LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2016

Loans and Leases Receivable Disclosure [Abstract]

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures, which are reviewed on a regular basis. Each class of loans is subject to risks that could have an adverse impact on the credit quality of the loan portfolio. Loans are primarily made in the Company's market area in North Carolina, principally Johnston, Wake, Harnett, Duplin, Sampson, and Moore counties. There have been no significant changes to the loan class definitions outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The classification of loan segments as of March 31, 2016 and December 31, 2015 are summarized as follows (amounts in thousands):



	March 31, 2016			December 31, 2015
Commercial and industrial	$	24,578		$	23,163
Commercial construction and land development	50,970			50,510
Commercial real estate	218,594			208,737
Residential construction	40,342			36,618
Residential mortgage	131,338			128,442
Consumer	6,380			6,638
Consumer credit cards	1,994			2,240
Business credit cards	1,402			1,168
Other	987			1,257
Gross loans	476,585			458,773
Less:
Net deferred loan fees	(742		)	(460		)
Net loans before allowance	475,843			458,313
Allowance for loan losses	(9,084		)	(9,616		)
Total net loans	$	466,759		$	448,697

Loans held for sale	$	730		$	1,145

Allowance for Loan Losses and Recorded Investment in Loans

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on at least a quarterly basis, which includes a review of loans both specifically and collectively evaluated for impairment.

The following tables are an analysis of the allowance for loan losses by loan segment as of and for the three months ended March 31, 2016 and 2015 and as of and for the twelve months ended December 31, 2015 (amounts in thousands).



	Three Months Ended
	March 31, 2016
				Real Estate
Allowances for loan losses:	Commercial and Industrial			Commercial Construction and Land Development			Commercial Real Estate			Residential Construction			Residential Mortgage			Consumer			Other		Totals
Balance, beginning of period	$	221		$	5,470		$	2,268		$	305		$	1,191		$	113		$	48	$	9,616

Provision for loan losses	28			(441		)	545			(34		)	(99		)	(3		)	4		—

Loans charged-off	(24		)	—			(565		)	—			—			(41		)	—		(630		)
Recoveries	27			11			2			21			10			26			1		98
Net recoveries (charge-offs)	3			11			(563		)	21			10			(15		)	1		(532		)

Balance, end of period	$	252		$	5,040		$	2,250		$	292		$	1,102		$	95		$	53	$	9,084
Ending balance: individually evaluated for impairment	$	2		$	649		$	—		$	—		$	—		$	—		$	—	$	651
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	250		$	4,391		$	2,250		$	292		$	1,102		$	95		$	53	$	8,433

Loans:
Balance, end of period	$	25,980		$	50,970		$	218,594		$	40,342		$	131,338		$	8,374		$	987	$	476,585
Ending balance: individually evaluated for impairment	$	78		$	1,421		$	1,775		$	261		$	1,262		$	—		$	—	$	4,797
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	25,902		$	49,549		$	216,819		$	40,081		$	130,076		$	8,374		$	987	$	471,788

⁽¹⁾ At March 31, 2016, there were $302,000 in impaired loans collectively evaluated for impairment with $43,000 in reserves established.



	Three Months Ended
	March 31, 2015
				Real Estate
Allowances for loan losses:	Commercial and Industrial			Commercial Construction and Land Development			Commercial Real Estate			Residential Construction			Residential Mortgage			Consumer			Other			Totals
Balance, beginning of period	$	119		$	5,105		$	2,382		$	436		$	1,206		$	89		$	40		$	9,377

Provision for loan losses	14			(322		)	108			(24		)	214			15			(5		)	—

Loans charged-off	(9		)	—			(4		)	—			(148		)	(54		)	—			(215		)
Recoveries	46			319			184			—			46			32			1			628
Net recoveries (charge-offs)	37			319			180			—			(102		)	(22		)	1			413

Balance, end of period	$	170		$	5,102		$	2,670		$	412		$	1,318		$	82		$	36		$	9,790
Ending balance: individually evaluated for impairment	$	—		$	508		$	125		$	—		$	—		$	3		$	—		$	636
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	170		$	4,594		$	2,545		$	412		$	1,318		$	79		$	36		$	9,154

Loans:
Balance, end of period	$	27,432		$	53,345		$	208,342		$	28,912		$	132,212		$	8,787		$	281		$	459,311
Ending balance: individually evaluated for impairment	$	—		$	6,123		$	4,103		$	—		$	2,125		$	3		$	—		$	12,354
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	27,432		$	47,222		$	204,239		$	28,912		$	130,087		$	8,784		$	281		$	446,957

⁽¹⁾ At March 31, 2015, there were $210,000 impaired loans collectively evaluated for impairment with $31,000 in reserves established.



	Twelve Months Ended
	December 31, 2015
				Real Estate
Allowances for loan losses:	Commercial and Industrial			Commercial Construction and Land Development			Commercial Real Estate			Residential Construction			Residential Mortgage			Consumer			Other			Totals
Balance, beginning of period	$	119		$	5,105		$	2,382		$	436		$	1,206		$	89		$	40		$	9,377

Provision for loan losses	(58		)	(615		)	71			(90		)	497			121			74			—

Loans charged-off	(74		)	(196		)	(578		)	(41		)	(713		)	(210		)	(69		)	(1,881		)
Recoveries	234			1,176			393			—			201			113			3			2,120
Net recoveries (charge-offs)	160			980			(185		)	(41		)	(512		)	(97		)	(66		)	239

Balance, end of period	$	221		$	5,470		$	2,268		$	305		$	1,191		$	113		$	48		$	9,616
Ending balance: individually evaluated for impairment	$	2		$	989		$	228		$	—		$	—		$	—		$	—		$	1,219
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	219		$	4,481		$	2,040		$	305		$	1,191		$	113		$	48		$	8,397

Loans:
Balance, end of period	$	24,331		$	50,510		$	208,737		$	36,618		$	128,442		$	8,878		$	1,257		$	458,773
Ending balance: individually evaluated for impairment	$	84		$	2,564		$	3,957		$	721		$	1,305		$	—		$	—		$	8,631
Ending balance: collectively evaluated for impairment ⁽¹⁾	$	24,247		$	47,946		$	204,780		$	35,897		$	127,137		$	8,878		$	1,257		$	450,142

⁽¹⁾ At December 31, 2015, there were $295,000 in impaired loans collectively evaluated for impairment with $42,000 in reserves established.

Credit Risk

The Company uses an internal grading system to assign the degree of inherent risk on each individual loan and monitors trends in portfolio quality. The grade is initially assigned by the lending officer or credit administration and reviewed by the loan administration function throughout the life of the loan. There have been no significant changes in credit grade definitions as outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The following tables are an analysis of the creditworthiness by loan class and credit card portfolio exposure as of March 31, 2016 and December 31, 2015 (amounts in thousands).



	March 31, 2016
			Real Estate
	Commercial and Industrial		Commercial Construction and Land Development		Commercial Real Estate		Residential Construction		Residential Mortgage		Consumer		Other		Totals
1 - Lowest Risk	$	1,899	$	56	$	—	$	—	$	—	$	1,701	$	—	$	3,656
2 - Strong	1,029		864		2,778		245		15,082		480		6		20,484
3 - Standard	10,595		10,621		91,544		5,462		53,170		1,145		454		172,991
4 - Acceptable	10,646		35,830		114,161		34,374		56,464		2,989		505		254,969
5 - Special Mention	296		2,131		7,659		—		5,321		65		—		15,472
6-8 - Substandard	113		1,468		2,452		261		1,301		—		22		5,617
	$	24,578	$	50,970	$	218,594	$	40,342	$	131,338	$	6,380	$	987	$	473,189



	Consumer - Credit Card		Business- Credit Card
Performing	$	1,975	$	1,369
Nonperforming	19		33
Total	$	1,994	$	1,402

Total Loans			$	476,585



	December 31, 2015
			Real Estate
	Commercial and Industrial		Commercial Construction and Land Development		Commercial Real Estate		Residential Construction		Residential Mortgage		Consumer		Other		Totals
1 - Lowest Risk	$	1,942	$	—	$	—	$	—	$	—	$	1,773	$	—	$	3,715
2 - Strong	971		749		2,280		—		15,187		386		7		19,580
3 - Standard	10,530		11,262		94,357		4,296		56,493		1,250		469		178,657
4 - Acceptable	9,297		33,832		103,740		31,431		50,226		3,170		757		232,453
5 - Special Mention	304		2,486		4,444		170		5,231		59		—		12,694
6-8 - Substandard	119		2,181		3,916		721		1,305		—		24		8,266
	$	23,163	$	50,510	$	208,737	$	36,618	$	128,442	$	6,638	$	1,257	$	455,365



	Consumer- Credit Card		Business- Credit Card
Performing	$	2,211	$	1,133
Non Performing	29		35
Total	$	2,240	$	1,168

Total Loans			$	458,773

Asset Quality

The following tables are an age analysis of past due loans, including those on nonaccrual by loan class, as of March 31, 2016 and December 31, 2015 (amounts in thousands).



	March 31, 2016
	30-89 Days Past Due		Nonaccrual		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans
Commercial & industrial	$	—	$	113	$	—	$	113	$	24,465	$	24,578
Commercial construction & land development	202		1,467		—		1,669		49,301		50,970
Commercial real estate	1		1,475		—		1,476		217,118		218,594
Residential construction	—		261		—		261		40,081		40,342
Residential mortgage	87		1,246		—		1,333		130,005		131,338
Consumer	39		—		—		39		6,341		6,380
Consumer credit cards	61		—		19		80		1,914		1,994
Business credit cards	79		—		33		112		1,290		1,402
Other loans	22		—		—		22		965		987
Total	$	491	$	4,562	$	52	$	5,105	$	471,480	$	476,585



	December 31, 2015
	30-89 Days Past Due		Nonaccrual		Greater than 90 Days Past Due		Total Past Due		Current		Total Loans
Commercial & industrial	$	56	$	119	$	—	$	175	$	22,988	$	23,163
Commercial construction & land development	211		1,626		—		1,837		48,673		50,510
Commercial real estate	—		2,929		—		2,929		205,808		208,737
Residential construction	133		721		—		854		35,764		36,618
Residential mortgage	499		1,203		—		1,702		126,740		128,442
Consumer	71		—		—		71		6,567		6,638
Consumer credit cards	95		—		29		124		2,116		2,240
Business credit cards	107		—		36		143		1,025		1,168
Other loans	—		—		—		—		1,257		1,257
Total	$	1,172	$	6,598	$	65	$	7,835	$	450,938	$	458,773

Nonperforming assets

Nonperforming assets at March 31, 2016 and December 31, 2015 consist of the following (amounts in thousands):



	March 31, 2016		December 31, 2015
Loans past due ninety days or more and still accruing	$	52	$	65
Nonaccrual loans	4,562		6,598
Foreclosed assets	2,482		1,760
Total nonperforming assets	$	7,096	$	8,423

Impaired Loans

The following tables illustrate the impaired loans by loan class as of March 31, 2016 and December 31, 2015 (amounts in thousands).



	March 31, 2016
	As of Date						Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	61	$	61	$	—	$	61	$	—
Commercial construction & land development	686		1,504		—		693		—
Commercial real estate	1,775		2,153		—		1,787		6
Residential construction	261		262		—		249		—
Residential mortgage	1,261		1,289		—		1,277		3
Subtotal:	4,044		5,269		—		4,067		9

With an allowance recorded:
Commercial and industrial	52		63		7		52		—
Commercial construction & land development	782		1,161		655		785		—
Residential mortgage	221		299		32		222		2
Subtotal:	1,055		1,523		694		1,059		2

Totals:
Commercial	3,356		4,942		662		3,378		6
Residential	1,743		1,850		32		1,748		5
Grand Total	$	5,099	$	6,792	$	694	$	5,126	$	11



	December 31, 2015
	As of Date						Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	67	$	67	$	—	$	63	$	3
Commercial construction & land development	737		1,706		—		1,031		19
Commercial real estate	2,258		2,614		—		2,020		50
Residential construction	721		722		—		408		8
Residential mortgage	1,305		1,312		—		1,191		51
Subtotal:	5,088		6,421		—		4,713		131

With an allowance recorded:
Commercial and industrial	52		63		7		58		4
Commercial construction & land development	1,948		3,020		1,006		2,086		122
Commercial real estate	1,699		1,699		228		1,713		79
Residential mortgage	139		217		20		183		8
Subtotal:	3,838		4,999		1,261		4,040		213

Totals:
Commercial	6,761		9,169		1,241		6,971		277
Residential	2,165		2,251		20		1,782		67
Grand Total:	$	8,926	$	11,420	$	1,261	$	8,753	$	344

Troubled Debt Restructurings

Loans are classified as a troubled debt restructuring ("TDR") when, for economic or legal reasons which result in a debtor experiencing financial difficulties, the Bank grants a concession through a modification of the original loan agreement that would not otherwise be considered. Generally concessions are granted as a result of a borrower's inability to meet the contractual repayment obligations of the initial loan terms and in the interest of improving the likelihood of recovery of the loan. We may grant these concessions by a number of means such as (1) forgiving principal or interest, (2) reducing the stated interest rate to a below market rate, (3) deferring principal payments, (4) changing repayment terms from amortizing to interest only, (5) extending the repayment period, or (6) accepting a change in terms based upon a bankruptcy plan. However, the Bank only restructures loans for borrowers that demonstrate the willingness and capacity to repay the loan under reasonable terms and where the Bank has sufficient protection provided by the cash flow of the underlying collateral or business.

The Bank's policy with respect to accrual of interest on loans restructured in a TDR process follows relevant supervisory guidance. If a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is considered and the loan is considered performing. If the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status. If the borrower was materially delinquent on payments prior to the restructuring but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual and nonperforming until such time as continued performance has been demonstrated, which is typically a period of at least six consecutive payments.

The following table provides a summary of loans modified as TDRs at March 31, 2016 and December 31, 2015 (amounts in thousands).



	March 31, 2016
	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
Commercial construction and land development	$	—	$	404	$	404	$	—
Commercial real estate	300		551		851		—
Residential mortgage	223		—		223		—
Total modifications	$	523	$	955	$	1,478	$	—



	December 31, 2015
	Accrual		Nonaccrual		Total TDRs		Allowance for Loan Losses Allocated
Commercial construction and land development	$	1,059	$	557	$	1,616	$	447
Commercial real estate	1,028		574		1,602		20
Residential mortgage	226		—		226		—
Total modifications	$	2,313	$	1,131	$	3,444	$	467

There were no new TDRs made to borrowers for the three months ended March 31, 2016 and there were no TDR loans modified during the previous twelve months that had a payment default for the three months ended March 31, 2016.