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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2017

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees of $140,127 at March 31, 2017 and $136,446 at December 31, 2016) are as follows:

	March 31,			December 31,
	2017			2016
Commercial loans	$	51,616,214		$	52,262,209
Commercial real estate:
Construction		1,076,143			1,208,901
Other		120,843,784			122,968,126
Consumer:
Real Estate		76,616,037			77,131,816
Other		5,311,665			7,005,063
		255,463,843			260,576,115
Allowance for loan losses		(3,876,857	)		(3,851,617	)
Loans, net	$	251,586,986		$	256,724,498

We had $99.0 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2017 and at December 31, 2016, 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 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 where applicable, and 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, 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, bankruptcy 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 table illustrates credit risks by category and internally assigned grades at March 31, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory.

March 31, 2017
		Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total

	Pass	$	47,382,739	$	672,121	$	115,258,858	$	74,598,257	$	5,115,618	$	243,027,593
	Watch		2,273,480		404,022		2,612,476		902,734		126,690		6,319,402
	OAEM		680,334		—		645,619		621,174		32,757		1,979,884
	Sub-Standard		1,279,661		—		2,326,831		493,872		36,600		4,136,964
	Doubtful		—		—		—		—		—		—
	Loss		—		—		—		—		—		—

	Total	$	51,616,214	$	1,076,143	$	120,843,784	$	76,616,037	$	5,311,665	$	255,463,843

December 31, 2016
		Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total

	Pass	$	48,289,944	$	798,884	$	116,490,396	$	74,115,426	$	6,728,367	$	246,423,017
	Watch		1,004,957		410,017		2,625,079		899,306		147,992		5,087,351
	OAEM		1,666,048		—		995,549		630,957		28,939		3,321,493
	Sub-Standard		1,301,260		—		2,857,102		1,486,127		99,765		5,744,254
	Doubtful		—		—		—		—		—		—
	Loss		—		—		—		—		—		—

	Total	$	52,262,209	$	1,208,901	$	122,968,126	$	77,131,816	$	7,005,063	$	260,576,115

The following tables include an aging analysis of the recorded investment of past-due financing receivable by class:

March 31, 2017
	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	$	54,563	$	35,000	$	26,868	$	116,431	$	51,499,783	$	51,616,214	$	—
Commercial Real Estate:
Commercial Real Estate -Construction		—		—		—		—		1,076,143		1,076,143		—
Commercial Real Estate -Other		—		1,366,640		1,545,221		2,911,861		117,931,923		120,843,784		—
Consumer:
Consumer Real Estate		—		—		—		—		76,616,037		76,616,037		—
Consumer-Other		90,032		1,022		—		91,054		5,220,611		5,311,665		—
Total	$	144,595	$	1,402,662	$	1,572,089	$	3,119,346	$	252,344,497	$	255,463,843	$	—

December 31, 2016
	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	$	438,159	$	—	$	—	$	438,159	$	51,824,050	$	52,262,209	$	—
Commercial Real Estate:
Commercial Real Estate -Construction		—		—		—		—		1,208,901		1,208,901		—
Commercial Real Estate -Other		6,363		—		1,501,153		1,507,516		121,460,610		122,968,126		89,908
Consumer:
Consumer Real Estate		415,457		—		—		415,457		76,716,359		77,131,816		—
Consumer-Other		56,784		—		33,322		90,106		6,914,957		7,005,063		33,322
Total	$	916,763	$	—	$	1,534,475	$	2,451,238	$	258,124,877	$	260,576,115	$	123,230

There were no loans at March 31, 2017 and two loans at December 31, 2016 over 90 days past due and still accruing.

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

	Loans Receivable on Non-Accrual
	March 31, 2017		December 31, 2016
Commercial	$	85,659	$	61,781
Commercial Real Estate:
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		1,769,854		1,678,876
Consumer:
Consumer - Real Estate		—		—
Consumer - Other		—		964

Total	$	1,855,513	$	1,741,621

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, 2017 and March 31, 2016. 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.

March 31, 2017
	Commercial		Commercial Real Estate-Construction		Commercial Real Estate-Other		Consumer Real Estate		Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,545,188	$	51,469	$	1,374,706	$	726,391	$	153,863		$	3,851,617
Charge-offs		—		—		—		—		—			—
Recoveries		—		—		—		21,000		1,740			22,740
Provisions		7,971		5,602		43,869		9,501		(64,443	)		2,500
Ending Balance	$	1,553,159	$	57,071	$	1,418,575	$	756,892	$	91,160		$	3,876,857

March 31, 2016
	Commercial			Commercial Real Estate-Construction			Commercial Real Estate-Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	896,854		$	59,861		$	1,345,094		$	941,470		$	174,548		$	3,417,827
Charge-offs		(33,045	)		—			—			—			(1,050	)		(34,095	)
Recoveries		1,284			—			6,000			—			746			8,030
Provisions		635,557			(15,593	)		(242,391	)		(328,228	)		(4,345	)		45,000
Ending Balance	$	1,500,650		$	44,268		$	1,108,703		$	613,242		$	169,899		$	3,436,762

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

March 31, 2017
	Commercial		Commercial Real Estate- Construction		Commercial Real Estate- Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,041,145	$	—	$	324,454	$	43,119	$	36,600	$	1,445,318
Collectively evaluated for impairment		512,014		57,071		1,094,121		713,773		54,560		2,431,539
Total Allowance for Losses	$	1,553,159	$	57,071	$	1,418,575	$	756,892	$	91,160	$	3,876,857
Loans Receivable
Individually evaluated for impairment	$	1,279,661	$	—	$	2,348,397	$	493,872	$	36,600	$	4,158,530
Collectively evaluated for impairment		50,336,553		1,076,143		118,495,387		76,122,165		5,275,065		251,305,313
Total Loans Receivable	$	51,616,214	$	1,076,143	$	120,843,784	$	76,616,037	$	5,311,665	$	255,463,843

December 31, 2016
	Commercial		Commercial Real Estate- Construction		Commercial Real Estate- Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,051,219	$	—	$	324,587	$	43,119	$	89,047	$	1,507,972
Collectively evaluated for impairment		493,969		51,469		1,050,119		683,272		64,816		2,343,645
Total Allowance for Losses	$	1,545,188	$	51,469	$	1,374,706	$	726,391	$	153,863	$	3,851,617
Loans Receivable
Individually evaluated for impairment	$	1,301,259	$	—	$	3,225,351	$	1,286,127	$	89,047	$	5,901,784
Collectively evaluated for impairment		50,960,950		1,208,901		119,742,775		75,845,689		6,916,016		254,674,331
Total Loans Receivable	$	52,262,209	$	1,208,901	$	122,968,126	$	77,131,816	$	7,005,063	$	260,576,115

As of March 31, 2017 and December 31, 2016, loans individually evaluated and considered impaired are presented in the following table:

Impaired and Restructured Loans As of
	March 31, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	180,000	$	180,000	$	—	$	250,040	$	250,040	$	—
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		1,297,815		1,297,815		—		2,174,770		2,174,770		—
Consumer Real Estate		450,753		450,753		—		1,243,008		1,243,008		—
Consumer Other		—		—		—		—		—		—
	$	1,928,568	$	1,928,568	$	—	$	3,667,818	$	3,667,818	$	—

With an allowance recorded:
Commercial	$	1,099,661	$	1,099,661	$	1,041,145	$	1,051,219	$	1,051,219	$	1,051,219
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		1,050,582		1,050,582		324,454		1,050,581		1,050,581		324,587
Consumer Real Estate		43,119		43,119		43,119		43,119		43,119		43,119
Consumer Other		36,600		36,600		36,600		89,047		89,047		89,047
	$	2,229,962	$	2,229,962	$	1,445,318	$	2,233,966	$	2,233,966	$	1,507,972

Total
Commercial	$	1,279,661	$	1,279,661	$	1,041,145	$	1,301,259	$	1,301,259	$	1,051,219
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		2,348,397		2,348,397		324,454		3,225,351		3,225,351		324,587
Consumer Real Estate		493,872		493,872		43,119		1,286,127		1,286,127		43,119
Consumer Other		36,600		36,600		36,600		89,047		89,047		89,047
	$	4,158,530	$	4,158,530	$	1,445,318	$	5,901,784	$	5,901,784	$	1,507,972

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated.

	For the Three Months Ended March 31,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:

Commercial	$	183,126	$	5,146	$	1,106,771	$	16,647
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,300,763		20,043		1,334,158		6,705
Consumer Real Estate		450,570		5,394		154,105		1,119
Consumer-Other		—		—		106,011		2,374
	$	1,934,459	$	30,583	$	2,701,045	$	26,845

With an allowance recorded:

Commercial	$	1,105,705	$	34,712	$	682,992	$	11,033
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,050,581		4,479		2,650,492		29,127
Consumer Real Estate		43,119		408		450,403		6,742
Consumer Other		37,594		570		68,240		—
	$	2,236,999	$	40,169	$	3,852,127	$	46,902

Total

Commercial	$	1,288,831	$	39,858	$	1,789,763	$	27,680
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		2,351,344		24,522		3,984,650		35,832
Consumer Real Estate		493,689		5,802		604,508		7,861
Consumer Other		37,594		570		174,251		2,374
	$	4,171,458	$	70,752	$	6,553,172	$	73,747

Restructured loans (loans, still accruing interest, which have been renegotiated at below-market interest rates or for which other concessions have been granted) were $33,300 (1 loan) and $378,392 (2 loans) at March 31, 2017 and December 31, 2016, respectively. Our restructured loans were granted extended payment terms with no principal or rate reductions. All restructured loans were performing as agreed as of March 31, 2017 and December 31, 2016, respectively. There were no additional loans identified as a troubled debt restructuring (“TDR”) during the three months ended March 31, 2017 or 2016. No TDRs defaulted during the three months ended March 31, 2017 and 2016, which were modified within the previous twelve months.