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Loan and Allowance for Loan Losses
 12 Months Ended
Dec. 31, 2013
Loans And Leases Receivable Disclosure  
Loans and leases receivable disclosure [Text Block]

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

December 31
(In thousands)20132012
Commercial and industrial$57,780$59,334
Construction and land development36,47937,631
Commercial real estate:
Owner occupied56,10264,368
Other118,818119,243
Total commercial real estate174,920183,611
Residential real estate:
Consumer mortgage57,87158,087
Investment property43,83547,544
Total residential real estate101,706105,631
Consumer installment12,89312,219
Total loans383,778398,426
Less: unearned income(439)(233)
Loans, net of unearned income$383,339$398,193

Loans secured by real estate were approximately 81.6% of the total loan portfolio at December 31, 2013. At December 31, 2013, 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.

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 two classes: (1) owner occupied and (2) 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.

Other – primarily includes loans to finance income-producing commercial and multi-family properties. Loans in this class include loans for neighborhood retail centers, hotels, medical and professional offices, single retail stores, industrial buildings, warehouses and apartments 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, 2013 and 2012.

AccruingAccruingTotal
30-89 DaysGreater thanAccruingNon-Total
(In thousands)CurrentPast Due90 daysLoansAccrualLoans
December 31, 2013:
Commercial and industrial$ 57,558 167 — 57,725 55$ 57,780
Construction and land development 34,883 14 — 34,897 1,582 36,479
Commercial real estate:
Owner occupied 54,214 861 — 55,075 1,027 56,102
Other 118,389 — — 118,389 429 118,818
Total commercial real estate 172,603 861 — 173,464 1,456 174,920
Residential real estate:
Consumer mortgage 56,191 745 69 57,005 866 57,871
Investment property 42,935 598 — 43,533 302 43,835
Total residential real estate 99,126 1,343 69 100,538 1,168 101,706
Consumer installment 12,789 100 4 12,893 — 12,893
Total$ 376,959 2,485 73 379,517 4,261$ 383,778
December 31, 2012:
Commercial and industrial$ 59,101 173 — 59,274 60$ 59,334
Construction and land development 35,917 8 — 35,925 1,706 37,631
Commercial real estate:
Owner occupied 63,323 — — 63,323 1,045 64,368
Other 113,344 230 — 113,574 5,669 119,243
Total commercial real estate 176,667 230 — 176,897 6,714 183,611
Residential real estate:
Consumer mortgage 55,521 1,202 58 56,781 1,306 58,087
Investment property 46,460 335 — 46,795 749 47,544
Total residential real estate 101,981 1,537 58 103,576 2,055 105,631
Consumer installment 12,157 62 — 12,219 — 12,219
Total$ 385,823 2,010 58 387,891 10,535$ 398,426

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 $270 thousand, $511 thousand and $494 thousand for the years ended December 31, 2013, 2012, and 2011, respectively.

Allowance for Loan Losses

The allowance for loan losses as of and for the years ended December 31, 2013, 2012 and 2011, is presented below.

Year ended December 31
(In thousands)201320122011
Beginning balance$ 6,723$ 6,919$ 7,676
Charged-off loans (2,020) (4,334) (3,413)
Recovery of previously charged-off loans 165 323 206
Net charge-offs (1,855) (4,011) (3,207)
Provision for loan losses 400 3,815 2,450
Ending balance$ 5,268$ 6,723$ 6,919

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 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 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, 2013 and 2012, 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

(in thousands)Commercial and industrialConstruction and land DevelopmentCommercial Real EstateResidential Real EstateConsumer InstallmentUnallocatedTotal
Balance, December 31, 2010$9722,2232,8931,336141111$ 7,676
Charge-offs(679)(1,758)(422)(533)(21) —(3,413)
Recoveries342 —15515 — 206
Net charge-offs(645)(1,756)(422)(378)(6) —(3,207)
Provision6211,003538405(6) (111)2,450
Balance, December 31, 2011$ 948 1,470 3,009 1,363 129 —$ 6,919
Charge-offs(289)(231)(3,184)(545)(85) —(4,334)
Recoveries54467113418 — 323
Net charge-offs(235)(185)(3,113)(411)(67) —(4,011)
Provision992603,24117441 —3,815
Balance, December 31, 2012$ 812 1,545 3,137 1,126 103 —$ 6,723
Charge-offs(514)(39)(262)(808)(397) —(2,020)
Recoveries48648819 — 165
Net charge-offs(466)(33)(258)(720)(378) —(1,855)
Provision40(1,146)307708491 —400
Balance, December 31, 2013$ 386 366 3,186 1,114 216 —$ 5,268

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, 2013 and 2012.

Collectively evaluated (1)Individually evaluated (2)Total
AllowanceRecordedAllowanceRecordedAllowanceRecorded
for loaninvestmentfor loaninvestmentfor loaninvestment
(In thousands)lossesin loanslossesin loanslossesin loans
December 31, 2013:
Commercial and industrial$ 386 57,656 — 124 386 57,780
Construction and land development 278 34,897 88 1,582 366 36,479
Commercial real estate 3,014 171,987 172 2,933 3,186 174,920
Residential real estate 1,114 100,780 — 926 1,114 101,706
Consumer installment 216 12,893 — — 216 12,893
Total$ 5,008 378,213 260 5,565 5,268 383,778
December 31, 2012:
Commercial and industrial$ 812 59,165 — 169 812 59,334
Construction and land development 1,416 36,008 129 1,623 1,545 37,631
Commercial real estate 3,003 176,085 134 7,526 3,137 183,611
Residential real estate 1,126 104,414 — 1,217 1,126 105,631
Consumer installment 103 12,219 — — 103 12,219
Total$ 6,460 387,891 263 10,535 6,723 398,426
(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 MentionSubstandard AccruingNonaccrualTotal loans
December 31, 2013
Commercial and industrial$ 53,060 4,183 482 55$ 57,780
Construction and land development 33,616 180 1,101 1,582 36,479
Commercial real estate:
Owner occupied 53,430 770 875 1,027 56,102
Other 117,490 91 808 429 118,818
Total commercial real estate 170,920 861 1,683 1,456 174,920
Residential real estate:
Consumer mortgage 50,392 1,137 5,476 866 57,871
Investment property 40,517 1,310 1,706 302 43,835
Total residential real estate 90,909 2,447 7,182 1,168 101,706
Consumer installment 12,713 34 146 — 12,893
Total$ 361,218 7,705 10,594 4,261$ 383,778
December 31, 2012
Commercial and industrial$ 58,487 224 563 60$ 59,334
Construction and land development 34,490 310 1,125 1,706 37,631
Commercial real estate:
Owner occupied 59,270 2,528 1,525 1,045 64,368
Other 111,719 653 1,202 5,669 119,243
Total commercial real estate 170,989 3,181 2,727 6,714 183,611
Residential real estate:
Consumer mortgage 49,462 1,544 5,775 1,306 58,087
Investment property 43,559 1,033 2,203 749 47,544
Total residential real estate 93,021 2,577 7,978 2,055 105,631
Consumer installment 11,850 155 214 — 12,219
Total$ 368,837 6,447 12,607 10,535$ 398,426

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 $500,000 secured by real estate (nonaccrual construction and land development, commercial real estate, and residential real

Individually evaluated impaired loans equal to or greater than $250,000 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, 2013 and 2012.

December 31, 2013
(In thousands)Unpaid principal balance (1)Charge-offs and payments applied (2)Recorded investment (3)Related allowance
With no allowance recorded:
Commercial and industrial$124 —124
Construction and land development2,879(1,682)1,197
Commercial real estate:
Owner occupied1,217(190)1,027
Other518(89)429
Total commercial real estate1,735(279)1,456
Residential real estate:
Consumer mortgages952(198)754
Investment property207(35)172
Total residential real estate1,159(233)926
Total $5,897(2,194)3,703
With allowance recorded:
Construction and land development452(67)38588
Commercial real estate:
Owner occupied875 —875110
Other602 —60262
Total commercial real estate1,477 —1,477172
Total $1,929 (67)1,862$ 260
Total impaired loans$7,826 (2,261)5,565$ 260
(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, 2012
(In thousands)Unpaid principal balance (1)Charge-offs and payments applied (2)Recorded investment (3)Related allowance
With no allowance recorded:
Commercial and industrial$169 —169
Construction and land development2,879 (1,682)1,197
Commercial real estate:
Owner occupied787 (212)575
Other7,914 (1,862)6,052
Total commercial real estate8,701(2,074)6,627
Residential real estate:
Consumer mortgages971 (152)819
Investment property508 (110)398
Total residential real estate1,479(262)1,217
Total $13,228 (4,018)9,210
With allowance recorded:
Construction and land development471 (45)426129
Commercial real estate:
Owner occupied899 —899134
Total commercial real estate899 —899134
Total $1,370 (45)1,325$263
Total impaired loans$14,598 (4,063)10,535$263
(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, 2013Year ended December 31, 2012Year ended December 31, 2011
AverageTotal interestAverageTotal interestAverageTotal interest
recordedincomerecordedincomerecordedincome
(In thousands)investmentrecognizedinvestmentrecognizedinvestmentrecognized
Impaired loans:
Commercial and industrial$1889$19413$3169
Construction and land
development1,603 —3,888 —4,136 —
Commercial real estate:
Owner occupied1,972512,449641,82824
Other1,454122,621 —2,374 —
Total commercial real estate3,426635,070644,20224
Residential real estate:
Consumer mortgages786 —861 —1,376 —
Investment property274 —652 —146 —
Total residential real estate1,060 —1,513 —1,522 —
Total $6,277 72$10,665 77$10,176 33

Troubled Debt Restructurings

Impaired loans also include troubled debt restructuring (“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. 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 restructuring.

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)AccruingNonaccrualTotalAllowance
December 31, 2013
Commercial and industrial$124 —124$ —
Construction and land development —1,5821,58288
Commercial real estate:
Owner occupied8752851,160110
Other6024291,03162
Total commercial real estate1,4777142,191172
Residential real estate:
Consumer mortgages —754754 —
Investment property —172172 —
Total residential real estate —926926 —
Total $1,6013,2224,823$260
December 31, 2012
Commercial and industrial$169 —169$ —
Construction and land development —1,6231,623129
Commercial real estate:
Owner occupied8991,0451,944134
Other —432432 —
Total commercial real estate8991,4772,376134
Residential real estate:
Consumer mortgages —819819 —
Investment property —188188 —
Total residential real estate —1,0071,007 —
Total $1,0684,1075,175$263

At December 31, 2013, 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-
modificationmodification
outstandingoutstanding
Number ofrecordedrecorded
($ in thousands)contractsinvestementinvestement
December 31, 2013
Construction and land development1$390387
Commercial real estate:
Owner occupied1882882
Other21,0371,041
Total commercial real estate31,9191,923
Residential real estate:
Consumer mortgages3849844
Investment property1172172
Total residential real estate41,0211,016
Total 8$3,3303,326
December 31, 2012
Construction and land development4$5,4194,305
Commercial real estate:
Owner occupied43,1672,225
Other21,8031,657
Total commercial real estate64,9703,882
Residential real estate:
Consumer mortgages2863858
Investment property2567563
Total residential real estate41,4301,421
Total 14$ 11,819 9,608
December 31, 2011
Commercial and industrial2$791523
Construction and land development34,9254,894
Commercial real estate:
Owner occupied53,1272,840
Other11,2291,229
Total commercial real estate64,3564,069
Residential real estate:
Investment property1391391
Total residential real estate1391391
Total 12$ 10,463 9,877

The majority of the loans modified in a TDR during the years ended December 31, 2013, 2012, and 2011, 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.

For the year ended December 31, 2012, decreases in the post modification outstanding recorded investment were primarily due to principal payments made by borrowers at the date of modification for construction and land development loans and A/B note restructurings for two owner occupied commercial real estate loans. In certain circumstances, the Company may require the borrower to reduce the principal balance in order to grant an extension or renewal of the loan. Total charge-offs related to B notes were $0.9 million for the year ended December 31, 2012.

For the year ended December 31, 2011, decreases in the post modification outstanding recorded investment were primarily due to two A/B note restructurings, where the B note was charged off. Total charge-offs related to B notes during the year ended December 31, 2011 were approximately $0.6 million.

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 the respective years.

Number ofRecorded
($ in thousands)Contractsinvestment (1)
December 31, 2013
Construction and land development1$1,197
Commercial real estate:
Other1425
Total commercial real estate1425
Total 2$1,622
December 31, 2012
Construction and land development1$2,386
Total 1$2,386
December 31, 2011
Commercial real estate:
Owner occupied2$1,172
Other11,201
Total commercial real estate32,373
Total 3$2,373
(1) Amount as of applicable month end during the respective year for which there was a payment default.