Loan and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2016

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

				December 31
(In thousands)				2016		2015
Commercial and industrial			$	49,850	$	52,479
Construction and land development				41,650		43,694
Commercial real estate:
	Owner occupied			49,745		46,602
	Multifamily			46,998		45,264
	Other			123,696		111,987
		Total commercial real estate		220,439		203,853
Residential real estate:
	Consumer mortgage			65,564		70,009
	Investment property			45,291		46,664
		Total residential real estate		110,855		116,673
Consumer installment				8,712		10,220
		Total loans		431,506		426,919
Less: unearned income				(560)		(509)
		Loans, net of unearned income	$	430,946	$	426,410

Loans secured by real estate were approximately 86.4% of the total loan portfolio at December 31, 2016. At December 31, 2016, the Company’s geographic loan distribution was concentrated primarily in Lee County, Alabama and surrounding areas.

In accordance with ASC 310, Receivables, 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.

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 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) multi-family 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.

Multifamily – 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. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, and warehouses leased generally to local businesses and 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.

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 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 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 class as of December 31, 2016 and 2015.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
December 31, 2016:
Commercial and industrial			$	49,747	66	—	49,813	37	$	49,850
Construction and land development				41,223	395	—	41,618	32		41,650
Commercial real estate:
	Owner occupied			49,564	43	—	49,607	138		49,745
	Multifamily			46,998	—	—	46,998	—		46,998
	Other			121,608	199	—	121,807	1,889		123,696
		Total commercial real estate		218,170	242	—	218,412	2,027		220,439
Residential real estate:
	Consumer mortgage			64,059	1,282	—	65,341	223		65,564
	Investment property			45,243	19	—	45,262	29		45,291
		Total residential real estate		109,302	1,301	—	110,603	252		110,855
Consumer installment				8,652	38	—	8,690	22		8,712
		Total	$	427,094	2,042	—	429,136	2,370	$	431,506

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
	Multifamily			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

The gross interest income which would have been recorded under the original terms of those nonaccrual loans had they been accruing interest, amounted to approximately $107 thousand and $133 thousand for the years ended December 31, 2016 and 2015, respectively.

Allowance for Loan Losses

The allowance for loan losses as of and for the years ended December 31, 2016 and 2015, is presented below.

		Year ended December 31
(In thousands)			2016		2015
Beginning balance		$	4,289	$	4,836
Charged-off loans			(540)		(1,114)
Recovery of previously charged-off loans			1,379		367
	Net charge-offs		839		(747)
Provision for loan losses			(485)		200
Ending balance		$	4,643	$	4,289

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, 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, independent loan review process. 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 loans. 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 these types of loans. 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 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 December 31, 2016 and 2015, and for the years 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 Company regularly re-evaluates its practices in determining the allowance for loan losses. Beginning with the quarter ended December 31, 2016, the Company implemented certain refinements to its allowance for loan losses methodology in order to better capture the effects of the most recent economic cycle on the Company’s loan loss experience. First, the Company increased its look-back period for calculating average losses for all loan segments to 31 quarters. Prior to December 31, 2016, the Company calculated average losses for all loan segments using a rolling 20 quarter look-back period. The Company will likely continue to increase its look-back period to incorporate the effects of at least one economic downturn in its loss history. The Company believes the extension of its look-back period is appropriate due to the risks inherent in the loan portfolio. Absent this extension, the early cycle periods in which the Company experienced significant losses would be excluded from the determination of the allowance for loan losses and its balance would decrease. Second, the Company increased the range of basis point adjustments allowed for qualitative and environmental factors to approximately 200 basis points, an increase of 65 basis points, or 48%, compared to the 135 basis point range used prior to December 31, 2016. After performing sensitivity testing of its calculation of the allowance for loan losses, the Company determined that it should increase the range of basis points allowed for qualitative and environmental factors in order to provide sufficient latitude in determining estimated probable credit losses during periods of economic stress. Third, the Company reduced the percentage allocation for qualitative and environmental factors on a weighted average basis to 21% of total basis points allocable at December 31, 2016, compared to 25% of total basis points allocable at September 30, 2016. The Company believes a decrease in the percentage allocation of qualitative environmental factors on a weighted average basis was appropriate due to the extension of its look-back period described above. If the Company did not make the changes described above, the Company’s calculated allowance for loan loss allocation would have decreased by approximately $0.9 million, or 0.21% of total loans, at December 31, 2016. Other than the changes discussed above, the Company has not made any material changes to its methodology that would impact the calculation of the allowance for loan losses or provision for loan losses for the periods included in the accompanying consolidated balance sheets and statements of earnings.

The following table details the changes in the allowance for loan losses by portfolio segment for the years ended December 31, 2016 and 2015.

(in thousands)			Commercial and industrial	Construction and land Development	Commercial Real Estate	Residential Real Estate	Consumer Installment		Total
Balance, December 31, 2014		$	639	974	1,928	1,119	176	$	4,836
Charge-offs			(100)	—	(866)	(89)	(59)		(1,114)
Recoveries			22	17	—	313	15		367
	Net (charge-offs) recoveries		(78)	17	(866)	224	(44)		(747)
Provision			(38)	(322)	817	(284)	27		200
Balance, December 31, 2015		$	523	669	1,879	1,059	159	$	4,289
Charge-offs			(97)	—	(194)	(182)	(67)		(540)
Recoveries			29	1,212	—	127	11		1,379
	Net (charge-offs) recoveries		(68)	1,212	(194)	(55)	(56)		839
Provision			85	(1,069)	386	103	10		(485)
Balance, December 31, 2016		$	540	812	2,071	1,107	113	$	4,643

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 December 31, 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
December 31, 2016:
Commercial and industrial		$	540	49,835	—	15	540	49,850
Construction and land development			812	41,618	—	32	812	41,650
Commercial real estate			2,040	218,356	31	2,083	2,071	220,439
Residential real estate			1,107	110,855	—	—	1,107	110,855
Consumer installment			113	8,712	—	—	113	8,712
	Total	$	4,612	429,376	31	2,130	4,643	431,506

December 31, 2015:
Commercial and industrial			$	523	52,431	—	48	523	52,479
Construction and land development				669	43,111	—	583	669	43,694
Commercial real estate				1,758	201,077	121	2,776	1,879	203,853
Residential real estate				1,059	116,673	—	—	1,059	116,673
Consumer installment				159	10,220	—	—	159	10,220
		Total	$	4,168	423,512	121	3,407	4,289	426,919

(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 unimpaired 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 in doubt.

(In thousands)				Pass	Special Mention	Substandard Accruing	Nonaccrual		Total loans
December 31, 2016
Commercial and industrial			$	49,558	22	233	37	$	49,850
Construction and land development				41,165	113	340	32		41,650
Commercial real estate:
	Owner occupied			48,788	414	405	138		49,745
	Multifamily			46,998	—	—	—		46,998
	Other			121,326	32	449	1,889		123,696
		Total commercial real estate		217,112	446	854	2,027		220,439
Residential real estate:
	Consumer mortgage			59,450	2,613	3,278	223		65,564
	Investment property			44,109	105	1,048	29		45,291
		Total residential real estate		103,559	2,718	4,326	252		110,855
Consumer installment				8,580	20	90	22		8,712
		Total	$	419,974	3,319	5,843	2,370	$	431,506

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

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

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

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


				December 31, 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			$	15	—	15
Construction and land development				140	(108)	32
Commercial real estate:
	Other			2,874	(984)	1,890
		Total commercial real estate		2,874	(984)	1,890
		Total	$	3,029	(1,092)	1,937
With allowance recorded:
Commercial real estate:
	Owner occupied			193	—	193		31
		Total commercial real estate		193	—	193		31
		Total	$	193	—	193	$	31
		Total impaired loans	$	3,222	(1,092)	2,130	$	31

(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.
(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.
(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.

			Year ended December 31, 2016			Year ended December 31, 2015
				Average	Total interest		Average	Total interest
				recorded	income		recorded	income
(In thousands)				investment	recognized		investment	recognized
Impaired loans:
Commercial and industrial			$	31	2	$	60	4
Construction and land
	development			94	—		603	—
Commercial real estate:
	Owner occupied			699	31		1,328	62
	Other			1,687	—		911	18
		Total commercial real estate		2,386	31		2,239	80
Residential real estate:
	Consumer mortgages			—	—		349	173
	Investment property			—	—		70	76
		Total residential real estate		—	—		419	249
		Total	$	2,511	33	$	3,321	333

Interest income recognized for 2015 included 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 2015 would have been $108 thousand.

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). In the normal course of business, management may grant concessions to borrowers who 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 determining whether a loan modification is a TDR, the Company considers the individual facts and circumstances surrounding each modification. In determining the appropriate accrual status at the time of restructure, the Company evaluates whether a restructured loan has adequate collateral protection, among other factors.

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 evaluated individually, including those that have payment defaults, for possible impairment.

The following is a summary of accruing and nonaccrual TDRs and the related loan losses, by portfolio segment and class.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
December 31, 2016
Commercial and industrial			$	15	—	15	$	—
Construction and land development				—	32	32		—
Commercial real estate:
	Owner occupied			193	—	193		31
	Other			—	1,818	1,818		—
		Total commercial real estate		193	1,818	2,011		31
		Total	$	208	1,850	2,058	$	31

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

At December 31, 2016, there were no significant outstanding commitments to advance additional funds to customers whose loans had been restructured.

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

					Pre-	Post-
					modification	modification
					outstanding	outstanding
			Number of		recorded	recorded
($ in thousands)			contracts		investment	investment
December 31, 2016
Commercial real estate:
	Other		3	$	3,147	3,137
		Total commercial real estate	3		3,147	3,137
		Total	3	$	3,147	3,137
December 31, 2015
Commercial and industrial			1	$	61	66
Construction and land development			1		116	113
Commercial real estate:
	Owner occupied		1		216	218
	Other		1		592	592
		Total commercial real estate	2		808	810
		Total	4	$	985	989

The majority of the loans modified in a TDR during the years ended December 31, 2016 and 2015, respectively, included 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 not considered to be a market rate.

The Company had no TDRs with a payment default during 2016. The following table summarizes the recorded investment in loans modified in a TDR within the previous twelve months for which there was a payment default (defined as 90 days or more past due) during 2015.

			Number of		Recorded
($ in thousands)			Contracts		investment (1)
December 31, 2015
Commercial real estate:
	Owner occupied		1	$	262
		Total commercial real estate	1		262
Residential real estate:
	Investment property		1		150
		Total residential real estate	1		150
		Total	2	$	412
(1) Amount as of applicable month end during the respective year for which there was a payment default.