Loan and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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)				2020		2019
Commercial and industrial			$	87,754	$	56,782
Construction and land development				32,967		32,841
Commercial real estate:
	Owner occupied			50,036		48,860
	Hotel/motel			43,183		43,719
	Multi-family			31,974		44,839
	Other			125,395		132,900
		Total commercial real estate		250,588		270,318
Residential real estate:
	Consumer mortgage			40,967		48,923
	Investment property			44,858		43,652
		Total residential real estate		85,825		92,575
Consumer installment				8,631		8,866
		Total loans		465,765		461,382
Less: unearned income				(1,491)		(481)
		Loans, net of unearned income	$	464,274	$	460,901

Loans secured by real estate were approximately 79.3%of the Company’s total loan portfolio at June 30, 2020. At June 30, 2020, 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 describes 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.

Hotel/motel – includes loans for hotels and motels. 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.

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, 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 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 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, 2020 and December 31, 2019.

					Accruing	Accruing	Total
					30-89 Days	Greater than	Accruing	Non-		Total
(In thousands)			Current		Past Due	90 days	Loans	Accrual		Loans
June 30, 2020:
Commercial and industrial			$	87,671	83	—	87,754	—	$	87,754
Construction and land development				32,967	—	—	32,967	—		32,967
Commercial real estate:
	Owner occupied			49,958	78	—	50,036	—		50,036
	Hotel/motel			43,183	—	—	43,183	—		43,183
	Multi-family			31,974	—	—	31,974	—		31,974
	Other			125,087	90	—	125,177	218		125,395
		Total commercial real estate		250,202	168	—	250,370	218		250,588
Residential real estate:
	Consumer mortgage			40,189	430	—	40,619	348		40,967
	Investment property			44,557	190	—	44,747	111		44,858
		Total residential real estate		84,746	620	—	85,366	459		85,825
Consumer installment				8,573	8	49	8,630	1		8,631
		Total	$	464,159	879	49	465,087	678	$	465,765

December 31, 2019:
Commercial and industrial			$	56,758	24	—	56,782	—	$	56,782
Construction and land development				32,385	456	—	32,841	—		32,841
Commercial real estate:
	Owner occupied			48,860	—	—	48,860	—		48,860
	Hotel/motel			43,719	—	—	43,719	—		43,719
	Multi-family			44,839	—	—	44,839	—		44,839
	Other			132,900	—	—	132,900	—		132,900
		Total commercial real estate		270,318	—	—	270,318	—		270,318
Residential real estate:
	Consumer mortgage			47,151	1,585	—	48,736	187		48,923
	Investment property			43,629	23	—	43,652	—		43,652
		Total residential real estate		90,780	1,608	—	92,388	187		92,575
Consumer installment				8,802	64	—	8,866	—		8,866
		Total	$	459,043	2,152	—	461,195	187	$	461,382

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, 2020 and December 31, 2019, 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, 2020, the Company increased its look-back period to 45 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. During the first six months of 2020, the Company adjusted certain qualitative and economic factors related to changes in economic conditions driven by the impact of the novel strain of coronavirus (“COVID-19 pandemic”) and resulting adverse economic conditions, including higher unemployment in our primary market area.

The following table details the changes in the allowance for loan losses by portfolio segment for the respective periods.

			June 30, 2020
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	675	582	2,596	877	137	$	4,867
Charge-offs			(4)	—	—	—	(27)		(31)
Recoveries			2	—	—	14	6		22
	Net (charge-offs) recoveries		(2)	—	—	14	(21)		(9)
Provision for loan losses			6	31	319	63	31		450
Ending balance		$	679	613	2,915	954	147	$	5,308

Six months ended:
Beginning balance		$	577	569	2,289	813	138	$	4,386
Charge-offs			(4)	—	—	—	(32)		(36)
Recoveries			55	—	—	45	8		108
	Net recoveries (charge-offs)		51	—	—	45	(24)		72
Provision for loan losses			51	44	626	96	33		850
Ending balance		$	679	613	2,915	954	147	$	5,308

			June 30, 2019
(In thousands)		Commercial and industrial		Construction and land development	Commercial real estate	Residential real estate	Consumer installment		Total
Quarter ended:
Beginning balance		$	686	773	2,251	930	168	$	4,808
Charge-offs			—	—	—	—	(1)		(1)
Recoveries			6	—	1	33	4		44
	Net recoveries (charge-offs)		6	—	1	33	3		43
Provision for loan losses			34	8	35	(59)	(18)		—
Ending balance		$	726	781	2,287	904	153	$	4,851

Six months ended:
Beginning balance		$	778	700	2,218	946	148	$	4,790
Charge-offs			—	—	—	—	(16)		(16)
Recoveries			24	—	1	47	5		77
	Net recoveries (charge-offs)		24	—	1	47	(11)		61
Provision for loan losses			(76)	81	68	(89)	16		—
Ending balance		$	726	781	2,287	904	153	$	4,851

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, 2020 and 2019.

			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, 2020:
Commercial and industrial		$	679	87,754	—	—	679	87,754
Construction and land development			613	32,967	—	—	613	32,967
Commercial real estate			2,915	250,370	—	218	2,915	250,588
Residential real estate			954	85,714	—	111	954	85,825
Consumer installment			147	8,631	—	—	147	8,631
	Total	$	5,308	465,436	—	329	5,308	465,765

June 30, 2019:
Commercial and industrial		$	726	54,307	—	—	726	54,307
Construction and land development			781	45,395	—	—	781	45,395
Commercial real estate			2,287	268,500	—	—	2,287	268,500
Residential real estate			904	99,292	—	—	904	99,292
Consumer installment			153	9,091	—	—	153	9,091
	Total	$	4,851	476,585	—	—	4,851	476,585
(1)	Represents loans collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies, 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, 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, 2020:
Commercial and industrial			$	85,347	2,196	211	—	$	87,754
Construction and land development				32,399	—	568	—		32,967
Commercial real estate:
	Owner occupied			48,988	902	146	—		50,036
	Hotel/motel			43,183	—	—	—		43,183
	Multi-family			28,444	3,530	—	—		31,974
	Other			124,285	873	19	218		125,395
		Total commercial real estate		244,900	5,305	165	218		250,588
Residential real estate:
	Consumer mortgage			37,453	739	2,427	348		40,967
	Investment property			43,991	538	218	111		44,858
		Total residential real estate		81,444	1,277	2,645	459		85,825
Consumer installment				8,520	55	55	1		8,631
		Total	$	452,610	8,833	3,644	678	$	465,765

December 31, 2019:
Commercial and industrial			$	54,340	2,176	266	—	$	56,782
Construction and land development				31,798	—	1,043	—		32,841
Commercial real estate:
	Owner occupied			47,865	917	78	—		48,860
	Hotel/motel			43,719	—	—	—		43,719
	Multi-family			44,839	—	—	—		44,839
	Other			132,030	849	21	—		132,900
		Total commercial real estate		268,453	1,766	99	—		270,318
Residential real estate:
	Consumer mortgage			45,247	962	2,527	187		48,923
	Investment property			42,331	949	372	—		43,652
		Total residential real estate		87,578	1,911	2,899	187		92,575
Consumer installment				8,742	60	64	—		8,866
		Total	$	450,911	5,913	4,371	187	$	461,382

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, 2020 and December 31, 2019.

				June 30, 2020
(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		$	218	—	218	$	—
		Total commercial real estate		218	—	218		—
Residential real estate:
	Investment property			111	—	111		—
		Total residential real estate		111	—	111		—
		Total impaired loans	$	329	—	329	$	—
(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, 2019
(In thousands)				Unpaid principal balance (1)	Charge-offs and payments applied (2)	Recorded investment (3)		Related allowance
With no allowance recorded:
Commercial and industrial			$	335	(236)	99	$	—
		Total impaired loans	$	335	(236)	99	$	—
(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, if any, by portfolio segment, 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, 2020		Six months ended June 30, 2020
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial real estate:
	Other		$	54	—	31	—
		Total commercial real estate		54	—	31	—
Residential real estate:
	Investment property			28	—	16	—
		Total residential real estate		28	—	16	—
		Total	$	82	—	47	—

				Quarter ended June 30, 2019		Six months ended June 30, 2019
				Average	Total interest	Average	Total interest
				recorded	income	recorded	income
(In thousands)				investment	recognized	investment	recognized
Impaired loans:
Commercial real estate:
	Owner occupied		$	—	—	45	9
		Total commercial real estate		—	—	45	9
		Total	$	—	—	45	9

Troubled Debt Restructurings

Impaired loans also include troubled debt restructurings (“TDRs”). On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under ASC 340-10 TDR classifications for a limited period of time to account for the effects of COVID-19. On April 7, 2020, the Federal Reserve and the other banking agencies and regulators issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (the “Interagency Statement on COVID-19 Loan Modifications”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled Debt Restructurings by Creditors,” apply to certain COVID-19-related modifications. If a loan modification is eligible, a bank may elect to account for the loan under section 4013 of the CARES Act. If a loan modification is not eligible under section 4013, or if the bank elects not to account for the loan modification under section 4013, the Revised Statement includes criteria when a bank may presume a loan modification is not a TDR in accordance with ASC 310-40.

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under the Interagency Statement on COVID-19 Loan Modifications in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. 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, when 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 Company had no TDRs as of December 31, 2019. There were no loans modified in a TDR during the quarter and six months ended June 30, 2020 and 2019, respectively. For the same periods, the Company had no loans modified in a TDR within the previous 12 months for which there was a payment default.

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, 2020.

				TDRs
								Related
(In thousands)				Accruing	Nonaccrual	Total		Allowance
June 30, 2020
Commercial real estate:
	Other		$	—	218	218	$	—
		Total commercial real estate		—	218	218		—
Residential real estate:
	Investment property			—	111	111		—
		Total residential real estate		—	111	111		—
		Total	$	—	329	329	$	—