LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2016

Loans and Leases Receivable Disclosure [Abstract]

LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

3. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Loans outstanding, by classification, are summarized as follows (in thousands): 

	September 30,		December 31,
	2016		2015
Commercial, financial, and agricultural	$	46,866	$	42,748
Commercial Real Estate		106,179		104,092
Single-Family Residential		30,554		31,096
Construction and Development		8,387		2,220
Consumer		7,355		6,804
		199,341		186,960
Allowance for loan losses		1,883		2,124
	$	197,458	$	184,836

Activity in the allowance for loan losses by portfolio segment is summarized as follows (in thousands):

	For the Three Month Period Ended September 30, 2016
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total
Beginning balance	$	428		$	925		$	483		$	9		$	213		$	2,058
Provision for loan losses		10			(110	)		91			2			44			37
Loans charged-off		—			(10	)		(219	)		—			(28	)		(257	)
Recoveries on loans charged-off		19			14			—			—			12			45
Ending Balance	$	457		$	819		$	355		$	11		$	241		$	1,883
	For the Nine Month Period Ended September 30, 2016
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total
Beginning balance	$	342		$	1,170		$	435		$	3		$	174		$	2,124
Provision for loan losses		115			(496	)		161			8			149			(63	)
Loans charged-off		(30	)		(189	)		(320	)		—			(125	)		(664	)
Recoveries on loans charged-off		30			334			79			—			43			486
Ending Balance	$	457		$	819		$	355		$	11		$	241		$	1,883
	For the Three Month Period Ended September 30, 2015
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total
Beginning balance	$	640		$	1,191		$	290		$	9		$	191		$	2,321
Provision for loan losses		60			(120	)		89			(5	)		51			75
Loans charged-off		—			(55	)		(60	)		—			(54	)		(169	)
Recoveries on loans charged-off		4			6			1			—			10			21
Ending Balance	$	704		$	1,022		$	320		$	4		$	198		$	2,248
	For the Nine Month Period Ended September 30, 2015
				Commercial			Single-family			Construction
	Commercial			Real Estate			Residential			& Development			Consumer			Total
Beginning balance	$	415		$	1,366		$	254		$	72		$	192		$	2,299
Provision for loan losses		275			(388	)		271			(74	)		116			200
Loans charged-off		—			(138	)		(230	)		—			(165	)		(533	)
Recoveries on loans charged-off		14			182			25			6			55			282
Ending Balance	$	704		$	1,022		$	320		$	4		$	198		$	2,248

Portions of the allowance for loan losses may be allocated for specific loans or portfolio segments. However, the entire allowance for loan losses is available for any loan that, in the judgment of management, should be charged-off.

In determining our allowance for loan losses, we regularly review loans for specific reserves based on the appropriate impairment assessment methodology. Consumer residential loans are evaluated as a homogeneous population and therefore loans are not evaluated individually for impairment. General reserves are determined using historical loss trends measured over a rolling four quarter average for consumer loans, and a three year average loss factor for commercial loans which is applied to risk rated loans grouped by Federal Financial Examination Council (“FFIEC”) call code. For commercial loans, the general reserves are calculated by applying the appropriate historical loss factor to the loan pool. Impaired loans greater than a minimum threshold established by management are excluded from this analysis.   The sum of all such amounts determines our total allowance for loan losses. 

The allocation of the allowance for loan losses by portfolio segment was as follows (in thousands): 

	At September 30, 2016
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	75	$	416	$	124	$	—	$	—	$	615
Total specific reserves		75		416		124		—		—		615
General reserves		382		403		231		11		241		1,268
Total	$	457	$	819	$	355	$	11	$	241	$	1,883
Loans individually evaluated for impairment	$	149	$	9,219	$	339	$	—	$	—	$	9,707
Loans collectively evaluated for impairment		46,717		96,960		30,215		8,387		7,355		189,634
Total	$	46,866	$	106,179	$	30,554	$	8,387	$	7,355	$	199,341
	At December 31, 2015
	Commercial		Commercial Real Estate		Single- family Residential		Construction & Development		Consumer		Total
Specific Reserves:
Impaired loans	$	—	$	550	$	100	$	—	$	—	$	650
Total specific reserves		—		550		100		—		—		650
General reserves		342		620		335		3		174		1,474
Total	$	342	$	1,170	$	435	$	3	$	174	$	2,124
Loans individually evaluated for impairment	$	—	$	9,392	$	417	$	—	$	—	$	9,809
Loans collectively evaluated for impairment		42,748		94,700		30,679		2,220		6,804		177,151
Total	$	42,748	$	104,092	$	31,096	$	2,220	$	6,804	$	186,960

The following table presents impaired loans by class of loan (in thousands):

	At September 30, 2016
	Impaired Loans - With Allowance						Impaired Loans - With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity		224		204		124		135		135
Commercial
Secured		75		75		75		150		74
Unsecured		—		—		—		—		—
Commercial Real Estate:
Owner occupied		406		406		416		8,418		7,846
Non-owner occupied		—		—		—		1,066		967
Multi-family		—		—		—		—		—
Construction and Development:
Construction		—		—		—		—		—
Improved Land		—		—		—		—		—
Unimproved Land		—		—		—		—		—
Consumer and Other		—		—		—		—		—
Total	$	705	$	685	$	615	$	9,769	$	9,022

The following table presents the average recorded investment and interest income recognized on impaired loans by class of loan (in thousands):

	Nine Months Ended				Nine Months Ended
	September 30, 2016				September 30, 2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—
HELOC’s and equity		345		9		212		34
Commercial:
Secured		225		—		—		—
Unsecured		—		—		—		—
Commercial Real Estate:
Owner occupied		8,447		202		8,802		296
Non-owner occupied		1,001		23		2,294		179
Multi-family		—		—		—		—
Construction and Development:
Construction		—		—		—		—
Improved Land		—		—		—		—
Unimproved Land		—		—		—		—
Consumer and Other		—		—		—		—
Total	$	10,018	$	234	$	11,308	$	509

	At December 31, 2015
	Impaired Loans - With Allowance						Impaired Loans - With no Allowance
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Average Recorded Investment		Interest Income Recognized
Residential:
First mortgages	$	—	$	—	$	—	$	—	$	—	$	—	$	—
HELOC’s and equity		134		134		100		304		283		209		43
Commercial
Secured		—		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		4,115		4,115		356		4,456		3,972		8,666		391
Non-owner occupied		691		691		194		667		614		1,679		193
Multi-family		—		—		—		—		—		—		—
Construction and Development:
Construction		—		—		—		—		—		—		—
Improved Land		—		—		—		—		—		—		—
Consumer and Other		—		—				—		—		—		—
Total	$	4,940	$	4,940	$	650	$	5,427	$	4,869	$	10,554	$	627

The following table is an aging analysis of our loan portfolio (in thousands):

	At September 30, 2016
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total				Loans		and
	Due		Due		Due		Past Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	—	$	440	$	534	$	974	$	18,822	$	19,796	$	—	$	1,027
HELOC’s and equity		88		9		57		154		10,604		10,758		—		125
Commercial:
Secured		5		174		150		329		39,097		39,426		—		150
Unsecured		—		—		—		—		7,440		7,440		—		—
Commercial Real Estate:
Owner occupied		868		355		149		1,372		49,628		51,000		—		238
Non-owner occupied		75		308		—		383		49,136		49,519		—		698
Multi-family		—		—		—		—		5,660		5,660		—		—
Construction and
Development		—		—		—		—		8,387		8,387		—		—
Consumer and Other		18		2		29		49		7,306		7,355		—		29
Total	$	1,054	$	1,288	$	919	$	3,261	$	196,080	$	199,341	$	—	$	2,267

	At December 31, 2015
													Recorded
													Investment
	30- 59		60- 89		Over 90						Total		> 90 Days
	Days Past		Days Past		Days Past		Total				Loans		and
	Due		Due		Due		Past Due		Current		Receivable		Accruing		Nonaccrual
Residential:
First mortgages	$	1,581	$	824	$	745	$	3,150	$	19,253	$	22,403	$	—	$	1,246
HELOC’s and equity		224		59		173		456		8,237		8,693		—		250
Commercial:
Secured		49		—		30		79		36,144		36,223		—		30
Unsecured		—		—		—		—		6,525		6,525		—		—
Commercial Real Estate:
Owner occupied		931		336		—		1,267		51,180		52,447		—		933
Non-owner occupied		441		691		—		1,132		45,684		46,816		—		551
Multi-family		—		—		—		—		4,829		4,829		—		—
Construction and
Development		—		—		—		—		2,220		2,220		—		—
Consumer and Other		29		41		6		76		6,728		6,804		—		6
Total	$	3,255	$	1,951	$	954	$	6,160	$	180,800	$	186,960	$	—	$	3,016

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant. 

Commercial, financial and agricultural loans—We centrally underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We endeavor to gain a complete understanding of our borrower’s businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, we gain an understanding of the likely value of the collateral and what level of strength the collateral brings to the loan transaction. To the extent that the principals or other parties provide personal guarantees, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including demand for products and services, personal events such as disability or change in marital status, and reductions in the value of our collateral. Due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Consumer—The installment loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

Commercial Real Estate—Real estate commercial loans consist of loans secured by multifamily housing, commercial non-owner and owner occupied and other commercial real estate loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. Commercial owner-occupied and other commercial real estate loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. These loans are primarily secured by real property and can include other collateral such as personal guarantees, personal property, or business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Also, due to the concentration of loans in the metro Atlanta and Birmingham areas, we are susceptible to changes in market and economic conditions of these areas.

Single-family Residential— Real estate residential loans are to individuals and are secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses during 2008-2012 within the banking industry.

Construction and Development—Real estate construction loans are highly dependent on the supply and demand for residential and commercial real estate in the markets we serve as well as the demand for newly constructed commercial space and residential homes and lots that our customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers. Real estate construction loans can experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral.

Risk categories—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. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if appropriately classified and impairment, if any. All other loan relationships greater than $750,000 are 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 will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) 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 even charged off. 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 payment 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.

The following table presents our loan portfolio by risk rating (in thousands):

	At September 30, 2016
					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	19,796	$	18,822	$	—	$	974	$	—
HELOC’s and equity		10,758		10,286		9		395		68
Commercial, financial, and agricultural:
Secured		39,426		39,275		—		76		75
Unsecured		7,440		7,440		—		—		—
Commercial Real Estate:
Owner occupied		51,000		44,963		248		5,789		—
Non-owner occupied		49,519		48,527		—		992		—
Multi-family		5,660		5,660		—		—		—
Construction and Development		8,387		8,387		—		—		—
Consumer		7,355		7,324		—		4		27
Total	$	199,341	$	190,684	$	257	$	8,230	$	170
	At December 31, 2015
					Special
	Total		Pass Credits		Mention		Substandard		Doubtful
Single-Family Residential:
First mortgages	$	22,403	$	20,729	$	—	$	1,651	$	23
HELOC’s and equity		8,693		8,004		66		547		76
Commercial, financial, and agricultural:
Secured		36,223		36,193		—		—		30
Unsecured		6,525		6,525		—		—		—
Commercial Real Estate:
Owner occupied		52,447		45,274		1,604		5,569		—
Non-owner occupied		46,816		45,458		107		1,251		—
Multi-family		4,829		4,524		305		—		—
Construction and Development		2,220		2,220		—		—		—
Consumer		6,804		6,749		—		16		39
Total	$	186,960	$	175,676	$	2,082	$	9,034	$	168

During the three and nine months ended September 30, 2016, the Company did not modify any loan that was considered to be a troubled debt restructuring. During the three and nine months ended September 30, 2015, the Company modified one (1) and five (5) loans, respectively, that were considered to be troubled debt restructurings. We extended the terms and decreased the interest rate on these loans (dollars in thousands).

Extended Terms and Decreased Interest Rate
	Three Months Ended September 30, 2015
	Number of		Pre-Modification		Post-Modification
	Loans		Recorded Investment		Recorded Investment
Troubled Debt Restructurings
Residential mortgages		1	$	325	$	325
Total		1	$	325	$	325
Decreased Interest Rate Only
	Nine Months Ended September 30, 2015
	Number of		Pre-Modification		Post-Modification
	Loans		Recorded Investment		Recorded Investment
Residential mortgages		5	$	445	$	445
Total		5	$	445	$	445

There were no loans restructured during the last twelve months that experienced payment default subsequent to restructuring during the three and nine month periods ended September 30, 2016. During the three and nine month periods ended September 30, 2015, there was one (1) loan restructured during the last twelve months that experienced payment default subsequent to restructuring.

The Company considers a default as failure to comply with the restructured loan agreement. This would include the restructured loan being past due greater than 90 days, failure to comply with financial covenants, or failure to maintain current insurance coverage or real estate taxes after the loan restructure date.