LOANS AND ALLOWANCE FOR LOAN LOSSES

12 Months Ended

Dec. 31, 2020

Receivables [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans (net of deferred loan fees of $676,155 at December 31, 2020, and $155,697 at December 31, 2019) are shown in the table below. 

	December 31, 2020			December 31, 2019
Commercial	$	51,041,397		$	52,848,455
Commercial real estate:
Construction		14,813,726			12,491,078
Other		146,187,886			143,821,990
Consumer:
Real estate		71,836,041			59,533,045
Other		4,480,491			5,377,992
Paycheck protection program		32,443,132			-
		320,802,673			274,072,560
Allowance for loan losses		(4,185,694	)		(4,003,758	)
Loans, net	$	316,616,979		$	270,068,802

We had $76.0 million and $85.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at December 31, 2020 and 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 payroll 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 processing fees of $1.4 million and recognized $0.6 million during the year ended December 31, 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 provided $37.8 million in funding to 266 customers through the PPP as of December 31, 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 cash flow barely sufficient to service debt, deteriorated financial condition, and bankruptcy is a possibility. 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 risks by category and internally assigned grades at December 31, 2020 and 2019. “Pass” includes loans internally graded as excellent, good and satisfactory.

	December 31, 2020
	Commercial		Commerical Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Pass	$	44,903,134	$	14,349,065	$	125,111,378	$	70,454,909	$	4,171,858	$	32,443,132	$	291,433,476
Watch		3,415,408		464,661		15,200,992		467,163		219,954		—		19,768,178
OAEM		1,039,647		—		1,784,296		623,226		46,783		—		3,493,952
Substandard		1,683,208		—		4,091,220		290,743		41,896		—		6,107,067
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	51,041,397	$	14,813,726	$	146,187,886	$	71,836,041	$	4,480,491	$	32,443,132	$	320,802,673

		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			—		—		—		—		—		—		—
	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.

		December 31, 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	$	144,999	$	27,855	$	—	$	172,854	$	50,868,543	$	51,041,397	$	—
Commercial Real Estate Construction		—		—		—		—		14,813,726		14,813,726		—
Commercial Real Estate Other		61,597		—		923,828		985,425		145,202,461		146,187,886		—
Consumer Real Estate		—		—		40,893		40,893		71,795,148		71,836,041		—
Consumer Other		—		—		—		—		4,480,491		4,480,491		—
Paycheck Protection Program		—		—		—		—		32,443,132		32,443,132
Total	$	206,596	$	27,855	$	964,721	$	1,199,172	$	319,603,501	$	320,802,673	$	—

	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 past due 90 days or more and still accruing interest at December 31, 2020 and 2019.

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

	Loans Receivable on Non-Accrual
	December 31, 2020		December 31, 2019
Commercial	$	178,975	$	178,975
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		923,828		857,327
Consumer Real Estate		40,893		629,999
Consumer Other		12,234		—
Paycheck Protection Program		—		—
Total	$	1,155,930	$	1,666,301

The following tables set forth the changes in the allowance and an allocation of the allowance by class at December 31, 2020, 2019, and 2018. The allowance 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.

	December 31, 2020
	Commercial			Commerical 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		(171,646	)		—		—		—		(116,001	)		(2,650	)		(290,297	)
Recoveries		88,811			—		99,801		—		43,599			22			232,233
Provisions		(317,772	)		90,031		538,875		428,856		(502,618	)		2,628			240,000
Ending Balance	$	1,029,310		$	199,266	$	1,909,121	$	925,077	$	122,920		$	—		$	4,185,694

	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
Beginning Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585	$	806,111		$	—	$	4,214,331
Charge-offs		(398,685	)		—		—			—		(8,342	)		—		(407,027	)
Recoveries		12,200			—		—			—		4,254			—		16,454
Provisions		150,989			45,359		(21,901	)		109,636		(104,083	)		—		180,000
Ending Balance	$	1,429,917		$	109,235	$	1,270,445		$	496,221	$	697,940		$	—	$	4,003,758

	December 31, 2018
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Paycheck Protection Program		Total
Allowance for Loan Losses
Beginning Balance	$	1,403,588		$	23,638	$	1,549,755		$	796,918		$	101,499		$	—	$	3,875,398
Charge-offs		(31,250	)		—		—			—			(84,637	)		—		(115,887	)
Recoveries		14,000			—		56,827			45,412			13,581			—		129,820
Provisions		279,075			40,238		(314,236	)		(455,745	)		775,668			—		325,000
Ending Balance	$	1,665,413		$	63,876	$	1,292,346		$	386,585		$	806,111		$	—	$	4,214,331

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

	December 31, 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	$	357,657	$	—	$	36,747	$	9,111	$	41,896	$	—	$	445,411
Collectively evaluated for impairment		671,653		199,266		1,872,374		915,966		81,024		—		3,740,283
Total Allowance for Loan Losses		1,029,310		199,266		1,909,121		925,077		122,920		—		4,185,694
Loans Receivable
Individually evaluated for impairment		2,298,120		—		5,174,841		290,743		41,896		—		7,805,600
Collectively evaluated for impairment		48,743,277		14,813,726		141,013,045		71,545,298		4,438,595		32,443,132		312,997,073
Total Loans Receivable	$	51,041,397	$	14,813,726	$	146,187,886	$	71,836,041	$	4,480,491	$	32,443,132	$	320,802,673

	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 December 31, 2020 and 2019, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table.

	Impaired and Restructured Loans As of
	December 31, 2020						December 31, 2019
		Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	1,721,818	$	1,721,818	$	—	$	1,355,875	$	1,355,875	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		4,831,757		4,831,757		—		1,432,988		1,432,988		—
Consumer Real Estate		249,850		249,850		—		879,753		879,753		—
Consumer Other		—		—		—		—		—		—
Paycheck Protection Program		—		—		—		—		—		—
Total		6,803,425		6,803,425		—		3,668,616		3,668,616		—
With an allowance recorded:
Commercial		576,302		576,302		357,657		709,857		709,857		683,278
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		343,084		343,084		36,747		346,685		246,884		1,782
Consumer Real Estate		40,893		40,893		9,111		—		—		—
Consumer Other		41,896		41,896		41,896		51,770		51,770		90
Paycheck Protection Program		—		—		—		—		—		—
Total		1,002,175		1,002,175		445,411		1,108,312		1,008,511		685,150
Total
Commercial		2,298,120		2,298,120		357,657		2,065,732		2,065,732		683,278
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		5,174,841		5,174,841		36,747		1,779,673		1,679,872		1,782
Consumer Real Estate		290,743		290,743		9,111		879,753		879,753		—
Consumer Other		41,896		41,896		41,896		51,770		51,770		90
Paycheck Protection Program		—		—		—		—		—		—
Total	$	7,805,600	$	7,805,600	$	445,411	$	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.

	For the year ended December 31,
	2020					2019				2018
	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	1,866,590	$	102,636		$	1,483,982	$	94,779	$	133,413	$	8,637
Commercial Real Estate Construction		—		—			—		—		—		—
Commercial Real Estate Other		4,849,474		218,372			1,533,720		76,183		982,078		40,174
Consumer Real Estate		249,813		11,580			879,753		30,400		879,753		51,520
Consumer Other		—		—			—		—		—		—
Paycheck Protection Program		—		—			—		—		—		—
Total		6,965,877		332,588			3,897,455		201,362		1,995,244		100,331
With an allowance recorded:
Commercial		578,399		37,663			725,353		44,299		1,915,139		100,395
Commercial Real Estate Construction		—		—			—		—		—		—
Commercial Real Estate Other		337,304		—			246,884		—		416,569		10,999
Consumer Real Estate		36,483		(116	)		—		—		—		—
Consumer Other		42,089		2,743			59,240		3,487		26,314		1,382
Paycheck Protection Program		—		—			—		—		—		—
Total		994,275		40,290			1,031,477		47,786		2,358,022		112,776
Total
Commercial		2,444,989		140,299			2,209,335		139,078		2,048,552		109,032
Commercial Real Estate Construction		—		—			—		—		—		—
Commercial Real Estate Other		5,186,778		218,372			1,780,604		76,183		1,398,647		51,173
Consumer Real Estate		286,296		11,464			879,753		30,400		879,753		51,520
Consumer Other		42,089		2,743			59,240		3,487		26,314		1,382
Paycheck Protection Program		—		—			—		—		—		—
	$	7,960,152	$	372,878		$	4,928,932	$	249,148	$	4,353,266	$	213,107

In general, the modification or restructuring of a debt 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 December 31, 2020, there were 14 TDRs with a balance of $5.8 million. As of December 31, 2019, there were 3 TDRs with a balance of $573,473. 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 December 31, 2020. During the year ended December 31, 2019, one TDR in the amount of $2,008 was charged off and the Company recovered $439. No other TDRs that were modified within the previous twelve months defaulted during the following year for the years ended December 31, 2020, 2019, and 2018.

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 balance of $25.9 million, during the year ended December 31, 2020. The principal deferments represent 0.24% of our total loan portfolio as of December 31, 2020. The Bank has examined the payment accommodations granted to borrowers in response to COVID-19 and classified 9 loans, with an aggregate loan balance of $4.0 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 75 customers that received payment accommodations that are not classified as TDRs, 15 customers, with an aggregate loan balance of $2.9 million, have paid their loan in full, 7 customers, with an aggregate loan balance of $3.3 million, are past due less than 30 days, and 53 customers, with an aggregate loan balance of $18.6 million, have commenced paying as agreed as of December 31, 2020. There are no loans that received payment accommodation past due greater than 30 days. The Bank will continue to examine payment accommodations as requested by borrowers.