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Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 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 $958,107 at September 30, 2020 and $155,697 at December 31, 2019, respectively) are as follows:

 

   September 30,
2020		   December 31,
2019		 
Commercial  $49,137,293   $52,848,455 
Commercial real estate:          
Construction   14,208,936    12,491,078 
Other   145,848,405    143,821,990 
Consumer:          
Real estate   70,225,264    59,533,045 
Other   4,610,569    5,377,992 
Paycheck Protection Program   36,722,174    — 
    320,752,641    274,072,560 
Allowance for loan losses   (4,153,814)   (4,003,758)
Loans, net  $316,598,827   $270,068,802 

 

We had $58.2 million and $85.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 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 as long as the borrower submits its loan forgiveness application within ten months of completion of the covered period, the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The Bank received a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. The Bank received $1.4 million of processing fees and has recognized $0.3 million during the nine months ended September 30, 2020. 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 $37.8 million in funding to 266 customers through the PPP as of September 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 September 30, 2020 and December 31, 2019. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

September 30, 2020 
    Commercial   Commercial
Real Estate Construction		   Commercial
Real Estate
Other		   Consumer
Real Estate		   Consumer
Other		   Paycheck Protection Program   Total 
Pass   $42,305,036   $13,223,424   $121,750,858   $68,448,332   $4,299,844   $—   $250,027,494 
Watch    3,724,838    985,512    18,032,014    866,450    220,303    —    23,829,117 
OAEM    1,041,844    —    3,987,438    623,226    48,526    —    5,701,034 
Substandard    2,065,575    —    2,078,095    287,256    41,896    —    4,472,822 
Doubtful    —    —    —    —    —    —    — 
Loss    —    —    —    —    —    —    — 
Unrated    —    —    —    —    —    36,722,174    36,722,174 
Total   $49,137,293   $14,208,936   $145,848,405   $70,225,264   $4,610,569   $36,722,174   $320,752,641 

 

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.

 

September 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  $25,809   $7,845   $—   $33,654   $49,103,639   $49,137,293   $— 
Commercial Real Estate Construction   —    —    —    —    14,208,936    14,208,936    — 
Commercial Real Estate Other   805,548    —    643,711    1,449,259    144,399,146    145,848,405    — 
Consumer Real Estate   —    —    37,407    37,407    70,187,857    70,225,264    — 
Consumer Other   26,449    —    —    26,449    4,584,120    4,610,569    — 
Paycheck Protection Program   —    —    —    —    36,722,174    36,722,174    — 
Total  $857,806   $7,845   $681,118   $1,546,769   $319,205,872   $320,752,641   $— 

 

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 September 30, 2020 and December 31, 2019.

 

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

  

   Loans Receivable on Non-Accrual  
   September 30, 2020   December 31, 2019 
Commercial  $189,492   $178,975 
Commercial Real Estate Construction   —    — 
Commercial Real Estate Other   917,638    857,327 
Consumer Real Estate   37,407    629,999 
Consumer Other   12,847    — 
Paycheck Protection Program   —    — 
Total  $1,157,384   $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 nine months ended September 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 September 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  $1,018,550   $150,807   $1,477,019   $883,300   $580,954   $—   $4,110,630 
Charge-offs   —    —    —    —    —    —    — 
Recoveries   —    —    —    —    3,184    —    3,184 
Provisions   197,766    28,766    312,806    (35,302)   (464,036)   —    40,000 
Ending balance  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $—   $4,153,814 

 

Nine Months Ended September 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    —    39,246    —    226,058 
Provisions   (300,612)   70,338    419,579    351,777    (501,082)   —    40,000 
Ending balance  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $—   $4,153,814 

 

Three Months Ended September 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  $1,539,652   $97,987   $1,332,803   $528,529   $631,577   $—   $4,130,548 
Charge-offs   —    —    —    —    —    —    — 
Recoveries   —    —    —    —    867    —    867 
Provisions   (494,762)   (1,281)   (39,630)   (27,382)   573,055    —    10,000 
Ending balance  $1,044,890   $96,706   $1,293,173   $501,147   $1,205,499   $—   $4,141,415 

 

Nine Months Ended September 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    —    —    —    3,821    —    9,821 
Provisions   (397,128)   32,830    827    114,562    403,909    —    155,000 
Ending balance  $1,044,890   $96,706   $1,293,173   $501,147   $1,205,499   $—   $4,141,415 

 

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.

 

September 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  $650,270   $—   $35,116   $5,625   $41,896   $—   $732,907 
Collectively evaluated for impairment   566,046    179,573    1,754,709    842,373    78,206    —    3,420,907 
Total Allowance for Loan Losses  $1,216,316   $179,573   $1,789,825   $847,998   $120,102   $—   $4,153,814 
Loans Receivable                                   
Individually evaluated for impairment  $2,680,487   $—   $5,361,814   $287,257   $41,896   $—   $8,371,454 
Collectively evaluated for impairment   46,456,806    14,208,936    140,486,591    69,938,007    4,568,673    36,722,174    312,381,187 
Total Loans Receivable  $49,137,293   $14,208,936   $145,848,405   $70,225,264   $4,610,569   $36,722,174   $320,752,641 

 

 

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

 

   Impaired Loans as of  
   September 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  $1,409,220   $1,409,220   $—   $1,355,875   $1,355,875   $— 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   5,020,362    5,020,362    —    1,432,988    1,432,988    — 
Consumer Real Estate   249,850    249,850    —    879,753    879,753    — 
Consumer Other   —    —    —    —    —    — 
Paycheck Protection Program   —    —    —    —    —    — 
Total   6,679,432    6,679,432    —    3,668,616    3,668,616    — 
                               
With an allowance recorded:                              
Commercial   1,271,267    1,271,267    650,270    709,857    709,857    683,278 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   341,452    341,452    35,116    346,685    246,884    1,782 
Consumer Real Estate   37,407    37,407    5,625    —    —    — 
Consumer Other   41,896    41,896    41,896    51,770    51,770    90 
Paycheck Protection Program   —    —    —    —    —    — 
Total   1,692,022    1,692,022    732,907    1,108,312    1,008,511    685,150 
                               
                               
Commercial   2,680,487    2,680,487    650,270    2,065,732    2,065,732    683,278 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   5,361,814    5,361,814    35,116    1,779,673    1,679,872    1,782 
Consumer Real Estate   287,257    287,257    5,625    879,753    879,753    — 
Consumer Other   41,896    41,896    41,896    51,770    51,770    90 
Paycheck Protection Program   —    —    —    —    —    — 
Total  $8,371,454   $8,371,454   $732,907   $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 September 30,  
   2020    2019  
   Average Recorded Investment    Interest Income Recognized    Average Recorded Investment    Interest Income Recognized  
With no related allowance recorded:                    
Commercial  $1,420,335   $19,891   $1,475,751   $23,707 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   5,024,801    56,189    1,136,872    11,832 
Consumer Real Estate   249,850    2,676    879,753    4,041 
Consumer Other   —    —    —    — 
Paycheck Protection Program   —    —    —    — 
    6,694,986    78,756    3,492,376    39,580 
                     
With an allowance recorded:                    
Commercial   1,299,038    26,910    178,975    — 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   335,664    —    346,685    — 
Consumer Real Estate   36,449    2,197    —    — 
Consumer Other   41,896    686    57,540    898 
Paycheck Protection Program   —    —    —    — 
    1,713,047    29,793    583,200    898 
Total                    
Commercial   2,719,373    46,801    1,654,726    23,707 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   5,360,465    56,189    1,483,557    11,832 
Consumer Real Estate   286,299    4,873    879,753    4,041 
Consumer Other   41,896    686    57,540    898 
Paycheck Protection Program   —    —    —    — 
   $8,408,033   $108,549   $4,075,576   $40,478 

 

   Nine Months Ended September 30,  
   2020    2019  
   Average
Recorded
Investment		    Interest
Income
Recognized		    Average
Recorded
Investment		    Interest
Income
Recognized		  
With no related allowance recorded:                    
Commercial  $1,442,248   $55,882   $1,519,222   $73,276 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   5,043,047    175,862    1,239,519    40,709 
Consumer Real Estate   249,801    9,148    879,753    26,676 
Consumer Other   —    —    —    — 
Paycheck Protection Program   —    —    —    — 
    6,735,096    240,892    3,638,494    140,661 
                     
With an allowance recorded:                    
Commercial   1,401,247    63,338    178,976    5,779 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   335,578    —    246,884    — 
Consumer Real Estate   35,460    —    —    — 
Consumer Other   42,154    1,931    61,089    2,644 
Paycheck Protection Program   —    —    —    — 
    1,814,439    65,269    486,949    8,423 
Total                    
Commercial   2,843,495    119,220    1,698,198    79,055 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   5,378,625    175,862    1,486,403    40,709 
Consumer Real Estate   285,261    9,148    879,753    26,676 
Consumer Other   42,154    1,931    61,089    2,644 
Paycheck Protection Program   —    —    —    — 
   $8,549,535   $306,161   $4,125,443   $149,084 

 

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 September 30, 2020, there were 13 TDRs with a balance of $5.5 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 September 30, 2020. No TDRs defaulted during the three and nine months ended September 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 $0.7 million in principal deferments to 84 customers, with an aggregate loan of $29.7 million, during the nine months ended September 30, 2020. The principal deferments represent 0.22% of our total loan portfolio as of September 30, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 8 loans, with an aggregate loan balance of $3.9 million, that were granted payment accommodations as TDRs given the continued financial difficulty of the customer, associated industry risk, and multiple deferral requests. All other borrowers were current prior to relief, were not experiencing financial difficulty prior to COVID-19, and the Bank determined they were not considered TDRs. Additionally, of the 76 customers that received payment accommodations that are not classified as TDRs, 5 customers, with an aggregate loan balance of $0.3 million, have paid their loan in full, 8 customers, with an aggregate loan balance of $2.3 million, are past due, and 63 customers, with an aggregate loan balance of $23.2 million, have commenced paying as agreed. The Bank will continue to examine payment accommodations periodically.