandard		2,180		5,609		1,712		538		-		10,039
Doubtful		-		-		-		-				-
Total	$	190,349	$	77,034	$	52,469	$	33,716	$	2,314	$	355,882

PCI Loans

	December 31, 2014
					Construction		Commercial
	Commercial		Consumer		and Land		and		Consumer
	Real Estate		Real Estate		Development		Industrial		and Other		Total
Pass	$	2,358	$	3,968	$	-	$	-	$	-	$	6,326
Watch		-		309		36		3		-		348
Special mention		-		-		-		-		-		-
Substandard		744		103		-		-		-		847
Doubtful		-		-		-		-				-
Total	$	3,102	$	4,380	$	36	$	3	$	-	$	7,521
Total loans	$	193,451	$	81,414	$	52,505	$	33,719	$	2,314	$	363,403

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places a loan on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.

The following tables present the aging of the recorded investment in loans and leases as of September 30, 2015 and December 31, 2014 (amounts in thousands):

	September 30, 2015
	30-89 Days		Past Due 90
	Past Due and		Days or More				Total				Current		Total
	Accruing		and Accruing		Nonaccrual		Past Due		PCI Loans		Loans		Loans

Commercial real estate	$	-	$	262	$	-	$	262	$	21,667	$	343,678	$	365,607
Consumer real estate		305		137		1,297		1,739		13,408		146,943		162,090
Construction and land development		-		-		-		-		2,728		94,322		97,050
Commercial and industrial		45		12		418		475		4,084		76,548		81,107
Consumer and other		12		-		-		12		-		4,573		4,585
Total	$	362	$	411	$	1,715	$	2,488	$	41,887	$	666,064	$	710,439

	December 31, 2014
	30-89 Days		Past Due 90
	Past Due and		Days or More				Total		PCI		Current		Total
	Accruing		and Accruing		Nonaccrual		Past Due		Loans		Loans		Loans

Commercial real estate	$	-	$	-	$	1,757	$	1,757	$	3,102	$	188,592	$	193,451
Consumer real estate		-		-		2,249		2,249		4,380		74,785		81,414
Construction and land development		-		-		643		643		36		51,826		52,505
Commercial and industrial		-		-		418		418		3		33,298		33,719
Consumer and other		12		-		-		12		-		2,302		2,314
Total	$	12	$	-	$	5,067	$	5,079	$	7,521	$	350,803	$	363,403

Impaired loans also include loans that the Company has elected to formally restructure when, due to the weakening credit status of a borrower, the restructuring may facilitate a repayment plan that seeks to minimize the potential losses that the Banks may have to otherwise incur. At September 30, 2015 and December 31, 2014, the Company has loans of approximately $5,015,000 and $5,563,000, respectively, that were modified in troubled debt restructurings. Troubled commercial loans are restructured by specialists within our Special Asset department and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process. These specialists are trained to reduce the Company’s overall risk and exposure to loss in the event of a restructuring through obtaining either or all of the following: improved documentation, additional guaranties, increase in curtailments, reduction in collateral terms, additional collateral or other similar strategies.

There were no troubled debt restructurings during the nine month period ended September 30,2015.

The following table presents a summary of loans that were modified as troubled debt restructurings during the nine month period ended September 30, 2014 (amounts in thousands):

		Pre-Modification		Post-Modification
		Outstanding Recorded		Outstanding Recorded
September 30, 2014	Number of Contracts	Investment		Investment

Commercial real estate	1	$	1,818	$	1,818
Consumer real estate	1		1,469		1,469
Commercial and industrial	1		53		53

There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default.

The Company has acquired loans which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

Commercial real estate	$	24,494
Consumer real estate		17,721
Construction and land development		3,660
Commercial and industrial		4,905
Consumer and other		1
Total loans	$	50,781
Less remaining purchase discount		(8,894)
		41,887
Less: Allowance for loan losses		-

Carrying amount, net of allowance	$	41,887

Activity related to the accretable portion of the purchase discount on loans acquired with deteriorated credit quality is as follows for the three and nine months period ended September 30, 2015:

	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015

Accretable yield, beginning of period	$	7,179	$	7,983
Additions		4,282		4,282
Accretion income		(162)		(886)
Reclassification from nonaccretable		55		110
Other changes, net		(521)		(656)
Accretable yield	$	10,833	$	10,833

The Company did not increase the allowance for loan losses on purchase credit impaired loans during the three or nine month periods ended September 30, 2015.

Purchased credit impaired loans acquired during the nine month period ended September 30, 2015 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

Contractual principal and interest at acquisition	$	45,678
Nonaccretable difference		(4,072)
Expected Cash flows at acquisition		41,606
Accretable yield		(4,282)
Basis in PCI loans at acquisition - estimated fair value	$	37,324