Loan and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2018

Loans And Leases Receivable Disclosure [Abstract]

Loans and leases receivable disclosure [Text Block]

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES

				June 30,		December 31,
(In thousands)				2018		2017
Commercial and industrial			$	52,921	$	59,086
Construction and land development				42,675		39,607
Commercial real estate:
	Owner occupied			45,266		44,192
	Multi-family			40,497		52,167
	Other			160,366		142,674
		Total commercial real estate		246,129		239,033
Residential real estate:
	Consumer mortgage			58,676		59,540
	Investment property			47,029		47,323
		Total residential real estate		105,705		106,863
Consumer installment				9,824		9,588
		Total loans		457,254		454,177
Less: unearned income				(682)		(526)
		Loans, net of unearned income	$	456,572	$	453,651

Loans secured by real estate were approximately 86.3% of the Company’s total loan portfolio at June 30,2018. At June 30,2018, 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 propertyvalue.

• 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 June 30,2018 and December 31,2017.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
June 30, 2018:
Commercial and industrial			$	52,813	108	—	52,921	—	$	52,921
Construction and land development				42,501	138	—	42,639	36		42,675
Commercial real estate:
	Owner occupied			45,266	—	—	45,266	—		45,266
	Multi-family			40,497	—	—	40,497	—		40,497
	Other			159,656	—	—	159,656	710		160,366
		Total commercial real estate		245,419	—	—	245,419	710		246,129
Residential real estate:
	Consumer mortgage			57,740	589	—	58,329	347		58,676
	Investment property			46,733	296	—	47,029	—		47,029
		Total residential real estate		104,473	885	—	105,358	347		105,705
Consumer installment				9,806	7	—	9,813	11		9,824
		Total	$	455,012	1,138	—	456,150	1,104	$	457,254

December 31, 2017:
Commercial and industrial			$	59,047	8	—	59,055	31	$	59,086
Construction and land development				39,607	—	—	39,607	—		39,607
Commercial real estate:
	Owner occupied			44,192	—	—	44,192	—		44,192
	Multi-family			52,167	—	—	52,167	—		52,167
	Other			140,486	—	—	140,486	2,188		142,674
		Total commercial real estate		236,845	—	—	236,845	2,188		239,033
Residential real estate:
	Consumer mortgage			58,195	746	—	58,941	599		59,540
	Investment property			46,871	312	—	47,183	140		47,323
		Total residential real estate		105,066	1,058	—	106,124	739		106,863
Consumer installment				9,517	57	—	9,574	14		9,588
		Total	$	450,082	1,123	—	451,205	2,972	$	454,177

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 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 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 June 30,2018 and December 31, 2017, 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 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. Since the fourth quarter of 2016, the Company has increased its look-back period each quarter 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. For the quarter ended June 30, 2018, the Company increased its look-back period to 37 quarters to continue to include losses incurred by the Company beginning with the first quarter of 2009. 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. Other than expanding the look-back period each quarter, 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 respective periods.

			June 30, 2018
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	724	670	2,119	1,053	166	$	4,732
Charge-offs			—	—	(39)	—	—		(39)
Recoveries			32	—	—	17	8		57
	Net recoveries (charge-offs)		32	—	(39)	17	8		18
Provision for loan losses			(156)	117	117	(53)	(25)		—
Ending balance		$	600	787	2,197	1,017	149	$	4,750

Six months ended:
Beginning balance		$	653	734	2,126	1,071	173	$	4,757
Charge-offs			(52)	—	(39)	(4)	(2)		(97)
Recoveries			46	—	—	33	11		90
	Net (charge-offs) recoveries		(6)	—	(39)	29	9		(7)
Provision for loan losses			(47)	53	110	(83)	(33)		—
Ending balance		$	600	787	2,197	1,017	149	$	4,750

			June 30, 2017
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	524	845	2,004	1,064	151	$	4,588
Charge-offs			—	—	—	—	(5)		(5)
Recoveries			4	209	—	63	6		282
	Net recoveries (charge-offs)		4	209	—	63	1		277
Provision for loan losses			149	(180)	117	(8)	22		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

Six months ended:
Beginning balance		$	540	812	2,071	1,107	113	$	4,643
Charge-offs			—	—	—	(78)	(6)		(84)
Recoveries			6	214	—	77	9		306
	Net recoveries (charge-offs)		6	214	—	(1)	3		222
Provision for loan losses			131	(152)	50	13	58		100
Ending balance		$	677	874	2,121	1,119	174	$	4,965

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 June 30,2018and 2017.

			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
June 30, 2018:
Commercial and industrial		$	600	52,921	—	—	600	52,921
Construction and land development			787	42,675	—	—	787	42,675
Commercial real estate			2,194	245,252	3	877	2,197	246,129
Residential real estate			1,017	105,705	—	—	1,017	105,705
Consumer installment			149	9,824	—	—	149	9,824
	Total	$	4,747	456,377	3	877	4,750	457,254

June 30, 2017:
Commercial and industrial		$	677	50,974	—	—	677	50,974
Construction and land development			874	46,386	—	—	874	46,386
Commercial real estate			2,099	218,882	22	1,981	2,121	220,863
Residential real estate			1,119	110,288	—	—	1,119	110,288
Consumer installment			174	9,409	—	—	174	9,409
	Total	$	4,943	435,939	22	1,981	4,965	437,920
(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
June 30, 2018:
Commercial and industrial			$	52,197	506	218	—	$	52,921
Construction and land development				41,892	90	657	36		42,675
Commercial real estate:
	Owner occupied			44,548	391	327	—		45,266
	Multi-family			40,497	—	—	—		40,497
	Other			158,644	629	383	710		160,366
		Total commercial real estate		243,689	1,020	710	710		246,129
Residential real estate:
	Consumer mortgage			52,988	2,051	3,290	347		58,676
	Investment property			46,082	308	639	—		47,029
		Total residential real estate		99,070	2,359	3,929	347		105,705
Consumer installment				9,709	53	51	11		9,824
		Total	$	446,557	4,028	5,565	1,104	$	457,254

December 31, 2017:
Commercial and industrial			$	58,842	94	119	31	$	59,086
Construction and land development				39,049	90	468	—		39,607
Commercial real estate:
	Owner occupied			43,615	240	337	—		44,192
	Multi-family			52,167	—	—	—		52,167
	Other			139,695	395	396	2,188		142,674
		Total commercial real estate		235,477	635	733	2,188		239,033
Residential real estate:
	Consumer mortgage			54,101	1,254	3,586	599		59,540
	Investment property			46,463	53	667	140		47,323
		Total residential real estate		100,564	1,307	4,253	739		106,863
Consumer installment				9,430	66	78	14		9,588
		Total	$	443,362	2,192	5,651	2,972	$	454,177

Impaired loans

The following tables present details related to the Company’s impaired loans. Loans that have been fully charged-off are not included 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 June 30,2018 and December 31,2017.

				June 30, 2018
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other		$	759	(49)	710
		Total commercial real estate		759	(49)	710
		Total	$	759	(49)	710
With allowance recorded:
Commercial real estate:
	Owner occupied			167	—	167		3
		Total commercial real estate		167	—	167		3
		Total		167	—	167		3
		Total impaired loans	$	926	(49)	877	$	3
(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, 2017
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial real estate:
	Other			3,630	(1,094)	2,536
		Total commercial real estate		3,630	(1,094)	2,536
		Total	$	3,630	(1,094)	2,536
With allowance recorded:
Commercial and industrial				52	(21)	31		31
Commercial real estate:
	Owner occupied		$	175	—	175	$	11
		Total commercial real estate		175	—	175		11
		Total		227	(21)	206		42
		Total impaired loans	$	3,857	(1,115)	2,742	$	42
(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 June 30, 2018		Six months ended June 30, 2018
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	7	—	17	—
Commercial real estate:
	Owner occupied			168	2	170	5
	Other			1,392	—	1,827	—
		Total commercial real estate		1,560	2	1,997	5
		Total	$	1,567	2	2,014	5

				Quarter ended June 30, 2017		Six months ended June 30, 2017
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial and industrial			$	2	—	6	—
Construction and land development				15	—	21	—
Commercial real estate:
	Owner occupied			186	2	189	5
	Other			1,821	—	1,845	—
		Total commercial real estate		2,007	2	2,034	5
		Total	$	2,024	2	2,061	5

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, where due, all amounts owed, 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 June 30,2018 and December 31,2017.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2018
Commercial real estate:
	Owner occupied		$	167	—	167	$	3
	Other			—	710	710		—
		Total commercial real estate		167	710	877		3
		Total	$	167	710	877	$	3

December 31, 2017
Commercial and industrial			$	—	31	31	$	31
Commercial real estate:
	Owner occupied			175	—	175		11
	Other			287	1,431	1,718		—
		Total commercial real estate		462	1,431	1,893		11
		Total	$	462	1,462	1,924	$	42

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

			Quarter ended June 30,				Six Months ended June 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
2018:
Commercial real estate:
	Other		—	$	—	—	1	$	737	737
		Total commercial real estate	—		—	—	1		737	737
		Total	—	$	—	—	1	$	737	737
2017:
	Other		1	$	1,275	1,266	1	$	1,275	1,266
		Total commercial real estate	1		1,275	1,266	1		1,275	1,266
		Total	1	$	1,275	1,266	1	$	1,275	1,266

One loan was modified in a TDR during thesix months ended June 30,2018 and 2017. The only concession granted by the Company in each instance was a delay in the required payment of interest.

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. During the quarter and six months ended June 30,2017, there were no 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).

			Quarter ended June 30,			Six Months ended June 30,
			Number of		Recorded	Number of		Recorded
(Dollars in thousands)			Contracts		investment(1)	Contracts		investment(1)
2018:
Commercial real estate:
	Other		—	$	—	1	$	1,259
		Total commercial real estate	—		—	1		1,259
		Total	—	$	—	1	$	1,259
(1) Amount as of applicable month end during the respective period for which there was a payment default.