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Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2022
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 of $157,002 and $488,481 at September 30, 2022 and December 31, 2021, respectively) are shown in the table below.

 

   September 30, 2022   December 31, 2021 
Commercial  $52,323,412   $45,804,434 
Commercial real estate:          
Construction   16,339,084    12,054,095 
Other   171,043,155    165,719,078 
Consumer:          
Real estate   84,706,632    71,307,488 
Other   3,871,990    3,768,531 
Paycheck Protection Program   —    7,978,603 
    328,284,273    306,632,229 
Allowance for loan losses   (4,329,221)   (4,376,987)
Loans, net  $323,955,052   $302,255,242 

 

We had $91.2 million and $94.7 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 30, 2022 and at December 31, 2021, 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. 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. In 2020 and 2021, the Bank provided $55.3 million in funding to 480 customers through the PPP and received a total of $2.4 million in processing fees. The processing fees were deferred and are being amortized over the life of the loans in accordance with ASC 310-20. During the three months ended September 30, 2022 and 2021, the Bank recognized $0.1 million and $0.1 million, respectively, in processing fees for the PPP. During the nine months ended September 30, 2022 and 2021, the Bank recognized $0.4 million and $1.0 million, respectively, in processing fees for the 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. Because the PPP 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 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.

 

●Other Assets Especially Mentioned (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, 2022 and December 31, 2021. “Pass” includes loans internally graded as excellent, good and satisfactory.

 

September 30, 2022 
    Commercial   Commercial
Real Estate Construction		   Commercial
Real Estate
Other		   Consumer
Real Estate		   Consumer
Other		   Total 
Pass   $50,147,494   $16,339,084   $165,720,219   $80,529,554   $3,590,328   $316,326,679 
Watch    601,185    —    3,149,899    3,654,235    234,836    7,640,155 
OAEM    272,911    —    978,517    274,445    8,350    1,534,223 
Substandard    1,301,822    —    1,194,520    248,398    38,476    2,783,216 
Doubtful    —    —    —    —    —    — 
Loss    —    —    —    —    —    — 
Total   $52,323,412   $16,339,084   $171,043,155   $84,706,632   $3,871,990   $328,284,273 

 

December 31, 2021 
    Commercial   Commercial
Real Estate Construction		   Commercial
Real Estate
Other		   Consumer
Real Estate		   Consumer
Other		   Paycheck Protection Program   Total 
Pass   $43,853,889   $11,616,118   $159,825,281   $69,920,347   $3,565,716   $7,978,603   $296,759,954 
Watch    450,319    437,977    3,082,408    862,938    133,418    —    4,967,060 
OAEM    36,749    —    1,158,268    274,445    29,244    —    1,498,706 
Substandard    1,463,477    —    1,653,121    249,758    40,153    —    3,406,509 
Doubtful    —    —    —    —    —    —    — 
Loss    —    —    —    —    —    —    — 
Total   $45,804,434   $12,054,095   $165,719,078   $71,307,488   $3,768,531   $7,978,603   $306,632,229 

 

 

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

 

September 30, 2022
   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  $199,690   $—   $—   $199,690   $52,123,722   $52,323,412   $— 
Commercial Real Estate Construction   —    —    —    —    16,339,084    16,339,084    — 
Commercial Real Estate Other   411,866    60,653    634,048    1,106,566    169,936,589    171,043,155    — 
Consumer Real Estate   —    —    —    —    84,706,632    84,706,632    — 
Consumer Other   —    —    —    —    3,871,990    3,871,990    — 
Total  $611,556   $60,653   $634,048   $1,306,256   $326,978,017   $328,284,273   $— 

 

December 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  $88,659   $—   $—   $88,659   $45,715,775   $45,804,434   $— 
Commercial Real Estate Construction   —    —    —    —    12,054,095    12,054,095    — 
Commercial Real Estate Other   59,269    288,464    337,490    685,223    165,033,855    165,719,078    — 
Consumer Real Estate   —    —    —    —    71,307,488    71,307,488    — 
Consumer Other   23,971    —    —    23,971    3,744,560    3,768,531    — 
Paycheck Protection Program   —    —    —    —    7,978,603    7,978,603    — 
Total  $171,899   $288,464   $337,490   $797,853   $305,834,376   $306,632,229   $— 

 

There were no loans over 90 days past due and still accruing as of September 30, 2022 and December 31, 2021.

 

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

 

   September 30, 2022   December 31, 2021 
         
Commercial  $—   $178,975 
Commercial Real Estate Other   634,048    625,953 
Consumer Other   —    9,686 
Total  $634,048   $814,614 

 

The following tables set forth the changes in the allowance for loan losses and an allocation of the allowance for loan losses by class for the three and nine months ended September 30, 2022 and 2021. 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, 2022
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses:                                   
Beginning balance  $882,994   $230,370   $2,210,311   $890,384   $92,806   $—   $4,306,865 
Charge-offs   —    —    —    —    —    —    — 
Recoveries   200    —    18,000    —    4,000    156    22,356 
Provisions   (51,621)   (12,590)   11,049    54,991    (1,673)   (156)   — 
Ending balance  $831,573   $217,780   $2,239,360   $945,375   $95,133   $—   $4,329,221 

 

                                                       
Nine Months Ended September 30, 2022
   Commercial   Commercial Real Estate Construction   Commercial Real Estate Other   Consumer Real Estate   Consumer Other   Paycheck Protection Program   Total 
Allowance for Loan Losses:                                   
Beginning balance  $795,689   $175,493   $2,376,306   $924,784   $104,715   $—   $4,376,987 
Charge-offs   —    —    —    (2,035)   —    (10)   (2,045)
Recoveries   200    —    18,000    —    10,224    855    29,279 
Provisions   35,684    42,287    (154,946)   22,626    (19,806)   (845)   (75,000)
Ending balance  $831,573   $217,780   $2,239,360   $945,375   $95,133   $—   $4,329,221 

 

                                                       
Three Months Ended September 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  $801,548   $154,276   $2,206,215   $1,025,506   $118,758   $—   $4,306,303 
Charge-offs   —    —    —    —    —    (903)   (903)
Recoveries   10,746    —    —    47,711    4,600    —    63,057 
Provisions   (9,338)   1,248    72,060    (65,539)   666    903    — 
Ending balance  $802,956   $155,524   $2,278,275   $1,007,678   $124,024   $—   $4,368,457 

  

                                                       
Nine  Months Ended September 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   —    —    —    —    (11,439)   (8,879)   (20,318)
Recoveries   21,329    —    —    47,711    14,041    —    83,081 
Provisions   (247,683)   (43,742)   369,154    34,890    (1,498)   8,879    120,000 
Ending balance  $802,956   $155,524   $2,278,275   $1,007,678   $124,024   $—   $4,368,457 

 

 

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, 2022 
   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  $179,891   $—   $—   $—   $38,475   $—   $218,366 
Collectively evaluated for impairment   651,682    217,780    2,239,360    945,375    56,658    —    4,110,855 
Total Allowance for Loan Losses  $831,573   $217,780   $2,239,360   $945,375   $95,133   $—   $4,329,221 
Loans Receivable                                   
Individually evaluated for impairment  $1,301,822   $—   $1,214,827   $248,398   $38,475   $—   $2,803,522 
Collectively evaluated for impairment   51,021,590    16,339,084    169,828,328    84,458,234    3,833,515    —    325,480,751 
Total Loans Receivable  $52,323,412   $16,339,084   $171,043,155   $84,706,632   $3,871,990   $—   $328,284,273 

 

                                                       
   December 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  $179,988   $—   $—   $—   $40,153   $—   $220,141 
Collectively evaluated for impairment   615,701    175,493    2,376,306    924,784    64,562    —    4,156,846 
Total Allowance for Loan Losses  $795,689   $175,493   $2,376,306   $924,784   $104,715   $—   $4,376,987 
Loans Receivable                                   
Individually evaluated for impairment  $1,463,477   $—   $1,653,121   $249,758   $40,153   $—   $3,406,509 
Collectively evaluated for impairment   44,340,957    12,054,095    164,065,957    71,057,730    3,728,378    7,978,603    303,225,720 
Total Loans Receivable  $45,804,434   $12,054,095   $165,719,078   $71,307,488   $3,768,531   $7,978,603   $306,632,229 

 

 

As of September 30, 2022 and December 31, 2021, loans individually evaluated and considered impaired are presented in the following table.

 

   Impaired Loans as of 
   September 30, 2022   December 31, 2021 
   Unpaid Principal Balance   Recorded Investment   Related Allowance   Unpaid Principal Balance   Recorded Investment   Related Allowance 
With no related allowance recorded:                              
Commercial  $947,035   $947,035   $—   $1,096,407   $1,096,407   $— 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   1,214,827    1,214,827    —    1,653,121    1,653,121    — 
Consumer Real Estate   248,398    248,398    —    249,758    249,758    — 
Consumer Other   —    —    —    —    —    — 
Paycheck Protection Program   —    —    —    —    —    — 
Total   2,410,260    2,410,260    —    2,999,286    2,999,286    — 
                               
With an allowance recorded:                              
Commercial   354,787    354,787    179,891    367,070    367,070    179,988 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   —    —    —    —    —    — 
Consumer Real Estate   —    —    —    —    —    — 
Consumer Other   38,475    38,475    38,475    40,153    40,153    40,153 
Paycheck Protection Program   —    —    —    —    —    — 
Total   393,262    393,262    218,366    407,223    407,223    220,141 
                               
Commercial   1,301,822    1,301,822    179,891    1,463,477    1,463,477    179,988 
Commercial Real Estate Construction   —    —    —    —    —    — 
Commercial Real Estate Other   1,214,827    1,214,827    —    1,653,121    1,653,121    — 
Consumer Real Estate   248,398    248,398    —    249,758    249,758    — 
Consumer Other   38,475    38,475    38,475    40,153    40,153    40,153 
Paycheck Protection Program   —    —    —    —    —    — 
Total  $2,803,522   $2,803,522   $218,366   $3,406,509   $3,406,509   $220,141 

 

 

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, 
   2022   2021 
   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized 
With no related allowance recorded:                    
Commercial  $958,895   $14,703   $1,327,590   $20,140 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   1,222,909    7,486    1,954,514    14,402 
Consumer Real Estate   249,684    3,773    249,758    2,675 
Consumer Other   —    —    —    — 
Paycheck Protection Program   —    —    —    — 
    2,431,488    25,962    3,531,862    37,217 
                     
With an allowance recorded:                    
Commercial   354,787    6,063    178,975    4,564 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   —    —    —    — 
Consumer Real Estate   —    —    —    — 
Consumer Other   38,685    634    40,921    670 
Paycheck Protection Program   —    —    —    — 
    393,472    6,697    219,896    5,234 
Total                    
Commercial   1,313,682    20,766    1,506,565    24,704 
Commercial Real Estate Construction   —    —    —    — 
Commercial Real Estate Other   1,222,909    7,486    1,954,514    14,402 
Consumer Real Estate   249,684    3,773    249,758    2,675 
Consumer Other   38,685    634    40,921    670 
Paycheck Protection Program   —    —    —    — 
   $2,824,960   $32,659   $3,751,758   $42,451 

 

   Nine Months Ended September 30, 
   2022   2021 
   Average Recorded Investment   Interest Income Recognized   Average Recorded Investment   Interest Income Recognized 
With no related allowance recorded:                    
Commercial  $979,852   $44,877   $1,357,025   $64,253 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   1,237,330    24,678    1,948,369    45,482 
Consumer Real Estate   249,724    11,338    249,783    8,842 
Consumer Other   —    —    —    — 
Paycheck Protection Program   —    —    —    — 
    2,466,906    80,893    3,555,177    118,577 
                     
With an allowance recorded:                    
Commercial   358,450    13,341    178,975    8,173 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   —    —    —    — 
Consumer Real Estate   —    —    —    — 
Consumer Other   39,241    1,923    41,384    2,047 
Paycheck Protection Program   —    —    —    — 
    397,691    15,264    220,359    10,220 
Total                    
Commercial   1,338,302    58,218    1,536,000    72,426 
Commercial Real Estate - Construction   —    —    —    — 
Commercial Real Estate - Other   1,237,330    24,678    1,948,369    45,482 
Consumer Real Estate   249,724    11,338    249,783    8,842 
Consumer Other   39,241    1,923    41,384    2,047 
Paycheck Protection Program   —    —    —    — 
   $2,864,597   $96,157   $3,775,536   $128,797 

 

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 both September 30, 2022 and December 31, 2021, there were 5 TDRs with an aggregate balance of $1.0 million. 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, 2022. No TDRs defaulted during the three and nine months ended September 30, 2022 and 2021, which were modified within the previous twelve months. There were no TDRs added during the three and nine months ended September 30, 2022 and 2021.

 

 

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. During 2020, the Bank processed approximately $0.7 million in principal deferments to 84 loans, with an aggregate loan balance of $25.9 million. The principal deferments represented 0.24% of our total loan portfolio as of December 31, 2020. The Bank did not process any principal deferments after December 31, 2020. As of September 30, 2022, there was one outstanding loan with a balance of $0.1 million in TDR status. There were two loans outstanding with a balance of $0.5 million in TDR status as of December 31, 2021. All other remaining outstanding loans were paying as agreed as of September 30, 2022 and December 31, 2021.