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Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2017

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees of $143,374 at June 30, 2017 and $136,446 at December 31, 2016) are as follows:

	June 30, 2017			December 31, 2016
Commercial loans	$	56,281,569		$	52,262,209
Commercial real estate:
Construction		1,457,591			1,208,901
Other		121,477,838			122,968,126
Consumer:
Real Estate		75,702,877			77,131,816
Other		5,309,870			7,005,063
		260,229,745			260,576,115
Allowance for loan losses		(3,927,515	)		(3,851,617	)
Loans, net	$	256,302,230		$	256,724,498

We had $103.4 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at June 30, 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, 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 a possiblility. 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 as of June 30, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory.

June 30, 2017
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total

Pass	$	51,883,004	$	1,061,069	$	117,318,419	$	73,856,986	$	5,097,028	$	249,216,506
Watch		2,480,236		396,522		1,425,095		1,351,454		177,229		5,830,536
OAEM		662,989		—		295,490		—		—		958,479
Sub-Standard		1,255,340		—		2,438,834		494,437		35,613		4,224,224
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Total	$	56,281,569	$	1,457,591	$	121,477,838	$	75,702,877	$	5,309,870	$	260,229,745

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 in loans segregated by class:

June 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total		Recorded Investment > 90 Days and Accruing
Commercial	$	225,212	$	19,467	$	—	$	244,679	$	56,036,890	$	56,281,569	$	—
Commercial Real Estate -Construction		—		—		—		—		1,457,591		1,457,591		—
Commercial Real Estate -Other		280,689		—		1,552,910		1,833,599		119,644,239		121,477,838		—
Consumer Real Estate		140,920		21,200		—		162,120		75,540,757		75,702,877		—
Consumer-Other		—		99,982		—		99,982		5,209,888		5,309,870		—
Total	$	646,821	$	140,649	$	1,552,910	$	2,340,380	$	257,889,365	$	260,229,745	$	—

	December 31, 2016
		30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total		Recorded Investment > 90 Days and Accruing
Commercial		$	438,159	$	—	$	—	$	438,159	$	51,824,050	$	52,262,209	$	—
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 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 June 30, 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
		June 30, 2017		December 31, 2016
Commercial	$	52,050	$	61,781
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		1,782,819		1,678,876
Consumer - Real Estate		—		—
Consumer - Other		—		964

Total	$	1,834,869	$	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 class for the three and six months ended June 30, 2017 and June 30, 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.

Three Months Ended June 30, 2017
	Commercial		Commercial Real Estate-Construction			Commercial Real Estate-Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,553,159	$	57,071		$	1,418,575		$	756,892		$	91,160		$	3,876,857
Charge-offs		—		—			—			—			(2,372	)		(2,372	)
Recoveries		—		—			—			21,000			2,030			23,030
Provisions		75,513		(4,308	)		(35,656	)		(6,039	)		490			30,000
Ending Balance	$	1,628,672	$	52,763		$	1,382,919		$	771,853		$	91,308		$	3,927,515

Six Months Ended June 30, 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		—		—		—		—		(2,372	)		(2,372	)
Recoveries		—		—		—		42,000		3,770			45,770
Provisions		83,484		1,294		8,213		3,462		(63,953	)		32,500
Ending Balance	$	1,628,672	$	52,763	$	1,382,919	$	771,853	$	91,308		$	3,927,515

Three Months Ended June 30, 2016
		Commercial			Commercial Real Estate-Construction		Commercial Real Estate-Other		Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,500,650		$	44,268	$	1,108,703	$	613,242		$	169,899		$	3,436,762
Charge-offs		—			—		—		(82,015	)		(541	)		(82,556	)
Recoveries		—			—		18,000		—			240			18,240
Provisions		(10,323	)		13,106		59,821		98,546			(21,150	)		140,000
Ending Balance	$	1,490,327		$	57,374	$	1,186,524	$	629,773		$	148,448		$	3,512,446

Six Months Ended June 30, 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	)		—			—			(82,015	)		(1,591	)		(116,651	)
Recoveries		1,284			—			24,000			—			986			26,270
Provisions		625,234			(2,487	)		(182,570	)		(229,682	)		(25,495	)		185,000
Ending Balance	$	1,490,327		$	57,374		$	1,186,524		$	629,773		$	148,448		$	3,512,446

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

June 30, 2017
	Commercial		Commercial Real Estate-Construction		Commercial Real Estate-Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,032,461	$	—	$	259,972	$	43,119	$	35,614	$	1,371,166
Collectively evaluated for impairment		596,211		52,763		1,122,947		728,734		55,694		2,556,349
Total Allowance for Losses	$	1,628,672	$	52,763	$	1,382,919	$	771,853	$	91,308	$	3,927,515
Loans Receivable
Individually evaluated for impairment	$	1,255,033	$	—	$	2,458,870	$	494,437	$	35,613	$	4,243,953
Collectively evaluated for impairment		55,026,536		1,457,591		119,018,968		75,208,440		5,274,257		255,985,792
Total Loans Receivable	$	56,281,569	$	1,457,591	$	121,477,838	$	75,702,877	$	5,309,870	$	260,229,745

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 June 30, 2017 and December 31, 2016, loans individually evaluated for impairment and the corresponding allowance for loan losses are presented in the following table:

	June 30, 2017						December 31, 2016
		Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	171,136	$	171,136	$	—	$	250,040	$	250,040	$	—
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		1,435,014		1,435,014		—		2,174,770		2,174,770		—
Consumer Real Estate		451,318		451,318		—		1,243,008		1,243,008		—
Consumer Other		—		—		—		—		—		—
	$	2,057,468	$	2,057,468	$	—	$	3,667,818	$	3,667,818	$	—

With an allowance recorded:
Commercial	$	1,083,897	$	1,083,897	$	1,032,461	$	1,051,219	$	1,051,219	$	1,051,219
Commercial Real Estate- Construction		—		—		—		—		—		—
Commercial Real Estate-Other		1,023,856		1,023,856		259,973		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		35,613		35,613		35,613		89,047		89,047		89,047
	$	2,186,485	$	2,186,485	$	1,371,166	$	2,233,966	$	2,233,966	$	1,507,972

Total
Commercial	$	1,255,033	$	1,255,033	$	1,032,461	$	1,301,259	$	1,301,259	$	1,051,219
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		2,458,870		2,458,870		259,973		3,225,351		3,225,351		324,587
Consumer Real Estate		494,437		494,437		43,119		1,286,127		1,286,127		43,119
Consumer Other		35,613		35,613		35,613		89,047		89,047		89,047
	$	4,243,953	$	4,243,953	$	1,371,166	$	5,901,784	$	5,901,784	$	1,507,972

The following tables present average investment in impaired loans and the related interest income recognized on those impaired loans, by class, for the periods indicated.

	For the Three Months Ended June 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	175,568	$	4,886	$	486,498	$	4,221
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,383,621		21,894		2,883,625		20,215
Consumer Real Estate		451,035		5,630		1,242,703		14,334
Consumer-Other		—		—		—		—
	$	2,010,224	$	32,410	$	4,612,826	$	38,770

With an allowance recorded:

Commercial	$	1,091,779	$	36,481	$	1,097,191	$	13,912
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,020,012		5,331		1,065,261		10,949
Consumer Real Estate		43,119		431		72,034		387
Consumer Other		36,107		516		100,212		1,177
	$	2,191,017	$	42,759	$	2,334,698	$	26,425

Total

Commercial	$	1,267,347	$	41,367	$	1,583,689	$	18,133
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		2,403,633		27,225		3,948,886		31,164
Consumer Real Estate		494,154		6,061		1,314,737		14,721
Consumer Other		36,107		516		100,212		1,177
	$	4,201,241	$	75,169	$	6,947,524	$	65,195

	For the Six Months Ended June 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	179,698	$	10,032	$	494,572	$	10,718
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,324,984		43,806		2,889,248		42,855
Consumer Real Estate		450,860		11,025		1,242,069		27,781
Consumer-Other		—		—		—		—
	$	1,955,542	$	64,863	$	4,625,889	$	81,354

With an allowance recorded:

Commercial	$	1,098,449	$	71,193	$	1,101,252	$	30,364
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,020,012		7,941		1,031,087		18,265
Consumer Real Estate		43,119		838		72,059		1,006
Consumer Other		36,848		1,086		102,264		3,510
	$	2,198,428	$	81,058	$	2,306,662	$	53,145

Total

Commercial	$	1,278,147	$	81,225	$	1,595,824	$	41,082
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		2,344,996		51,747		3,920,335		61,120
Consumer Real Estate		493,979		11,863		1,314,128		28,787
Consumer Other		36,848		1,086		102,264		3,510
	$	4,153,970	$	145,921	$	6,932,552	$	134,499

Restructured loans, also known as troubled debt restructurings (“TDR”), are loans, still accruing interest, which have been renegotiated at below-market interest rates or have been granted other concessions. At June 30, 2017 and December 31, 2016, there were $33,300 (1 loan) and $378,392 (2 loans) in restructured loans, respectively. Our restructured loans were granted extended payment terms with no principal or rate reductions. All TDRs were performing as agreed as of June 30, 2017 and December 31, 2016, respectively. There were no additional loans identified as a TDR during the three or six months ended June 30, 2017 or 2016. No TDRs defaulted during the three or six months ended June 30, 2017 and 2016, which were modified within the previous twelve months.