Loan and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2016

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 5: LOANS AND ALLOWANCE FOR LOAN LOSSES

				September 30,		December 31,
(In thousands)				2016		2015
Commercial and industrial			$	50,881	$	52,479
Construction and land development				44,004		43,694
Commercial real estate:
	Owner occupied			46,427		46,602
	Multi-family			45,799		45,264
	Other			119,332		111,987
		Total commercial real estate		211,558		203,853
Residential real estate:
	Consumer mortgage			67,238		70,009
	Investment property			45,065		46,664
		Total residential real estate		112,303		116,673
Consumer installment				8,996		10,220
		Total loans		427,742		426,919
Less: unearned income				(539)		(509)
		Loans, net of unearned income	$	427,203	$	426,410

Loans secured by real estate were approximately 86.0% of the Company’s total loan portfolio at September 30, 2016. At September 30, 2016, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama, and surrounding areas.

In accordance with ASC 310, a portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. As part of the Company’s quarterly assessment of the allowance, the loan portfolio is disaggregated into the following portfolio segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. Where appropriate, the Company’s loan portfolio segments are further disaggregated into classes. A class is generally determined based on the initial measurement attribute, risk characteristics of the loan, and an entity’s method for monitoring and determining credit risk.

The following describe the risk characteristics relevant to each of the portfolio segments and classes.

Commercial and industrial (“C&I”) — includes loans to finance business operations, equipment purchases, or other needs for small and medium-sized commercial customers. Also included in this category are loans to finance agricultural production. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower.

Construction and land development (“C&D”) — includes both loans and credit lines for the purpose of purchasing, carrying, and developing land into commercial developments or residential subdivisions. Also included are loans and credit lines for construction of residential, multi-family, and commercial buildings. Generally, the primary source of repayment is dependent upon the sale or refinance of the real estate collateral.

Commercial real estate (“CRE”) — includes loans disaggregated into three classes: (1) owner occupied, (2) multifamily and (3) other.

Owner occupied – includes loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized commercial customers. Generally, the primary source of repayment is the cash flow from business operations and activities of the borrower, who owns the property.

Multi-family – primarily includes loans to finance income-producing multi-family properties. Loans in this class include loans for 5 or more unit residential property and apartments leased to residents. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Other – primarily includes loans to finance income-producing commercial properties that are not owner occupied. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, and warehouses leased to local businesses. Generally, the primary source of repayment is dependent upon income generated from the real estate collateral. The underwriting of these loans takes into consideration the occupancy and rental rates, as well as the financial health of the borrower.

Residential real estate (“RRE”) — includes loans disaggregated into two classes: (1) consumer mortgage and (2) investment property.

Consumer mortgage – primarily includes first or second lien mortgages and home equity lines of credit to consumers that are secured by a primary residence or second home. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value.

Investment property – primarily includes loans to finance income-producing 1-4 family residential properties. Generally, the primary source of repayment is dependent upon income generated from leasing the property securing the loan. The underwriting of these loans takes into consideration the rental rates and property value, as well as the financial health of the borrower.

Consumer installment — includes loans to individuals both secured by personal property and unsecured. Loans include personal lines of credit, automobile loans, and other retail loans. These loans are underwritten in accordance with the Bank’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and, if applicable, property value.

The following is a summary of current, accruing past due, and nonaccrual loans by portfolio segment and class as of September 30, 2016 and December 31, 2015.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
September 30, 2016:
Commercial and industrial			$	50,840	3	—	50,843	38	$	50,881
Construction and land development				43,959	—	—	43,959	45		44,004
Commercial real estate:
	Owner occupied			46,427	—	—	46,427	—		46,427
	Multi-family			45,799	—	—	45,799	—		45,799
	Other			117,811	—	—	117,811	1,521		119,332
		Total commercial real estate		210,037	—	—	210,037	1,521		211,558
Residential real estate:
	Consumer mortgage			66,705	312	211	67,228	10		67,238
	Investment property			45,008	57	—	45,065	—		45,065
		Total residential real estate		111,713	369	211	112,293	10		112,303
Consumer installment				8,956	40	—	8,996	—		8,996
		Total	$	425,505	412	211	426,128	1,614	$	427,742


December 31, 2015:
Commercial and industrial			$	52,387	49	—	52,436	43	$	52,479
Construction and land development				43,111	—	—	43,111	583		43,694
Commercial real estate:
	Owner occupied			46,372	—	—	46,372	230		46,602
	Multi-family			45,264	—	—	45,264	—		45,264
	Other			110,467	—	—	110,467	1,520		111,987
		Total commercial real estate		202,103	—	—	202,103	1,750		203,853
Residential real estate:
	Consumer mortgage			68,579	1,105	—	69,684	325		70,009
	Investment property			46,435	229	—	46,664	—		46,664
		Total residential real estate		115,014	1,334	—	116,348	325		116,673
Consumer installment				10,179	28	—	10,207	13		10,220
		Total	$	422,794	1,411	—	424,205	2,714	$	426,919

Allowance for Loan Losses

The Company assesses the adequacy of its allowance for loan losses prior to the end of each calendar quarter. The level of the allowance is based upon management’s evaluation of the loan portfolio, past loan loss experience, current asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay (including the timing of future payment), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan loss rates, and other pertinent factors, including regulatory recommendations. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Loans are charged off, in whole or in part, when management believes that the full collectability of the loan is unlikely. A loan may be partially charged-off after a “confirming event” has occurred, which serves to validate that full repayment pursuant to the terms of the loan is unlikely.

The Company deems loans impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Collection of all amounts due according to the contractual terms means that both the interest and principal payments of a loan will be collected as scheduled in the loan agreement.

An impairment allowance is recognized if the fair value of the loan is less than the recorded investment in the loan. The impairment is recognized through the allowance. Loans that are impaired are recorded at the present value of expected future cash flows discounted at the loan’s effective interest rate, or if the loan is collateral dependent, the impairment measurement is based on the fair value of the collateral, less estimated disposal costs.

The level of allowance maintained is believed by management to be adequate to absorb probable losses inherent in the portfolio at the balance sheet date. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously charged-off.

In assessing the adequacy of the allowance, the Company also considers the results of its ongoing internal and independent loan review processes. The Company’s loan review process assists in determining whether there are loans in the portfolio whose credit quality has weakened over time and evaluating the risk characteristics of the entire loan portfolio. The Company’s loan review process includes the judgment of management, the input from our independent loan reviewers, and reviews that may have been conducted by bank regulatory agencies as part of their examination process. The Company incorporates loan review results in the determination of whether or not it is probable that it will be able to collect all amounts due according to the contractual terms of a loan.

As part of the Company’s quarterly assessment of the allowance, management divides the loan portfolio into five segments: commercial and industrial, construction and land development, commercial real estate, residential real estate, and consumer installment. The Company analyzes each segment and estimates an allowance allocation for each loan segment.

The allocation of the allowance for loan losses begins with a process of estimating the probable losses inherent for each loan segment. The estimates for these loans are established by category and based on the Company’s internal system of credit risk ratings and historical loss data. The Company calculates average losses for all loan segments using a rolling 20 quarter historical period. The estimated loan loss allocation rate for the Company’s internal system of credit risk grades is based on its experience with similarly graded loans. For loan segments where the Company believes it does not have sufficient historical loss data, the Company may make adjustments based, in part, on loss rates of peer bank groups. At September 30, 2016 and December 31, 2015, and for the periods then ended, the Company adjusted its historical loss rates for the commercial real estate portfolio segment based, in part, on loss rates of peer bank groups.

The estimated loan loss allocation for all five loan portfolio segments is then adjusted for management’s estimate of probable losses for several “qualitative and environmental” factors. The allocation for qualitative and environmental factors is particularly subjective and does not lend itself to exact mathematical calculation. This amount represents estimated probable inherent credit losses which exist, but have not yet been identified, as of the balance sheet date, and are based upon quarterly trend assessments in delinquent and nonaccrual loans, credit concentration changes, prevailing economic conditions, changes in lending personnel experience, changes in lending policies or procedures, and other influencing factors. These qualitative and environmental factors are considered for each of the five loan segments and the allowance allocation, as determined by the processes noted above, is increased or decreased based on the incremental assessment of these factors.

The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.

			September 30, 2016
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	506	744	2,092	1,061	125	$	4,528
Charge-offs			—	—	—	(7)	(1)		(8)
Recoveries			3	5	—	49	1		58
	Net recoveries		3	5	—	42	—		50
Provision for loan losses			6	(76)	140	(83)	13		—
Ending balance		$	515	673	2,232	1,020	138	$	4,578

Nine months ended:
Beginning balance		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			(83)	—	(194)	(162)	(29)		(468)
Recoveries			26	1,207	—	115	9		1,357
	Net (charge-offs) recoveries		(57)	1,207	(194)	(47)	(20)		889
Provision for loan losses			49	(1,203)	547	8	(1)		(600)
Ending balance		$	515	673	2,232	1,020	138	$	4,578

			September 30, 2015
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	681	640	2,146	1,180	239	$	4,886
Charge-offs			—	—	—	(26)	(23)		(49)
Recoveries			13	4	—	71	2		90
	Net recoveries (charge-offs)		13	4	—	45	(21)		41
Provision for loan losses			(190)	(17)	533	(122)	(4)		200
Ending balance		$	504	627	2,679	1,103	214	$	5,127

Nine months ended:
Beginning balance		$	639	974	1,928	1,119	176	$	4,836
Charge-offs			(58)	—	—	(86)	(45)		(189)
Recoveries			17	13	—	236	14		280
	Net (charge-offs) recoveries		(41)	13	—	150	(31)		91
Provision for loan losses			(94)	(360)	751	(166)	69		200
Ending balance		$	504	627	2,679	1,103	214	$	5,127

The following table presents an analysis of the allowance for loan losses and recorded investment in loans by portfolio segment and impairment methodology as of September 30, 2016 and 2015.

			Collectively evaluated (1)		Individually evaluated (2)		Total
			Allowance	Recorded	Allowance	Recorded	Allowance	Recorded
			for loan	investment	for loan	investment	for loan	investment
(In thousands)			losses	in loans	losses	in loans	losses	in loans
September 30, 2016:
Commercial and industrial		$	515	50,858	—	23	515	50,881
Construction and land development			673	43,959	—	45	673	44,004
Commercial real estate			2,196	209,840	36	1,718	2,232	211,558
Residential real estate			1,020	112,303	—	—	1,020	112,303
Consumer installment			138	8,996	—	—	138	8,996
	Total	$	4,542	425,956	36	1,786	4,578	427,742

September 30, 2015:
Commercial and industrial		$	504	47,869	—	56	504	47,925
Construction and land development			627	40,999	—	593	627	41,592
Commercial real estate			1,719	197,693	960	3,756	2,679	201,449
Residential real estate			1,103	117,863	—	—	1,103	117,863
Consumer installment			214	14,362	—	—	214	14,362
	Total	$	4,167	418,786	960	4,405	5,127	423,191

(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies (formerly FAS 5), and
	pursuant to amendments by ASU 2010-20 regarding allowance for non-impaired loans.
(2)	Represents loans individually evaluated for impairment in accordance with ASC 310-30, Receivables (formerly FAS 114), and
	pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.

Credit Quality Indicators

The credit quality of the loan portfolio is summarized no less frequently than quarterly using categories similar to the standard asset classification system used by the federal banking agencies. The following table presents credit quality indicators for the loan portfolio segments and classes. These categories are utilized to develop the associated allowance for loan losses using historical losses adjusted for qualitative and environmental factors and are defined as follows:

Pass – loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral.

Special Mention – loans with potential weakness that may, if not reversed or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans are not adversely classified and do not expose an institution to sufficient risk to warrant an adverse classification.

Substandard Accruing – loans that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These loans are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected.

Nonaccrual – includes loans where management has determined that full payment of principal and interest is not expected.

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
September 30, 2016:
Commercial and industrial			$	46,784	3,703	356	38	$	50,881
Construction and land development				43,554	53	352	45		44,004
Commercial real estate:
	Owner occupied			45,456	528	443	—		46,427
	Multi-family			45,799	—	—	—		45,799
	Other			117,006	64	741	1,521		119,332
		Total commercial real estate		208,261	592	1,184	1,521		211,558
Residential real estate:
	Consumer mortgage			61,379	2,579	3,270	10		67,238
	Investment property			43,806	106	1,153	—		45,065
		Total residential real estate		105,185	2,685	4,423	10		112,303
Consumer installment				8,849	58	89	—		8,996
		Total	$	412,633	7,091	6,404	1,614	$	427,742

December 31, 2015:
Commercial and industrial			$	48,038	4,075	323	43	$	52,479
Construction and land development				42,458	60	593	583		43,694
Commercial real estate:
	Owner occupied			45,772	381	219	230		46,602
	Multi-family			45,264	—	—	—		45,264
	Other			110,159	36	272	1,520		111,987
		Total commercial real estate		201,195	417	491	1,750		203,853
Residential real estate:
	Consumer mortgage			64,502	1,964	3,218	325		70,009
	Investment property			45,399	112	1,153	—		46,664
		Total residential real estate		109,901	2,076	4,371	325		116,673
Consumer installment				10,038	55	114	13		10,220
		Total	$	411,630	6,683	5,892	2,714	$	426,919

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off do not appear in the following tables. The related allowance generally represents the following components that correspond to impaired loans:

Individually evaluated impaired loans equal to or greater than $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real estate loans).

Individually evaluated impaired loans equal to or greater than $250,000 not secured by real estate (nonaccrual commercial and industrial and consumer installment loans).

The following tables set forth certain information regarding the Company’s impaired loans that were individually evaluated for impairment at September 30, 2016 and December 31, 2015.


				September 30, 2016
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	23	—	23
Construction and land development				151	(106)	45
Commercial real estate:
	Other			2,472	(952)	1,520
		Total commercial real estate		2,472	(952)	1,520
		Total	$	2,646	(1,058)	1,588
With allowance recorded:
Commercial real estate:
	Owner occupied			198	—	198		36
		Total commercial real estate		198	—	198		36
		Total	$	198	—	198	$	36
		Total impaired loans	$	2,844	(1,058)	1,786	$	36

(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

				December 31, 2015
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	48	—	48
Construction and land development				2,582	(1,999)	583
Commercial real estate:
	Owner occupied			308	(78)	230
	Other			2,136	(617)	1,519
		Total commercial real estate		2,444	(695)	1,749
		Total	$	5,074	(2,694)	2,380
With allowance recorded:
Commercial real estate:
	Owner occupied			1,027	—	1,027		121
		Total commercial real estate		1,027	—	1,027		121
		Total	$	1,027	—	1,027	$	121
		Total impaired loans	$	6,101	(2,694)	3,407	$	121

(1) Unpaid principal balance represents the contractual obligation due from the customer.
(2) Charge-offs and payments applied represents cumulative charge-offs taken, as well as interest payments that have been
	applied against the outstanding principal balance subsequent to the loans being placed on nonaccrual status.
(3) Recorded investment represents the unpaid principal balance less charge-offs and payments applied; it is shown before
	any related allowance for loan losses.

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class during the respective periods.

				Quarter ended September 30, 2016		Nine months ended September 30, 2016
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	26	—	36	2
Construction and land development				48	—	111	—
Commercial real estate:
	Owner occupied			465	3	850	29
	Other			1,532	—	1,662	—
		Total commercial real estate		1,997	3	2,512	29
		Total	$	2,071	3	2,659	31

				Quarter ended September 30, 2015		Nine months ended September 30, 2015
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	58	1	63	3
Construction and land development				596	—	608	—
Commercial real estate:
	Owner occupied			1,433	11	1,273	32
	Other			921	—	610	18
		Total commercial real estate		2,354	11	1,883	50
Residential real estate:
	Consumer mortgages			—	—	454	173
	Investment property			—	—	91	76
		Total residential real estate		—	—	545	249
		Total	$	3,008	12	3,099	302

Interest income recognized for the nine months ended September 30, 2015 included non-routine interest recoveries of $225 thousand related to two impaired residential real estate loans that paid off in June 2015. Excluding the interest recoveries on these two loans, interest income recognized on impaired loans for the nine months ended September 30, 2015 would have been $77 thousand.

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers that are experiencing financial difficulty. A concession may include, but is not limited to, delays in required payments of principal and interest for a specified period, reduction of the stated interest rate of the loan, reduction of accrued interest, extension of the maturity date, or reduction of the face amount or maturity amount of the debt. A concession has been granted when, as a result of the restructuring, the Bank does not expect to collect all amounts due, including interest at the original stated rate. A concession may have also been granted if the debtor is not able to access funds elsewhere at a market rate for debt with similar risk characteristics as the restructured debt. In making the determination of whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. As part of the credit approval process, the restructured loans are evaluated for adequate collateral protection in determining the appropriate accrual status at the time of restructure.

Similar to other impaired loans, TDRs are measured for impairment based on the present value of expected payments using the loan’s original effective interest rate as the discount rate, or the fair value of the collateral, less selling costs if the loan is collateral dependent. If the recorded investment in the loan exceeds the measure of fair value, impairment is recognized by establishing a valuation allowance as part of the allowance for loan losses or a charge-off to the allowance for loan losses. In periods subsequent to the modification, all TDRs are individually evaluated for possible impairment.

The following is a summary of accruing and nonaccrual TDRs, which are included in the impaired loan totals, and the related allowance for loan losses, by portfolio segment and class as of September 30, 2016 and December 31, 2015.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
September 30, 2016
Commercial and industrial			$	23	—	23	$	—
Construction and land development				—	45	45		—
Commercial real estate:
	Owner occupied			198	—	198		36
	Other			—	1,520	1,520		—
		Total commercial real estate		198	1,520	1,718		36
		Total	$	221	1,565	1,786	$	36

December 31, 2015
Commercial and industrial			$	48	—	48	$	—
Construction and land development				—	582	582		—
Commercial real estate:
	Owner occupied			1,027	230	1,257		121
		Total commercial real estate		1,027	230	1,257		121
		Total	$	1,075	812	1,887	$	121

The following table summarizes loans modified in a TDR during the respective periods both before and after their modification.

			Quarter ended September 30,				Nine months ended September 30,
					Pre-	Post -			Pre-	Post -
					modification	modification			modification	modification
			Number		outstanding	outstanding	Number		outstanding	outstanding
			of		recorded	recorded	of		recorded	recorded
(Dollars in thousands)			contracts		investment	investment	contracts		investment	investment
2016:
Commercial real estate:
	Other		—	$	—	—	1	$	1,509	1,509
		Total commercial real estate	—		—	—	1		1,509	1,509
		Total	—	$	—	—	1	$	1,509	1,509
2015:
Commercial and industrial			—	$	—	—	1	$	61	66
Construction and land development			—		—	—	1		116	113
Commercial real estate:
	Owner occupied		1		216	218	1		216	218
	Other		—		—	—	1		592	592
		Total commercial real estate	1		216	218	2		808	810
		Total	1	$	216	218	4	$	985	989

The majority of the loans modified in a TDR during the quarter and nine month ended September 30, 2016 and 2015, included permitting delays in required payments of principal and/or interest or where the only concession granted by the Company was that the interest rate at renewal was considered to be less than a market rate.

There were no TDRs with default payments during the quarter and nine months ended September 30, 2016. The following table summarizes the recorded investment in loans modified in a TDR within the previous 12 months for which there was a payment default (defined as 90 days or more past due) during the respective periods.

			Quarter ended September 30,			Nine months ended September 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment⁽¹⁾	Contracts		investment⁽¹⁾
2015:
Commercial real estate:
	Owner occupied		—	$	—	1	$	261
		Total commercial real estate	—		—	1		261
Residential real estate:
	Investment property		—		—	1		150
		Total residential real estate	—		—	1		150
		Total	—	$	—	2	$	411
(1) Amount as of applicable month end during the respective period for which there was a payment default.