LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2015

LOANS AND ALLOWANCE FOR LOAN LOSSES [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans as of September 30, 2015 and December 31, 2014 were as follows:

(dollars in thousands)	September 30, 2015			December 31, 2014
Commercial loans	$	64,658		$	57,876
Real estate mortgage loans:
Residential		74,979			71,002
Commercial		229,165			222,468
Construction and land		29,799			22,319
Consumer and other loans		1,513			1,489
Loans, gross		400,114			375,154
Less:
Net deferred loan fees		(603	)		(498	)
Allowance for loan losses		(12,570	)		(14,377	)
Loans, net	$	386,941		$	360,279

Loans acquired as a result of the merger with Atlantic BancGroup, Inc. (ABI) were recorded at fair value on the date of acquisition. The amounts reported in the table above are net of the fair value adjustments.  The table below reflects the contractual amount of purchased loans less the discount to principal balances remaining from these fair value adjustments by class of loan as of September 30, 2015 and December 31, 2014. This discount will be accreted into interest income as deemed appropriate over the remaining term of the related loans or to support unidentified losses.

(dollars in thousands) September 30, 2015	Gross Contractual Amount Receivable		Discount		Carrying Amount
Commercial loans	$	1,557	$	115	$	1,442
Real estate mortgage loans:
Residential		12,847		616		12,231
Commercial		32,683		1,834		30,849
Construction and land		2,907		235		2,672
Consumer and other loans		366		3		363
Total	$	50,360	$	2,803	$	47,557

December 31, 2014	Gross Contractual Amount Receivable		Discount		Carrying Amount
Commercial loans	$	1,758	$	144	$	1,614
Real estate mortgage loans:
Residential		15,748		761		14,987
Commercial		37,481		2,167		35,314
Construction and land		3,452		334		3,118
Consumer and other loans		400		3		397
Total	$	58,839	$	3,409	$	55,430

The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. The three portfolio segments identified by the Company are described below.

Commercial Loans

Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from operating cash flows. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, loans are secured by a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured with short-term assets whereas long-term loans are primarily secured with long-term assets. Credit risk is mitigated by the diversity and number of borrowers as well as loan type within the commercial portfolio.

Real Estate Mortgage Loans

Real estate mortgage loans are typically segmented into three classes:  commercial real estate, residential real estate and construction and land development. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the underwriting guidelines authorized by the Bank’s Board of Directors. Such standards include, among other factors, loan-to-value limits, debt service coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Bank’s Board, including repayment capacity and source, value of the underlying property, credit history, stability and purchaser guidelines. Construction loans to borrowers are to finance the construction of owner occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Bank carefully monitors these loans with on-site inspections and requires the receipt of invoices and lien waivers prior to advancing funds. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Bank considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Bank also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development of either commercial or residential use by the borrower. The Bank carefully analyzes the intended use of the property and the viability thereof.

Repayment of real estate loans is primarily dependent upon the personal income or business income generated by the secured property of the borrowers, which can be impacted by the economic conditions in their market area. Risk is mitigated by the fact that the properties securing the Company’s real estate loan portfolio are diverse in type and spread over a large number of borrowers.

Consumer and Other Loans

Consumer and other loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. The Company also offers home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels.  Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014 was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2015			2014			2015			2014
Allowance at beginning of period	$	12,861		$	14,616		$	14,377		$	15,760
Charge-offs:
Commercial loans		(4	)		(70	)		(170	)		(272	)
Real estate mortgage loans		(874	)		(545	)		(1,264	)		(2,034	)
Consumer and other loans		-			(154	)		(4	)		(170	)
Total charge-offs		(878	)		(769	)		(1,438	)		(2,476	)
Recoveries:
Commercial loans		14			10			53			37
Real estate mortgage loans		457			1,306			1,436			1,545
Consumer and other loans		116			7			153			17
Total recoveries		587			1,323			1,642			1,599
Net (charge-offs) recoveries		(291	)		554			204			(877	)
Provision for loan losses charged to operating expenses:
Commercial loans		(1	)		(26	)		(43	)		102
Real estate mortgage loans		(15	)		(312	)		(1,271	)		(73	)
Consumer and other loans		16			338			(697	)		258
Total provision		-			-			(2,011	)		287
Allowance at end of period	$	12,570		$	15,170		$	12,570		$	15,170

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2015 and December 31, 2014:

(dollars in thousands) September 30, 2015	Commercial Loans		Real Estate Mortgage Loans		Consumer and Other Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	59	$	1,526	$	-	$	1,585
Collectively evaluated for impairment		1,072		9,536		377		10,985
Loans acquired with deteriorated credit quality		-		-		-		-
Total ending allowance balance	$	1,131	$	11,062	$	377	$	12,570
Loans:
Loans individually evaluated for impairment	$	59	$	14,454	$	23	$	14,536
Loans collectively evaluated for impairment		64,517		308,102		1,490		374,109
Loans acquired with deteriorated credit quality		82		11,387		-		11,469
Total ending loans balance	$	64,658	$	333,943	$	1,513	$	400,114

December 31, 2014	Commercial Loans		Real Estate Mortgage Loans		Consumer and Other Loans		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	21	$	539	$	-	$	560
Collectively evaluated for impairment		1,270		11,622		925		13,817
Loans acquired with deteriorated credit quality		-		-		-		-
Total ending allowance balance	$	1,291	$	12,161	$	925	$	14,377
Loans:
Loans individually evaluated for impairment	$	21	$	16,033	$	28	$	16,082
Loans collectively evaluated for impairment		57,749		285,371		1,461		344,581
Loans acquired with deteriorated credit quality		106		14,385		-		14,491
Total ending loans balance	$	57,876	$	315,789	$	1,489	$	375,154

The following table presents loans individually evaluated for impairment, by class of loans as of September 30, 2015 and December 31, 2014:

	September 30, 2015						December 31, 2014
(dollars in thousands)	Unpaid Principal  Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded  Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial loans	$	-	$	-	$	-	$	-	$	-	$	-
Real estate mortgage loans:
Residential		790		734		-		2,288		2,211		-
Commercial		9,173		8,675		-		14,012		11,104		-
Construction and land		1,100		1,071		-		1,174		1,126		-
Consumer and other loans		26		23		-		31		28		-
Subtotal		11,089		10,503		-		17,505		14,469		-
With an allowance recorded:
Commercial loans		60		59		59		21		21		21
Real estate mortgage loans:
Residential		1,797		1,740		693		692		629		103
Commercial		1,957		1,948		655		489		489		214
Construction and land		332		286		178		493		474		222
Consumer and other loans		-		-		-		-		-		-
Subtotal		4,146		4,033		1,585		1,695		1,613		560
Total	$	15,235	$	14,536	$	1,585	$	19,200	$	16,082	$	560

The following table presents the average recorded investment in impaired loans and the related interest income recognized during impairment for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(dollars in thousands)	Average Impaired Loans		Interest Income		Cash Basis		Average Impaired Loans		Interest  Income		Cash Basis
With no related allowance recorded:
Commercial loans	$	-	$	-	$	-	$	56	$	-	$	-
Real estate mortgage loans:
Residential		806		5		5		884		16		16
Commercial		7,530		72		72		9,015		349		349
Construction and land		1,078		9		9		1,191		28		28
Consumer and other loans		23		-		-		25		-		-
Subtotal		9,437		86		86		11,171		393		393
With an allowance recorded:
Commercial loans		61		-		-		62		-		-
Real estate mortgage loans:
Residential		1,742		5		5		939		15		16
Commercial		474		6		6		480		17		17
Construction and land		288		-		-		294		-		-
Consumer and other loans		-		-		-		-		-		-
Subtotal		2,565		11		11		1,775		32		33
Total	$	12,002	$	97	$	97	$	12,946	$	425	$	426

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(dollars in thousands)	Average  Impaired Loans		Interest Income		Cash Basis		Average Impaired Loans		Interest Income		Cash Basis
With no related allowance recorded:
Commercial loans	$	68	$	-	$	-	$	192	$	-	$	-
Real estate mortgage loans:
Residential		2,063		18		18		2,407		63		63
Commercial		10,556		42		42		10,651		126		126
Construction and land		2,503		7		7		4,119		21		21
Consumer and other loans		32		-		-		35		-		-
Subtotal		15,222		67		67		17,404		210		210
With an allowance recorded:
Commercial loans		16		-		-		17		-		-
Real estate mortgage loans:
Residential		830		7		7		830		21		21
Commercial		5,496		13		13		4,291		38		38
Construction and land		591		3		3		545		10		10
Consumer and other loans		308		-		-		314		-		-
Subtotal		7,241		23		23		5,997		69		69
Total	$	22,463	$	90	$	90	$	23,401	$	279	$	279

The following table presents the recorded investment in nonaccrual loans by class of loans as of September 30, 2015 and December 31, 2014:

(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial loans	$	59	$	21
Real estate mortgage loans:
Residential		2,092		1,151
Commercial		4,485		7,408
Construction and land		386		574
Consumer and other loans		23		28
Total	$	7,045	$	9,182

There were no loans past due 90 days or greater and still accruing at September 30, 2015 and December 31, 2014.

The following table presents the aging of the recorded investment in past due loans by class of loans as of September 30, 2015 and December 31, 2014:

	Past Due Loans
(dollars in thousands) September 30, 2015	30-59 Days		60-89  Days		90 Days and Greater		Total		Loans Not Past Due		Total
Commercial loans	$	199	$	-	$	21	$	220	$	64,438	$	64,658
Real estate mortgage loans:
Residential		589		163		235		987		73,992		74,979
Commercial		-		1,477		2,699		4,176		224,989		229,165
Construction and land		-		-		122		122		29,677		29,799
Consumer and other loans		258		-		-		258		1,255		1,513
Total	$	1,046	$	1,640	$	3,077	$	5,763	$	394,351	$	400,114

	Past Due Loans
December 31, 2014	30-59 Days		60-89 Days		90 Days and Greater		Total		Loans Not  Past Due		Total
Commercial loans	$	218	$	-	$	-	$	218	$	57,658	$	57,876
Real estate mortgage loans:
Residential		874		579		681		2,134		68,868		71,002
Commercial		5,032		1,701		4,784		11,517		210,951		222,468
Construction and land		-		-		350		350		21,969		22,319
Consumer and other loans		269		-		-		269		1,220		1,489
Total	$	6,393	$	2,280	$	5,815	$	14,488	$	360,666	$	375,154

The delinquency status of purchased credit impaired loans that resulted from our acquisition of ABI is based on the contractual terms of the loan. In effect, past due status of an acquired loan is determined in the same manner as loans originated by the Bank.

Troubled Debt Restructurings

During the normal course of business, the Company may restructure or modify the terms of a loan for various reasons. The restructuring of a loan is considered a troubled debt restructuring (TDR) if both (i) the borrower is experiencing financial difficulties and (ii) a concession is granted that otherwise would not have occurred under normal circumstances.

The following table presents the recorded investment and specific reserves allocated to loans modified as TDRs as of September 30, 2015 and December 31, 2014.

(dollars in thousands)	September 30, 2015		December 31, 2014
Recorded investment(1)	$	10,671	$	10,794
Specific reserves allocated(2)		342		372

⁽¹⁾ Of the total recorded investment in loans modified as TDRs, $1,101 and $1,285, respectively, were for customers whose loans were collateral dependent with collateral shortfalls.

⁽²⁾ Of the specific reserves allocated to customers whose loan terms were modified as TDRs, $342 and $372, respectively, were allocated to customers whose loans were collateral dependent with collateral shortfalls.

The following table represents loans by class modified as TDRs that occurred during the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(dollars in thousands)	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of loans		Pre- Modification Outstanding  Recorded  Investment		Post- Modification Outstanding Recorded Investment
Commercial loans		-	$	-	$	-		-	$	-	$	-
Real estate mortgage loans:
Residential		1		214		208		1		214		208
Commercial		-		-		-		1		1,496		1,689
Construction and land		-		-		-		-		-		-
Consumer and other loans		-		-		-		-		-		-
Total		1	$	214	$	208		2	$	1,710	$	1,897

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(dollars in thousands)	Number of loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number  of loans		Pre- Modification Outstanding Recorded  Investment		Post- Modification Outstanding Recorded  Investment
Commercial loans		-	$	-	$	-		1	$	62	$	62
Real estate mortgage loans:
Residential		-		-		-		2		171		151
Commercial		-		-		-		6		3,579		3,629
Construction and land		-		-		-		2		281		219
Consumer and other loans		1		208		208		2		447		447
Total		1	$	208	$	208		13	$	4,540	$	4,508

During the three and nine months ended September 30, 2015, respectively, there was one and two collateral-impaired loan modified as TDRs. During the three and nine months ended September 30, 2014, there were one and thirteen loans, respectively, modified as TDRs. The terms of these loans were modified as TDRs because the borrowers were experiencing financial difficulties. The loan modifications allowed the borrowers to make reduced payments, such as (i) reduced fixed interest rate through maturity and an advance to cover a deficiency from sale of a separate foreclosed property, (ii) change from principal and interest payments to interest only payments for a limited period of time, (iii) reduced principal and interest payments through maturity, (iv) change from variable rate interest only payments through maturity to fixed rate interest only payments for a limited period of time and reduced principal and interest payments through maturity, (v) change from variable rate interest only payments through maturity to fixed rate and reduced principal and interest payments through maturity, or (vi) proposed forgiveness of principal contingent upon the satisfaction of the modified terms. The TDRs described above did not increase the allowance for loan losses as of September 30, 2015 and there were no related charge-offs for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014, the TDRs described above did not increase the allowance for loan losses as of September 30, 2014 and resulted in charge-offs of $0 and $256,000, respectively.

As of September 30, 2015 and December 31, 2014, the Company had no commitments to lend additional amounts to customers with outstanding loans whose terms were modified as TDRs.

There were no TDRs for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2015 and 2014.  A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Loans modified that did not meet the definition of a TDR had a total recorded investment of $7.3 million and $14.7 million for the three and nine months ended September 30, 2015, respectively, and $1.9 million and $12.1 million for the three and nine months ended September 30, 2014, respectively. These modifications involved loans to borrowers who were not experiencing financial difficulties and included (i) allowing the borrowers to make interest-only payments for a limited period of time, (ii) adjusting the interest rate to a market interest rate through maturity, (iii) extension of interest-only payments for a limited period of time, or (iv) extension of maturity date.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Company analyzes loans individually by classifying the loans as to credit risk.  All loans are graded upon initial issuance. Loans classified as substandard or special mention are reviewed at least quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company determines the appropriate loan grade.

Loans excluded from the review process above are generally classified as pass credits until:  (i) they become past due; (ii) management becomes aware of a deterioration in the credit worthiness of the borrower; or (iii) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or doubtful.  The Company uses the following definitions for risk ratings:

Special Mention:

Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard:

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful:

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.  As of September 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:

(dollars in thousands) September 30, 2015	Pass		Special Mention		Substandard		Doubtful		Total
Commercial loans	$	64,480	$	76	$	102	$	-	$	64,658
Real estate mortgage loans:
Residential		66,702		4,628		3,649		-		74,979
Commercial		218,529		2,552		8,084		-		229,165
Construction and land		27,013		1,688		1,098		-		29,799
Consumer and other loans		1,477		13		23		-		1,513
Total	$	378,201	$	8,957	$	12,956	$	-	$	400,114

December 31, 2014	Pass		Special Mention		Substandard		Doubtful		Total
Commercial loans	$	56,704	$	1,103	$	69	$	-	$	57,876
Real estate mortgage loans:
Residential		61,666		4,717		4,619		-		71,002
Commercial		202,225		5,278		14,965		-		222,468
Construction and land		20,799		62		1,458		-		22,319
Consumer and other loans		1,437		24		28		-		1,489
Total	$	342,831	$	11,184	$	21,139	$	-	$	375,154

Purchased Loans

The Company has purchased loans for 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 unpaid principal balance and carrying amounts of these loans were as follows as of September 30, 2015 and December 31, 2014:

(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial loans	$	112	$	150
Real estate mortgage loans:
Residential		2,111		3,625
Commercial		10,320		11,937
Construction and land		233		240
Consumer and other loans		-		-
Unpaid principal balance	$	12,776	$	15,952
Carrying amount	$	11,469	$	14,491

Accretable yield, or income collected, from these loans was as follows:

(dollars in thousands)
Balance as of December 31, 2013	$	8,993
New loans purchased, including loans classified as held-for-sale		-
Accretion of income		(766	)
Reduction for loans sold, paid off and other		(1,837	)
Loans charged off		(28	)
Reclassifications from nonaccretable difference		-
Disposals		-
Balance as of September 30, 2014	$	6,362
Balance as of December 31, 2014	$	6,329
New loans purchased, including loans classified as held-for-sale		-
Accretion of income		(599	)
Reduction for loans sold, paid off and other		(673	)
Loans charged off		-
Reclassifications from nonaccretable difference		127
Disposals		-
Balance as of September 30, 2015	$	5,184

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses as of September 30, 2015 or December 31, 2014, respectively.