Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees and costs of $1,128,775 at June 30, 2020 and $155,697 at December 31, 2019, respectively) are as follows:

	June 30, 2020			December 31, 2019
Commercial	$	42,680,070		$	52,848,455
Commercial Real Estate:
Construction		14,301,901			12,491,078
Other		140,469,962			143,821,990
Consumer:
Real Estate		71,183,544			59,533,045
Other		4,728,864			5,377,992
Paycheck Protection Program		36,542,964			—
		309,907,305			274,072,560
Allowance for loan losses		(4,110,630	)		(4,003,758	)
Loans, net	$	305,796,675		$	270,068,802

We had $68.7 million and $85.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at June 30, 2020 and at December 31, 2019, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for Paycheck and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00% and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and payments are deferred for the first six months of the loan. The Bank receives a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The Bank has provided $36.5 million in funding to 266 customers through the PPP as of June 30, 2020. Because these loans are 100% guaranteed by the SBA and did not undergo the Bank’s typical underwriting process, they are not graded and do not have an associated reserve.

Our portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Our internal credit risk grading system is based on experience with similarly graded loans, industry best practices, and regulatory guidance. Our portfolio is graded in its entirety, with the exception of the PPP loans.

Our internally assigned grades pursuant to the Board-approved lending policy are as follows:

● Excellent (1) The borrowing entity has more than adequate cash flow, unquestionable strength, strong earnings and capital and, where applicable, no overdrafts.

● Good (2) The borrowing entity has dependable cash flow, better than average financial condition, good capital and usually no overdrafts.

● Satisfactory (3) The borrowing entity has adequate cash flow, satisfactory financial condition, and explainable overdrafts (if any).

● Watch (4) The borrowing entity has generally adequate, yet inconsistent cash flow, cyclical earnings, weak capital, loan to/from stockholders, and infrequent overdrafts. The borrower has consistent yet sometimes unpredictable sales and growth.

● OAEM (5) The borrowing entity has marginal cash flow, occasional past dues, and frequent and unexpected working capital needs.

● Substandard (6) The borrowing entity has a cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is possible. The borrowing entity has declining sales, rising costs, and may need to look for secondary source of repayment.

● Doubtful (7) The borrowing entity has negative cash flow. Survival of the business is at risk, full repayment is unlikely, and there are frequent and unexplained overdrafts. The borrowing entity shows declining trends and no operating profits.

● Loss (8) The borrowing entity has negative cash flow with no alternatives. Survival of the business is unlikely.

The following tables illustrate credit quality by class and internally assigned grades at June 30, 2020 and December 31, 2019. “Pass” includes loans internally graded as excellent, good and satisfactory.

June 30, 2020
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Pass	$	35,665,736	$	13,461,039	$	118,080,815	$	68,776,698	$	4,430,294	$	—	$	240,414,582
Watch		4,701,530		840,862		20,069,519		869,152		219,765		—		26,700,828
OAEM		388,727		—		238,227		622,731		36,909		—		1,286,594
Substandard		1,924,077		—		2,081,401		914,963		41,896		—		4,962,337
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Unrated		—		—		—		—		—		36,542,964		36,542,964
Total	$	42,680,070	$	14,301,901	$	140,469,962	$	71,183,544	$	4,728,864	$	36,542,964	$	309,907,305

December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Pass	$	48,098,936	$	12,005,834	$	137,641,011	$	56,034,247	$	4,966,615	$	—	$	258,746,643
Watch		2,303,568		485,244		3,758,220		2,096,445		315,375		—		8,958,852
OAEM		460,551		—		649,039		522,600		44,232		—		1,676,422
Substandard		1,985,400		—		1,773,720		879,753		51,770		—		4,690,643
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Unrated		—		—		—		—		—		—		—
Total	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	—	$	274,072,560

The following tables include an aging analysis of the recorded investment in loans segregated by class.

June 30, 2020
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment ≥ 90 Days and Accruing
Commercial	$	—	$	210,121	$	—	$	210,121	$	42,469,949	$	42,680,070	$	—
Commercial Real Estate Construction		—		—		—		—		14,301,901		14,301,901		—
Commercial Real Estate Other		335,448		423,170		638,139		1,396,757		139,073,205		140,469,962		—
Consumer Real Estate		—		—		665,114		665,114		70,518,430		71,183,544		—
Consumer Other		—		2,560		—		2,560		4,726,304		4,728,864		—
Paycheck Protection Program		—		—		—		—		36,542,964		36,542,964		—
Total	$	335,448	$	635,851	$	1,303,253	$	2,274,552	$	307,632,753	$	309,907,305	$	—

December 31, 2019
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Recorded Investment ≥ 90 Days and Accruing
Commercial	$	39,329	$	—	$	178,975	$	218,304	$	52,630,151	$	52,848,455	$	—
Commercial Real Estate Construction		—		—		—		—		12,491,078		12,491,078		—
Commercial Real Estate Other		620,837		300,240		582,419		1,503,496		142,318,494		143,821,990		—
Consumer Real Estate		—		2,965		629,999		632,964		58,900,081		59,533,045		—
Consumer Other		32,842		—		—		32,842		5,345,150		5,377,992		—
Paycheck Protection Program		—		—		—		—		—		—		—
Total	$	693,008	$	303,205	$	1,391,393	$	2,387,606	$	271,684,954	$	274,072,560	$	—

There were no loans over 90 days past due and still accruing as of June 30, 2020 and December 31, 2019.

The following table summarizes the balances of non-accrual loans:

	Loans Receivable on Non-Accrual
		June 30, 2020		December 31, 2019
Commercial	$	190,751	$	178,975
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		912,067		857,327
Consumer Real Estate		665,114		629,999
Consumer Other		13,450		—
Paycheck Protection Program		—		—
Total	$	1,781,382	$	1,666,301

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by loan category for the three and six months ended June 30, 2020 and 2019. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current economic factors.

	Three Months Ended June 30, 2020
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program		Total
Allowance for Loan Losses:
Beginning balance	$	1,416,267		$	123,069	$	1,212,647	$	562,000	$	700,230		$	—	$	4,014,213
Charge-offs		—			—		—		—		(76,410	)		—		(76,410	)
Recoveries		71,511			—		99,801		—		1,515			—		172,827
Provisions		(469,228	)		27,738		164,571		321,300		(44,381	)		—		—
Ending balance	$	1,018,550		$	150,807	$	1,477,019	$	883,300	$	580,954		$	—	$	4,110,630

	Six Months Ended June 30, 2020
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program		Total
Allowance for Loan Losses:
Beginning balance	$	1,429,917		$	109,235	$	1,270,445	$	496,221	$	697,940		$	—	$	4,003,758
Charge-offs		—			—		—		—		(116,002	)		—		(116,002	)
Recoveries		87,011			—		99,801		—		36,062			—		222,874
Provisions		(498,378	)		41,572		106,773		387,079		(37,046	)		—		—
Ending balance	$	1,018,550		$	150,807	$	1,477,019	$	883,300	$	580,954		$	—	$	4,110,630

	Three Months Ended June 30, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program		Total
Allowance for Loan Losses:
Beginning balance	$	1,528,577	$	81,047	$	1,318,918	$	377,641	$	683,239		$	—	$	3,989,422
Charge-offs		—		—		—		—		(2,009	)		—		(2,009	)
Recoveries		5,500		—		—		—		2,635			—		8,135
Provisions		5,575		16,940		13,885		150,888		(52,288	)		—		135,000
Ending balance	$	1,539,652	$	97,987	$	1,332,803	$	528,529	$	631,577		$	—	$	4,130,548

	Six Months Ended June 30, 2019
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other			Paycheck Protection Program		Total
Allowance for Loan Losses:
Beginning balance	$	1,665,413		$	63,876	$	1,292,346	$	386,585	$	806,111		$	—	$	4,214,331
Charge-offs		(229,395	)		—		—		—		(8,342	)		—		(237,737	)
Recoveries		6,000			—		—		—		2,954			—		8,954
Provisions		97,634			34,111		40,457		141,944		(169,146	)		—		145,000
Ending balance	$	1,539,652		$	97,987	$	1,332,803	$	528,529	$	631,577		$	—	$	4,130,548

The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans, for the periods indicated.

	June 30, 2020
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	466,463	$	—	$	29,199	$	170,794	$	—	$	—	$	666,456
Collectively evaluated for impairment		552,087		150,807		1,447,820		712,506		580,954		—		3,444,174
Total Allowance for Loan Losses	$	1,018,550	$	150,807	$	1,477,019	$	883,300	$	580,954	$	—	$	4,110,630
Loans Receivable
Individually evaluated for impairment	$	1,924,077	$	—	$	2,084,973	$	914,964	$	41,896	$	—	$	4,965,910
Collectively evaluated for impairment		40,755,993		14,301,901		138,384,989		70,268,580		4,686,968		36,542,964		304,941,395
Total Loans Receivable	$	42,680,070	$	14,301,901	$	140,469,962	$	71,183,544	$	4,728,864	$	36,542,964	$	309,907,305

	December 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	683,278	$	—	$	1,782	$	—	$	90	$	—	$	685,150
Collectively evaluated for impairment		746,639		109,235		1,268,663		496,221		697,850		—		3,318,608
Total Allowance for Loan Losses	$	1,429,917	$	109,235	$	1,270,445	$	496,221	$	697,940	$	—	$	4,003,758
Loans Receivable
Individually evaluated for impairment	$	2,065,732	$	—	$	1,679,872	$	879,753	$	51,770	$	—	$	4,677,127
Collectively evaluated for impairment		50,782,723		12,491,078		142,142,118		58,653,292		5,326,222		—		269,395,433
Total Loans Receivable	$	52,848,455	$	12,491,078	$	143,821,990	$	59,533,045	$	5,377,992	$	—	$	274,072,560

As of June 30, 2020 and December 31, 2019, loans individually evaluated and considered impaired are presented in the following table.

	Impaired Loans as of
	June 30, 2020						December 31, 2019
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	956,102	$	956,102	$	—	$	1,355,875	$	1,355,875	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,749,438		1,749,438		—		1,432,988		1,432,988		—
Consumer Real Estate		249,850		249,850		—		879,753		879,753		—
Consumer Other		41,896		41,896		—		—		—		—
Paycheck Protection Program		—		—		—		—		—		—
Total		2,997,286		2,997,286		—		3,668,616		3,668,616		—
With an allowance recorded:
Commercial		967,975		967,975		466,463		709,857		709,857		683,278
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		435,336		335,535		29,199		346,685		246,884		1,782
Consumer Real Estate		665,114		665,114		170,794		—		—		—
Consumer Other		—		—		—		51,770		51,770		90
Paycheck Protection Program		—		—		—		—		—		—
Total		2,068,425		1,968,624		666,456		1,108,312		1,008,511		685,150
Commercial		1,924,077		1,924,077		466,463		2,065,732		2,065,732		683,278
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		2,184,774		2,084,973		29,199		1,779,673		1,679,872		1,782
Consumer Real Estate		914,964		914,964		170,794		879,753		879,753		—
Consumer Other		41,896		41,896		—		51,770		51,770		90
Paycheck Protection Program		—		—		—		—		—		—
Total	$	5,065,711	$	4,965,910	$	666,456	$	4,776,928	$	4,677,127	$	685,150

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated.

	Three Months Ended June 30,
	2020				2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	960,398	$	14,480	$	117,741	$	2,071
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,752,669		21,646		863,351		10,354
Consumer Real Estate		249,800		2,647		879,753		14,257
Consumer Other		42,163		683		—		—
Paycheck Protection Program		—		—		—		—
		3,005,030		39,456		1,860,845		26,682
With an allowance recorded:
Commercial		1,052,358		11,434		1,582,324		25,869
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		235,734		—		501,279		2,735
Consumer Real Estate		665,058		—		—		—
Consumer Other		—		—		17,108		224
Paycheck Protection Program		—		—		—		—
		1,953,150		11,434		2,100,711		28,828
Total
Commercial		2,012,756		25,914		1,700,065		27,940
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,988,403		21,646		1,364,630		13,089
Consumer Real Estate		914,858		2,647		879,753		14,257
Consumer Other		42,163		683		17,108		224
Paycheck Protection Program		—		—		—		—
	$	4,958,180	$	50,890	$	3,961,556	$	55,510

		Six Months Ended June 30,
		2020				2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,024,907	$	29,570	$	123,509	$	4,334
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		1,772,945		37,824		967,076		20,700
Consumer Real Estate		249,754		6,472		879,753		28,357
Consumer Other		43,903		1,342		—		—
Paycheck Protection Program		—		—		—		—
		3,091,509		75,208		1,970,338		53,391
With an allowance recorded:
Commercial		1,184,428		26,662		1,597,013		51,983
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		229,149		—		403,001		5,498
Consumer Real Estate		664,701		—		—		—
Consumer Other		—		—		18,279		478
Paycheck Protection Program		—		—		—		—
		2,078,278		26,662		2,018,293		57,959
Total
Commercial		2,209,335		56,232		1,720,522		56,317
Commercial Real Estate - Construction		—		—		—		—
Commercial Real Estate - Other		2,002,094		37,824		1,370,077		26,198
Consumer Real Estate		914,455		6,472		879,753		28,357
Consumer Other		43,903		1,342		18,279		478
Paycheck Protection Program		—		—		—		—
	$	5,169,787	$	101,870	$	3,988,631	$	111,350

In general, the modification or restructuring of a loan is considered a troubled debt restructuring (“TDR”) if we, for economic or legal reasons related to a borrower’s financial difficulties, grant a concession to the borrower that we would not otherwise consider. As of June 30, 2020, there were 6 TDRs with a balance of $1.7 million compared to 3 TDRs with a balance of $573,473 as of December 31, 2019. These TDRs were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. All TDRs were performing as agreed as of June 30, 2020. No TDRs defaulted during the three and six months ended June 30, 2020 and 2019, which were modified within the previous twelve months.

Regulatory agencies, as set forth in the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (initially issued on March 22, 2020 and revised on April 7, 2020), have encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19. In this statement, the regulatory agencies expressed their view of loan modification programs as positive actions that may mitigate adverse effects on borrowers due to COVID-19 and that the agencies will not criticize institutions for working with borrowers in a safe and sound manner. Moreover, the revised statement provides that eligible loan modifications related to COVID-19 may be accounted for under section 4013 of the CARES Act or in accordance with ASC 310-40. Under Section 4013 of the CARES Act, banks may elect not to categorize loan modifications as TDRs if the modifications are related to COVID-19, executed on a loan that was not more than 30 days past due as of December 31, 2019, and executed between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the date of termination of the National Emergency. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not considered TDRs. Beginning in March 2020, the Bank provided payment accommodations to customers, consisting of 60-day principal deferral to borrowers negatively impacted by COVID-19. The Bank processed approximately $0.6 million in principal deferments to 80 customers during the six months ended June 30, 2020. This represents 0.18% of our total loan portfolio as of June 30, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and found that all borrowers were current prior to relief and were not experiencing financial difficulty prior to COVID-19.