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LOANS AND ALLOWANCE FOR LOAN LOSSES
 3 Months Ended
Mar. 31, 2021
Receivables [Abstract]  
LOANS AND ALLOWANCE FOR LOAN LOSSES
3. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

Major classifications of loans (net of deferred loan fees of $830,945 at March 31, 2021 and $676,155 at December 31, 2020, respectively) are shown in the table below.:

 

    March 31, 2021     December 31, 2020  
Commercial   $ 42,201,186     $ 51,041,397  
Commercial real estate:                
Construction     10,373,102       14,813,726  
Other     156,377,427       146,187,886  
Consumer:                
Real estate     81,231,579       71,836,041  
Other     4,163,221       4,480,491  
Paycheck Protection Program     27,936,714       32,443,132  
      322,283,229       320,802,673  
Allowance for loan losses     (4,296,165 )     (4,185,694 )
Loans, net   $ 317,987,064     $ 316,616,979  

 

We had $91.0 million and $76.0 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2021 and at December 31, 2020, 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 $1.4 million of processing fees related to the first round of PPP. The Bank 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 March 31, 2021. 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.

 

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) was enacted, which reauthorized lending under the PPP program through March 31, 2021, with an additional $325 billion. On March 31, 2021, the PPP Extension Act of 2021 was signed into law, which formally changed the PPP application deadline from March 31, 2021 to May 31, 2021. Under the Economic Aid Act, the 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 five 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 will receive a processing fee based on the size of the loan from the SBA, and a tiered structure. For loans up to $50,000 in principal, the lender processing fee will be the lesser of 50% of the principal amount or $2,500. For loans between $50,000 and $350,000 in principal, the lender processing fee will be 5% of the principal amount. For loans $350,000 and above, the lender processing fee will be 3% of the principal amount. For loans of at least $2.0 million, the lender processing fee will be 1% of the principal amount. The fees are deferred and amortized over the life of the loans in accordance with ASC 310-20. As of March 31, 2021, the Bank received 193 applications with a total loan amount of $16.1 million. Of those 193 applications, the SBA approved 184 applications in the aggregate amount of $15.7 million. The Bank funded 176 loans in the aggregate amount of $15.5 million. The Bank received $0.8 million of processing fees related to the second round of PPP. During the three months ended March 31, 2021, the Bank recognized $0.6 million in PPP processing fees for the first and second round of PPP.

 

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 March 31, 2021 and December 31, 2020. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

March 31, 2021  
      Commercial     Commercial
Real Estate Construction		     Commercial
Real Estate
Other		     Consumer
Real Estate		     Consumer
Other		     Paycheck Protection Program     Total  
Pass     $ 37,770,275     $ 9,915,067     $ 136,296,189     $ 80,012,464     $ 3,762,913     $ 27,936,714     $ 295,693,622  
Watch       2,030,528       458,035       14,155,587       346,231       314,336       —       17,304,717  
OAEM       710,385       —       1,248,150       623,127       44,237       —       2,625,899  
Substandard       1,689,998       —       4,677,501       249,757       41,735       —       6,658,991  
Doubtful       —       —       —       —       —       —       —  
Loss       —       —       —       —       —       —       —  
Total     $ 42,201,186     $ 10,373,102     $ 156,377,427     $ 81,231,579     $ 4,163,221     $ 27,936,714     $ 322,283,229  

 

December 31, 2020  
      Commercial     Commercial
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  

   

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

 

March 31, 2021
    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   $ 11,000     $ 19,681     $ —     $ 30,681     $ 42,170,505     $ 42,201,186     $ —  
Commercial Real Estate Construction     —       —       —       —       10,373,102       10,373,102       —  
Commercial Real Estate Other     900,000       —       921,580       1,821,580       154,555,847       156,377,427       —  
Consumer Real Estate     —       —       —       —       81,231,579       81,231,579       —  
Consumer Other     5,092       14,580       —       19,672       4,143,549       4,163,221       —  
Paycheck Protection Program     —       —       —       —       27,936,714       27,936,714       —  
Total   $ 916,092     $ 34,261     $ 921,580     $ 1,871,933     $ 320,411,296     $ 322,283,229     $ —  

 

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     $ —  

 

There were no loans over 90 days past due and still accruing as of March 31, 2021 and December 31, 2020.

 

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

 

      Loans Receivable on Non-Accrual  
      March 31, 2021       December 31, 2020  
Commercial   $ 178,975     $ 178,975  
Commercial Real Estate Construction     —       —  
Commercial Real Estate Other     921,580       923,828  
Consumer Real Estate     —       40,893  
Consumer Other     11,609       12,234  
Paycheck Protection Program     —       —  
Total   $ 1,112,164     $ 1,155,930  

 

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 months ended March 31, 2021 and 2020. 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 March 31, 2021
    Commercial     Commercial Real Estate Construction     Commercial Real Estate Other     Consumer Real Estate     Consumer Other     Paycheck Protection Program     Total  
Allowance for Loan Losses:                                                        
Beginning balance   $ 1,029,310     $ 199,266     $ 1,909,121     $ 925,077     $ 122,920     $ —     $ 4,185,694  
Charge-offs     —       —       —       —       (8,152 )     (6,479 )     (14,631 )
Recoveries     —       —       —       —       4,812       290       5,102  
Provisions     (126,428 )     (54,721 )     168,648       127,083       (771 )     6,189       120,000  
Ending balance   $ 902,882     $ 144,545     $ 2,077,769     $ 1,052,160     $ 118,809     $ —     $ 4,296,165  

 

Three Months Ended March 31, 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     —       —       —       —       (39,592 )     —       (39,592 )
Recoveries     15,500       —       —       —       34,547       —       50,047  
Provisions     (29,150 )     13,834       (57,798 )     65,779       7,335       —       —  
Ending balance   $ 1,416,267     $ 123,069     $ 1,212,647     $ 562,000     $ 700,230     $ —     $ 4,014,213  

 

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.

 

    March 31, 2021  
    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   $ 338,237     $ —     $ —     $ —     $ 41,735     $ —     $ 379,972  
Collectively evaluated for impairment     564,645       144,545       2,077,769       1,052,160       77,074       —       3,916,193  
Total Allowance for Loan Losses   $ 902,882     $ 144,545     $ 2,077,769     $ 1,052,160     $ 118,809     $ —     $ 4,296,165  
Loans Receivable                                                        
Individually evaluated for impairment   $ 1,978,615     $ —     $ 5,479,899     $ 249,758     $ 41,735     $ —     $ 7,750,007  
Collectively evaluated for impairment     40,222,571       10,373,102       150,897,528       80,981,821       4,121,486       27,936,714       314,533,222  
Total Loans Receivable   $ 42,201,186     $ 10,373,102     $ 156,377,427     $ 81,231,579     $ 4,163,221     $ 27,936,714     $ 322,283,229  

 

    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  

 

As of March 31, 2021 and December 31, 2020, loans individually evaluated and considered impaired are presented in the following table.

 

    Impaired Loans as of  
    March 31, 2021     December 31, 2020  
      Unpaid Principal Balance       Recorded Investment       Related Allowance       Unpaid Principal Balance       Recorded Investment       Related Allowance  
With no related allowance recorded:                                                
Commercial   $ 1,511,021     $ 1,511,021     $ —     $ 1,721,818     $ 1,721,818     $ —  
Commercial Real Estate Construction     —       —       —       —       —       —  
Commercial Real Estate Other     5,479,899       5,479,899       —       4,831,757       4,831,757       —  
Consumer Real Estate     249,758       249,758       —       249,850       249,850       —  
Consumer Other     —       —       —       —       —       —  
Paycheck Protection Program     —       —       —       —       —       —  
Total     7,240,678       7,240,678       —       6,803,425       6,803,425       —  
                                                 
With an allowance recorded:                                                
Commercial     467,594       467,594       338,237       576,302       576,302       357,657  
Commercial Real Estate Construction     —       —       —       —       —       —  
Commercial Real Estate Other     —       —       —       343,084       343,084       36,747  
Consumer Real Estate     —       —       —       40,893       40,893       9,111  
Consumer Other     41,735       41,735       41,735       41,896       41,896       41,896  
Paycheck Protection Program     —       —       —       —       —       —  
Total     509,329       509,329       379,972       1,002,175       1,002,175       445,411  
                                                 
                                                 
Commercial     1,978,615       1,978,615       338,237       2,298,120       2,298,120       357,657  
Commercial Real Estate Construction     —       —       —       —       —       —  
Commercial Real Estate Other     5,479,899       5,479,899       —       5,174,841       5,174,841       36,747  
Consumer Real Estate     249,758       249,758       —       290,743       290,743       9,111  
Consumer Other     41,735       41,735       41,735       41,896       41,896       41,896  
Paycheck Protection Program     —       —       —       —       —       —  
Total   $ 7,750,007     $ 7,750,007     $ 379,972     $ 7,805,600     $ 7,805,600     $ 445,411  

 

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 March 31,  
    2021     2020  
    Average Recorded Investment     Interest Income Recognized     Average Recorded Investment     Interest Income Recognized  
With no related allowance recorded:                                
Commercial   $ 1,563,106     $ 25,815     $ 1,345,166     $ 20,499  
Commercial Real Estate Construction     —       —       —       —  
Commercial Real Estate Other     5,482,702       49,760       2,093,392       16,136  
Consumer Real Estate     249,833       3,491       879,753       3,580  
Consumer Other     —       —       —       —  
Paycheck Protection Program     —       —       —       —  
      7,295,641       79,066       4,318,311       40,215  
                                 
With an allowance recorded:                                
Commercial     472,422       7,519       707,965       7,147  
Commercial Real Estate Construction     —       —       —       —  
Commercial Real Estate Other     —       —       246,884       —  
Consumer Real Estate     —       —       —       —  
Consumer Other     41,848       672       49,758       783  
Paycheck Protection Program     —       —       —       —  
      514,270       8,191       1,004,607       7,930  
Total                                
Commercial     2,035,528       33,334       2,053,131       27,646  
Commercial Real Estate Construction     —       —       —       —  
Commercial Real Estate Other     5,482,702       49,760       2,340,276       16,136  
Consumer Real Estate     249,833       3,491       879,753       3,580  
Consumer Other     41,848       672       49,758       783  
Paycheck Protection Program     —       —       —       —  
    $ 7,809,911     $ 87,257     $ 5,322,918     $ 48,145  

 

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 March 31, 2021, there were 12 TDRs with a balance of $5.3 million compared to 14 TDRs with a balance of $5.8 million as of December 31, 2020. 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 March 31, 2021. No TDRs defaulted during the three months ended March 31, 2021 and 2020, 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 loans, 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 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. As of March 31, 2021, 6 loans remain classified as TDRs with an aggregate balance of $3.5 million. 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 loans that received payment accommodations that are not classified as TDRs, 22 loans, with an aggregate loan balance of $5.1 million, have paid their loan in full, 7 loans, with an aggregate loan balance of $0.8 million, are past due less than 30 days, and 46 loans, with an aggregate loan balance of $21.6 million, have commenced paying as agreed as of March 31, 2021. 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.