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LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2021

LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans (net of deferred loan fees of $842,852 at June 30, 2021 and $676,155 at December 31, 2020, respectively) are shown in the table below.:

	June 30, 2021			December 31, 2020
Commercial	$	44,529,978		$	51,041,397
Commercial real estate:
Construction		10,715,947			14,813,726
Other		158,898,149			146,187,886
Consumer:
Real estate		77,835,892			71,836,041
Other		4,235,489			4,480,491
Paycheck Protection Program		16,956,115			32,443,132
		313,171,570			320,802,673
Allowance for loan losses		(4,306,303	)		(4,185,694	)
Loans, net	$	308,865,267		$	316,616,979

We had $92.5 million and $76.0 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at June 30, 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 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.

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 $325.0 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, based on 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.

The Bank provided $37.8 million to 266 customers in the first round of PPP and $17.5 million to 214 customers in the second round of PPP. 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. The Bank received $2.4 million in processing fees related to the PPP program. During the three months ended June 30, 2021 and 2020, the Bank recognized $0.3 million and $0.2 million, respectively, in processing fees for the PPP program. During the six months ended June 30, 2021 and 2020, the Bank recognized $0.9 million and $0.2 million, respectively, in processing fees for the PPP program.

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

June 30, 2021
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Paycheck Protection Program		Total
Pass	$	41,928,145	$	10,264,498	$	148,589,336	$	76,642,106	$	3,922,541	$	16,956,115	$	298,302,741
Watch		694,276		451,449		5,112,721		321,321		229,128		—		6,808,895
OAEM		390,711		—		1,092,308		622,708		42,589		—		2,148,316
Substandard		1,516,846		—		4,103,784		249,757		41,231		—		5,911,618
Doubtful		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—
Total	$	44,529,978	$	10,715,947	$	158,898,149	$	77,835,892	$	4,235,489	$	16,956,115	$	313,171,570

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.

June 30, 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	$	447,596	$	—	$	—	$	447,596	$	44,082,382	$	44,529,978	$	—
Commercial Real Estate Construction		—		—		—		—		10,715,947		10,715,947		—
Commercial Real Estate Other		37,085		60,243		638,834		736,162		158,161,987		158,898,149		—
Consumer Real Estate		—		—		—		—		77,835,892		77,835,892		—
Consumer Other		1,937		—		—		1,937		4,233,552		4,235,489		—
Paycheck Protection Program		—		—		—		—		16,956,115		16,956,115		—
Total	$	486,618	$	60,243	$	638,834	$	1,185,695	$	311,985,875	$	313,171,570	$	—

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 June 30, 2021 and December 31, 2020.

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

	Loans Receivable on Non-Accrual
	June 30, 2021		December 31, 2020
Commercial	$	178,975	$	178,975
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		918,918		923,828
Consumer Real Estate		—		40,893
Consumer Other		10,978		12,234
Paycheck Protection Program		—		—
Total	$	1,108,871	$	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 and six months ended June 30, 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 June 30, 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	$	902,882		$	144,545	$	2,077,769	$	1,052,160		$	118,809		$	—		$	4,296,165
Charge-offs		—			—		—		—			(3,288	)		(1,786	)		(5,074	)
Recoveries		10,584			—		—		—			4,628			—			15,212
Provisions		(111,918	)		9,731		128,446		(26,654	)		(1,391	)		1,786			—
Ending balance	$	801,548		$	154,276	$	2,206,215	$	1,025,506		$	118,758		$	—		$	4,306,303


Six Months Ended June 30, 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		—			—			—		—		(11,440	)		(7,976	)		(19,416	)
Recoveries		10,584			—			—		—		9,441			—			20,025
Provisions		(238,346	)		(44,990	)		297,094		100,429		(2,163	)		7,976			120,000
Ending balance	$	801,548		$	154,276		$	2,206,215	$	1,025,506	$	118,758		$	—		$	4,306,303


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

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, 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	$	178,975	$	—	$	—	$	—	$	41,231	$	—	$	220,206
Collectively evaluated for impairment		622,573		154,276		2,206,215		1,025,506		77,527		—		4,086,097
Total Allowance for Loan Losses	$	801,548	$	154,276	$	2,206,215	$	1,025,506	$	118,758	$	—	$	4,306,303
Loans Receivable
Individually evaluated for impairment	$	1,516,845	$	—	$	4,103,784	$	249,758	$	41,231	$	—	$	5,911,618
Collectively evaluated for impairment		43,013,133		10,715,947		154,794,365		77,586,134		4,194,258		16,956,115		307,259,952
Total Loans Receivable	$	44,529,978	$	10,715,947	$	158,898,149	$	77,835,892	$	4,235,489	$	16,956,115	$	313,171,570


	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 June 30, 2021 and December 31, 2020, loans individually evaluated and considered impaired are presented in the following table.

Impaired Loans as of

June 30, 2021 December 31, 2020

Unpaid
Principal
Balance Recorded
Investment Related
Allowance Unpaid
Principal
Balance Recorded
Investment Related
Allowance

With no related allowance recorded:

Commercial $ 1,337,870 $ 1,337,870 $ — $ 1,721,818 $ 1,721,818 $ —

Commercial Real Estate Construction — — — — — —

Commercial Real Estate Other 4,103,784 4,103,784 — 4,831,757 4,831,757 —

Consumer Real Estate 249,758 249,758 — 249,850 249,850 —

Consumer Other — — — — — —

Paycheck Protection Program — — — — — —

Total 5,691,412 5,691,412 — 6,803,425 6,803,425 —

With an allowance recorded:

Commercial 178,975 178,975 178,975 576,302 576,302 357,657

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 41,231 41,231 41,231 41,896 41,896 41,896

Paycheck Protection Program — — — — — —

Total 220,206 220,206 220,206 1,002,175 1,002,175 445,411

Total Impaired Loans

Commercial 1,516,845 1,516,845 178,975 2,298,120 2,298,120 357,657

Commercial Real Estate Construction — — — — — —

Commercial Real Estate Other 4,103,784 4,103,784 — 5,174,841 5,174,841 36,747

Consumer Real Estate 249,758 249,758 — 290,743 290,743 9,111

Consumer Other 41,231 41,231 41,231 41,896 41,896 41,896

Paycheck Protection Program — — — — — —

Total $ 5,911,618 $ 5,911,618 $ 220,206 $ 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 June 30,

2021 2020

Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized

With no related allowance recorded:

Commercial $ 1,348,413 $ 20,237 $ 960,398 $ 14,480

Commercial Real Estate Construction — — — —

Commercial Real Estate Other 4,113,624 47,843 1,752,669 21,646

Consumer Real Estate 249,758 2,646 249,800 2,647

Consumer Other — — 42,163 683

Paycheck Protection Program — — — —

5,711,795 70,726 3,005,030 39,456

With an allowance recorded:

Commercial 178,975 1,760 1,052,358 11,434

Commercial Real Estate Construction — — — —

Commercial Real Estate Other — — 235,734 —

Consumer Real Estate — — 665,058 —

Consumer Other 41,424 671 — —

Paycheck Protection Program — — — —

220,399 2,431 1,953,150 11,434

Total

Commercial 1,527,388 21,997 2,012,756 25,914

Commercial Real Estate Construction — — — —

Commercial Real Estate Other 4,113,624 47,843 1,988,403 21,646

Consumer Real Estate 249,758 2,646 914,858 2,647

Consumer Other 41,424 671 42,163 683

Paycheck Protection Program — — — —

$ 5,932,194 $ 73,157 $ 4,958,180 $ 50,890

Six Months Ended June 30,

2021 2020

Average
Recorded
Investment Interest
Income
Recognized Average
Recorded
Investment Interest
Income
Recognized

With no related allowance recorded:

Commercial $ 1,373,127 $ 41,189 $ 1,024,907 $ 29,570

Commercial Real Estate - Construction — — — —

Commercial Real Estate - Other 4,114,822 80,773 1,772,945 37,824

Consumer Real Estate 249,796 5,265 249,754 6,472

Consumer Other — — 43,903 1,342

Paycheck Protection Program — — — —

5,737,745 127,227 3,091,509 75,208

With an allowance recorded:

Commercial 178,975 3,609 1,184,428 26,662

Commercial Real Estate - Construction — — — —

Commercial Real Estate - Other — — 229,149 —

Consumer Real Estate — — 664,701 —

Consumer Other 41,635 1,367 — —

Paycheck Protection Program — — — —

220,610 4,976 2,078,278 26,662

Total

Commercial 1,552,102 44,798 2,209,335 56,232

Commercial Real Estate - Construction — — — —

Commercial Real Estate - Other 4,114,822 80,773 2,002,094 37,824

Consumer Real Estate 249,796 5,265 914,455 6,472

Consumer Other 41,635 1,367 43,903 1,342

Paycheck Protection Program — — — —

$ 5,958,355 $ 132,203 $ 5,169,787 $ 101,870

In general, the modification or restructuring of a loan is considered a troubled debt restructuring (“TDR”) if the Company, 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, 2021, there were 7 TDRs with a balance of $3.5 million compared to 14 TDRs with a balance of $5.8 million as of December 31, 2020. There were no TDRs added during the three and six months ended June 30, 2021. There were no TDRs added during the three months ended June 30, 2020 and one TDR, in the amount of $0.6 million was added during the six months ended June 30, 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 June 30, 2021. No TDRs defaulted during the three and six months ended June 30, 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. In accordance with the FDIC guidance, borrowers who were current prior to becoming affected by COVID-19, that received payment accommodations as a result of the pandemic, generally are not reported as past due. There were no interest deferments granted and all loans given payment accommodations are still paying interest. There have been no payment accommodations granted during the six months ended June 30, 2021. All loans granted payment accommodations during the year ended December 31, 2020 have commenced paying as agreed and are current as of June 30, 2021.