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Loan and Allowance for Loan Losses
12 Months Ended
Dec. 31, 2022
Loans And Leases Receivable Disclosure [Abstract]  
Loans and leases receivable disclosure [Text Block]
NOTE 5: LOANS AND ALLOWANCE
 
FOR LOAN LOSSES
December 31
(In thousands)
2022
2021
Commercial and industrial
$
66,179
$
83,977
Construction and land development
66,479
32,432
Commercial real estate:
Owner occupied
61,265
63,375
Hotel/motel
33,457
43,856
Multifamily
41,181
42,587
Other
129,278
108,553
Total commercial real estate
265,181
258,371
Residential real estate:
Consumer mortgage
45,410
29,781
Investment property
52,325
47,880
Total residential real estate
97,735
77,661
Consumer installment
9,546
6,682
Total loans
505,120
459,123
Less: unearned income
(662)
(759)
Loans, net of unearned income
$
504,458
$
458,364
Loans secured by real estate were approximately
85.0
% of the total loan portfolio at December 31, 2022.
 
At December 31,
2022, the Company’s geographic loan
 
distribution was concentrated primarily in Lee County,
 
Alabama and surrounding
areas.
In accordance with ASC 310,
Receivables
, 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.
 
We
 
were a participating lender in the PPP.
 
PPP loans are forgivable in whole or in part, if the proceeds are used
for payroll and other permitted purposes in accordance with the requirements of the PPP.
 
As of December 31, 2022, the
Company had
one
 
PPP loan with an aggregate outstanding principal balance of $
0.1
 
million included in this category.
 
The
Company had
138
 
PPP loans with an aggregate outstanding principal balance of $
8.1
 
million included in this category at
December 31, 2021.
 
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 three classes: (1) owner occupied (2)
 
multi-family
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.
 
Multifamily
 
– 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.
 
Loans in this class
 
include loans
 
for neighborhood retail centers, hotels, medical and professional offices, sing
 
le retail stores, industrial buildings, and
 
warehouses 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, 2022
and 2021.
Accruing
Accruing
Total
30-89 Days
Greater than
Accruing
Non-
Total
 
(In thousands)
Current
Past Due
90 days
Loans
Accrual
Loans
December 31, 2022:
Commercial and industrial
$
65,731
5
65,736
443
$
66,179
Construction and land development
66,479
66,479
66,479
Commercial real estate:
Owner occupied
61,265
61,265
61,265
Hotel/motel
33,457
33,457
33,457
Multifamily
41,181
41,181
41,181
Other
127,162
127,162
2,116
129,278
Total commercial real estate
263,065
263,065
2,116
265,181
Residential real estate:
Consumer mortgage
45,200
38
45,238
172
45,410
Investment property
52,325
52,325
52,325
Total residential real estate
97,525
38
97,563
172
97,735
Consumer installment
9,506
40
9,546
9,546
Total
$
502,306
83
502,389
2,731
$
505,120
December 31, 2021:
Commercial and industrial
$
83,974
3
83,977
$
83,977
Construction and land development
32,228
204
32,432
32,432
Commercial real estate:
Owner occupied
63,375
63,375
63,375
Hotel/motel
43,856
43,856
43,856
Multifamily
42,587
42,587
42,587
Other
108,366
108,366
187
108,553
Total commercial real estate
258,184
258,184
187
258,371
Residential real estate:
Consumer mortgage
29,070
516
29,586
195
29,781
Investment property
47,818
47,818
62
47,880
Total residential real estate
76,888
516
77,404
257
77,661
Consumer installment
6,657
25
6,682
6,682
Total
$
457,931
748
458,679
444
$
459,123
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 $
26
 
thousand and $
27
 
thousand for the years ended December 31, 2022
and 2021, respectively.
Allowance for Loan Losses
The allowance for loan losses as of and for the years ended December 31,
 
2022 and 2021, is presented below.
Year ended December 31
(In thousands)
2022
2021
Beginning balance
$
4,939
$
5,618
Charged-off loans
(292)
(294)
Recovery of previously charged-off loans
118
215
Net charge-offs
(174)
(79)
Provision for loan losses
1,000
(600)
Ending balance
$
5,765
$
4,939
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, independent
loan review process. 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, 2022 and 2021, 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 based on 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 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
year ended December 31, 2022, the Company increased its look-back period to
 
55 quarters to continue to include losses
incurred by the Company beginning with the first quarter of 2009.
 
During 2021, the Company adjusted certain qualitative
and economic factors to reflect improvements in economic conditions in our primary
 
market area that had previously been
observed as a result of the COVID-19 pandemic.
 
No changes were made to qualitative and economic factors during 2022.
The following table details the changes in the allowance for loan losses by portfolio segment
 
for the years ended December
31, 2022 and 2021.
(in thousands)
Commercial
and industrial
Construction
and land
Development
Commercial
Real Estate
Residential
Real Estate
Consumer
Installment
Total
Balance, December 31, 2020
$
807
594
3,169
944
104
$
5,618
Charge-offs
(254)
(3)
(37)
(294)
Recoveries
140
55
20
215
Net recoveries (charge-offs)
140
(254)
52
(17)
(79)
Provision
(90)
(76)
(176)
(257)
(1)
(600)
Balance, December 31, 2021
$
857
518
2,739
739
86
$
4,939
Charge-offs
(222)
(70)
(292)
Recoveries
7
23
26
62
118
Net (charge-offs) recoveries
(215)
23
26
(8)
(174)
Provision
105
431
347
63
54
1,000
Balance, December 31, 2022
$
747
949
3,109
828
132
$
5,765
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, 2022 and 2021.
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
December 31, 2022:
Commercial and industrial
$
688
65,736
59
443
747
66,179
Construction and land development
949
66,479
949
66,479
Commercial real estate
2,663
263,065
446
2,116
3,109
265,181
Residential real estate
828
97,735
828
97,735
Consumer installment
132
9,546
132
9,546
Total
$
5,260
502,561
505
2,559
5,765
505,120
December 31, 2021:
Commercial and industrial
$
857
83,977
857
83,977
Construction and land development
518
32,432
518
32,432
Commercial real estate
2,739
258,184
187
2,739
258,371
Residential real estate
739
77,599
62
739
77,661
Consumer installment
86
6,682
86
6,682
Total
$
4,939
458,874
249
4,939
459,123
(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
Mention
Substandard
Accruing
Nonaccrual
Total loans
December 31, 2022
Commercial and industrial
$
65,517
7
212
443
$
66,179
Construction and land development
66,479
66,479
Commercial real estate:
Owner occupied
60,866
238
161
61,265
Hotel/motel
33,457
33,457
Multifamily
41,181
41,181
Other
126,992
170
2,116
129,278
Total commercial real estate
262,496
408
161
2,116
265,181
Residential real estate:
Consumer mortgage
44,212
439
587
172
45,410
Investment property
52,034
43
248
52,325
Total residential real estate
96,246
482
835
172
97,735
Consumer installment
9,498
1
47
9,546
Total
$
500,236
898
1,255
2,731
$
505,120
December 31, 2021
Commercial and industrial
$
83,725
26
226
$
83,977
Construction and land development
32,212
2
218
32,432
Commercial real estate:
Owner occupied
61,573
1,675
127
63,375
Hotel/motel
36,162
7,694
43,856
Multifamily
39,093
3,494
42,587
Other
107,426
911
29
187
108,553
Total commercial real estate
244,254
13,774
156
187
258,371
Residential real estate:
Consumer mortgage
27,647
452
1,487
195
29,781
Investment property
47,459
98
261
62
47,880
Total residential real estate
75,106
550
1,748
257
77,661
Consumer installment
6,650
20
12
6,682
Total
$
441,947
14,372
2,360
444
$
459,123
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 thousand secured by real
 
estate (nonaccrual
construction and land development, commercial real estate, and residential real estate).
Individually evaluated impaired loans equal to or greater than $250 thousand 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, 2022 and 2021.
December 31, 2022
(In thousands)
Unpaid
 
principal
 
balance (1)
Charge-offs
 
and payments
 
applied (2)
Recorded
investment (3)
Related
allowance
With no allowance recorded:
Commercial and industrial
$
210
(1)
$
209
Commercial real estate:
Owner occupied
858
(3)
855
Total commercial real estate
858
(3)
855
Total
 
$
1,068
(4)
$
1,064
With allowance recorded:
Commercial and industrial
$
234
234
$
59
Commercial real estate:
Owner occupied
1,261
1,261
446
Total commercial real estate
1,261
1,261
446
Total
 
1,495
1,495
505
Total
 
impaired loans
$
2,563
(4)
2,559
$
505
(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, 2021
(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
$
205
(18)
187
Total commercial real estate
205
(18)
187
Residential real estate:
Investment property
68
(6)
62
Total residential real estate
68
(6)
62
Total
 
$
273
(24)
$
249
With allowance recorded:
Total
 
impaired loans
$
273
(24)
249
$
(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, 2022
Year ended December 31, 2021
Average
Total interest
Average
Total interest
recorded
income
recorded
income
(In thousands)
investment
recognized
investment
recognized
Impaired loans:
Commercial and industrial
$
34
$
Commercial real estate:
Owner occupied
163
Other
$
153
$
199
Total commercial real estate
316
199
Residential real estate:
Investment property
5
96
Total residential real estate
5
96
Total
 
$
355
$
295
Troubled Debt
 
Restructurings
 
Impaired loans also include troubled debt restructurings (“TDRs”).
 
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. Section 4013 of the
CARES Act was extended to January 1, 2022 by Section 541 of the Consolidated
 
Appropriations Act of 2021.
The Interagency Statement on COVID-19 Loan Modifications, encourages banks
 
to work prudently with borrowers and
describes the agencies’ interpretation of how accounting rules under ASC 310-40, “Troubled
 
Debt Restructurings by
Creditors,” apply to certain COVID-19-related modifications.
 
The Interagency Statement on COVID-19 Loan
Modifications was supplemented on June 23, 2020 by the Interagency Examiner Guidance
 
for Assessing Safety and
Soundness Considering the Effect of the COVID-19 Pandemic on Institutions.
 
If a loan modification was 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 evaluated individually,
 
including those that have payment defaults,
for possible impairment.
The Company had no TDRs at December 31, 2022.
 
The following is a summary of accruing and nonaccrual TDRs and the
related allowance for loan losses, by portfolio segment and class at December 31, 2021.
TDRs
Related
(In thousands)
Accruing
Nonaccrual
Total
Allowance
December 31, 2021
Commercial real estate:
Other
$
187
187
$
Total commercial real estate
187
187
Residential real estate:
Investment property
62
62
Total residential real estate
62
62
Total
 
$
249
249
$
At December 31, 2022 there were no significant outstanding commitments to advance
 
additional funds to customers whose
loans had been restructured.
During the years ended December 31, 2022 and 2021, respectively,
 
the Company had 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).