Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2023

Receivables [Abstract]

Loans and Allowance for Credit Losses

Note 3: Loans and Allowance for Credit Losses

Major classifications of loans (net of deferred loan fees of $144,055 and $159,434 at March 31,2023 and December 31, 2022, respectively) are shown in the table below.

	March 31, 2023			December 31, 2022
Commercial	$	46,212,003		$	45,072,059
Commercial real estate:
Construction		20,146,368			17,524,260
Other		174,860,808			172,897,387
Consumer:
Real estate		88,962,556			91,636,538
Other		3,607,720			3,851,538
		333,789,455			330,981,782
Allowance for credit losses		(3,688,503	)		(4,291,221	)
Loans, net	$	330,100,952		$	326,690,561

We had $107.9 million and $93.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2023 and at December 31, 2022, respectively.

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.

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, loans 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 sources 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 table illustrates credit quality by class indicators by year of origination at March 31, 2023:

	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial
Pass	$	6,126,737	$	15,777,976	$	5,724,744	$	5,283,844	$	954,143	$	436,185	$	9,651,873	$	43,955,503
Watch		193,968		517,215		38,787		101,971		—		—		183,423		1,035,364
OAEM		—		824		15,845		—		—		—		130,000		146,670
Substandard		—		939,656		—		134,810		—		—		—		1,074,466
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	6,320,705	$	17,235,671	$	5,779,376	$	5,520,626	$	954,143	$	436,185	$	9,965,297	$	46,212,003
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	46,341	$	—	$	46,341
Commercial Real Estate Construction
Pass	$	2,717,256	$	9,691,545	$	3,159,648	$	4,577,919	$	—	$	—	$	—	$	20,146,368
Watch		—		—		—		—		—		—		—		—
OAEM		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	2,717,256	$	9,691,545	$	3,159,648	$	4,577,919	$	—	$	—	$	—	$	20,146,368
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate Other
Pass	$	6,648,022	$	56,736,163	$	52,765,365	$	25,416,225	$	10,612,328	$	8,085,081	$	5,573,442	$	165,836,625
Watch		3,621,749		442,699		779,071		933,712		—		—		248,029		6,025,260
OAEM		863,683		—		648,343		14,244		—		—		297,909		1,824,180
Substandard		—		—		863,493		—		—		311,249		—		1,174,743
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	11,133,454	$	57,178,862	$	55,056,273	$	26,364,181	$	10,612,328	$	8,396,330	$	6,119,380	$	174,860,808
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer Real Estate
Pass	$	4,439,050	$	29,475,217	$	8,479,952	$	9,320,267	$	291,943	$	29,311	$	34,899,380	$	86,935,121
Watch		—		—		—		—		—		—		1,503,232		1,503,232
OAEM		—		—		—		—		—		—		274,445		274,445
Substandard		—		—		—		—		—		—		249,758		249,758
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	4,439,050	$	29,475,217	$	8,479,952	$	9,320,267	$	291,943	$	29,311	$	36,926,815	$	88,962,556
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Consumer Other
Pass	$	633,324	$	1,204,254	$	626,934	$	359,183	$	116,129	$	51,352	$	389,933	$	3,381,110
Watch		4,055		87,544		21,822		40,864		—		—		28,469		182,755
OAEM		—		—		—		6,324		—		—		—		6,324
Substandard		37,530		—		—		—		—		—		—		37,530
Doubtful		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—
Total	$	674,909	$	1,291,799	$	648,757	$	406,372	$	116,129	$	51,352	$	418,402	$	3,607,720
Current period gross charge-offs	$	—	$	—	$	1,977	$	—	$	—	$	—	$	—	$	1,977

The following table illustrates credit quality by class and internally assigned grades at December 31, 2022. "Pass" includes loans internally graded as excellent, good and satisfactory.

December 31, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Pass	$	42,724,289	$	17,524,260	$	167,518,577	$	86,183,899	$	3,597,886	$	317,548,911
Watch		976,966		—		3,223,532		4,928,437		208,417		9,337,352
OAEM		94,803		—		968,611		274,445		7,345		1,345,204
Substandard		1,276,001		—		1,186,667		249,757		37,890		2,750,315
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	45,072,059	$	17,524,260	$	172,897,387	$	91,636,538	$	3,851,538	$	330,981,782

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

March 31, 2023
	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	$	—	$	—	$	—	$	—	$	46,212,003	$	46,212,003	$	—
Commercial Real Estate Construction		—		—		—		—		20,146,368		20,146,368		—
Commercial Real Estate Other		360,029		—		627,927		987,956		173,872,852		174,860,808		—
Consumer Real Estate		—		274,444		—		274,444		88,688,112		88,962,556		—
Consumer Other		—		—		—		—		3,607,720		3,607,720		—
Total	$	360,029	$	274,444	$	627,927	$	1,262,400	$	332,527,055	$	333,789,455	$	—

December 31, 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	$	16,451	$	178,975	$	—	$	195,426	$	44,876,633	$	45,072,059	$	—
Commercial Real Estate Construction		—		—		—		—		17,524,260		17,524,260		—
Commercial Real Estate Other		45,425		—		631,453		676,878		172,220,509		172,897,387		—
Consumer Real Estate		274,445		—		—		274,445		91,362,093		91,636,538		—
Consumer Other		—		—		—		—		3,851,538		3,851,538		—
Total	$	336,321	$	178,975	$	631,453	$	1,146,749	$	329,835,033	$	330,981,782	$	—

There were no loans over 90 days past due and still accruing as of March 31, 2023 and December 31, 2022.

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

	CECL						Incurred Loss
	March 31, 2023						December 31, 2022
	Nonaccrual Loans with No Allowance		Nonaccrual Loans with an Allowance		Total Nonaccrual Loans		Nonaccrual Loans
Commercial	$	—	$	—	$	—	$	—
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		627,927		—		627,927		631,453
Consumer Real Estate		—		—		—		—
Consumer Other		—		—		—		—
Total	$	627,927	$	—	$	627,927	$	631,453

We designate individually evaluated loans on nonaccrual status as collateral dependent loans, as well other loans that management designates as having higher risk. Collateral dependent loans are loans for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, we adopted the practical expedient to measure the allowance for credit losses based on the fair value of the collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.

The following table details the amortized cost of collateral dependent loans:

	March 31, 2023
Commercial	$	—
Commercial Real Estate Construction		—
Commercial Real Estate Other		1,188,986
Consumer Real Estate		249,758
Consumer Other		—
Total	$	1,438,744

The following table set forth the changes in the allowance for credit losses and an allocation of the allowance for credit losses by class for the three months ended March 31, 2023 under the CECL methodology.

Three Months Ended March 31, 2023
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Credit Losses:
Beginning balance	$	735,759		$	230,625		$	2,216,484		$	1,014,777		$	93,576		$	4,291,221
Adoption of ASU 2016-13		(82,001	)		(36,509	)		(314,522	)		(160,802	)		(6,166	)		(600,000	)
Charge-offs		(46,341	)		—			—			—			(1,977	)		(48,318	)
Recoveries		600			—			—			—			—			600
Provisions		(93,936	)		42,873			98,558			6,524			(9,019	)		45,000
Ending balance	$	514,081		$	236,989		$	2,000,520		$	860,498		$	76,415		$	3,688,503

Prior to the adoption of ASC 326 on January 1, 2023, we calculated the allowance for loan losses under the incurred loss methodology. The following table sets forth the changes in the allowance for loan losses for the three months ended March 31, 2022.

Three Months Ended March 31, 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		—			—		—			—			4,200			360			4,560
Provisions		(7,596	)		28,075		(82,296	)		(2,777	)		(10,056	)		(350	)		(75,000	)
Ending balance	$	788,093		$	203,568	$	2,294,010		$	919,972		$	98,859		$	—		$	4,304,502

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the incurred loss methodology. The tables are are disclosures related to the allowance for loan losses in prior periods.

	December 31, 2022
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	179,230	$	—	$	—	$	—	$	37,889	$	217,119
Collectively evaluated for impairment		556,529		230,625		2,216,484		1,014,777		55,687		4,074,102
Total Allowance for Loan Losses	$	735,759	$	230,625	$	2,216,484	$	1,014,777	$	93,576	$	4,291,221
Loans Receivable
Individually evaluated for impairment	$	1,276,001	$	—	$	1,202,412	$	249,758	$	37,889	$	2,766,060
Collectively evaluated for impairment		43,796,058		17,524,260		171,694,975		91,386,780		3,813,649		328,215,722
Total Loans Receivable	$	45,072,059	$	17,524,260	$	172,897,387	$	91,636,538	$	3,851,538	$	330,981,782

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

	Impaired Loans as of
	December 31, 2022
	Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	317,553	$	317,553	$	—
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		1,202,412		1,202,412		—
Consumer Real Estate		249,758		249,758		—
Consumer Other		—		—		—
Total		1,769,723		1,769,723		—
With an allowance recorded:
Commercial		958,448		958,448		179,230
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		—		—		—
Consumer Real Estate		—		—		—
Consumer Other		37,889		37,889		37,889
Total		996,337		996,337		217,119
Commercial		1,276,001		1,276,001		179,230
Commercial Real Estate Construction		—		—		—
Commercial Real Estate Other		1,202,412		1,202,412		—
Consumer Real Estate		249,758		249,758		—
Consumer Other		37,889		37,889		37,889
Total	$	2,766,060	$	2,766,060	$	217,119

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,
	2022
	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	181,347	$	2,720
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		1,226,665		7,706
Consumer Real Estate		249,758		2,617
Consumer Other		—		—
		1,657,770		13,043
With an allowance recorded:
Commercial		1,186,718		19,382
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		—		—
Consumer Real Estate		—		—
Consumer Other		39,822		638
		1,226,540		20,020
Total
Commercial		1,368,065		22,102
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		1,226,665		7,706
Consumer Real Estate		249,758		2,617
Consumer Other		39,822		638
	$	2,884,310	$	33,063

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. We use the loss rate approach to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, we modify loans by providing principal forgiveness on certain real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, we will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

There were no loans modified during the first quarter of 2023. As of March 31, 2023, there were five loans with a balance of $1.0 million that were granted extended payment terms with no principal reduction. The structure of two of the loans changed to interest only. One loan was performing as agreed as of March 31, 2023, while the other loan was not performing and we are considering further collection actions, including potential foreclosure proceedings.

The following table shows the amortized cost basis as of March 31, 2023 of the loans modified for borrowers experiencing financial difficulty, disaggregated by class of loans and describes the financial effect of the modifications made for borrowers experiencing financial difficulty: 

	Term Extension
	Amortized Cost Basis		% of Total Loan Type			Financial Effect
Commercial	$	303,143		0.7	%	Reduced monthly payment
Commercial Real Estate Other		613,682		0.4	%	Forbearance agreement signed for one loan and provided eleven months deferral to second borrower and added to the end of the original term loan
Consumer Other		37,529		1.0	%	Reduced monthly payment
Total	$	954,354

We maintain an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $644,912 at March 31, 2023 and December 31, 2022 is classified on the balance sheet within Accrued interest payable and other liabilities.