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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2017

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees of $149,640 at September 30, 2017 and $136,446 at December 31, 2016) are as follows:

	September 30,			December 31,
	2017			2016
Commercial loans	$	53,348,364		$	52,262,209
Commercial real estate:
Construction		1,842,668			1,208,901
Other		134,779,206			122,968,126
Consumer:
Real Estate		74,254,387			77,131,816
Other		4,908,006			7,005,063
		269,132,631			260,576,115
Allowance for loan losses		(3,886,959	)		(3,851,617	)
Loans, net	$	265,245,672		$	256,724,498

We had $101.1 million and $101.2 million of loans pledged as collateral to secure funding with the Federal Reserve Bank Discount Window at September 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 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 no overdrafts, more than adequate cash flow, unquestionable strength, strong earnings and capital, where applicable.

●

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 September 30, 2017 and December 31, 2016. “Pass” includes loans internally graded as excellent, good and satisfactory.

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

Pass	$	49,209,010	$	1,453,646	$	129,338,835	$	73,172,945	$	4,665,789	$	257,840,225
Watch		2,260,670		389,022		2,942,987		587,005		208,110		6,387,794
OAEM		49,164		—		291,128		—		—		340,292
Sub-Standard		1,829,520		—		2,206,256		494,437		34,107		4,564,320
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Total	$	53,348,364	$	1,842,668	$	134,779,206	$	74,254,387	$	4,908,006	$	269,132,631

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:

September 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	$	78,271	$	150,000	$	13,902	$	242,173	$	53,106,191	$	53,348,364	$	13,902
Commercial Real Estate - Construction		—		—		—		—		1,842,668		1,842,668		—
Commercial Real Estate - Other		675,000		—		1,415,738		2,090,738		132,688,468		134,779,206		—
Consumer Real Estate		153,112		564,877		—		717,989		73,536,398		74,254,387		—
Consumer Other		11,547		—		—		11,547		4,896,459		4,908,006		—
Total	$	917,930	$	714,877	$	1,429,640	$	3,062,447	$	266,070,184	$	269,132,631	$	13,902

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

As of September 30, 2017 and December 31, 2016, there were one and two loans over 90 days past due and still accruing, respectively.

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

		Loans Receivable on Non-Accrual
		September 30, 2017		December 31, 2016
Commercial	$	46,899	$	61,781
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		1,554,368		1,678,876
Consumer Real Estate		—		—
Consumer Other		—		964

Total	$	1,601,267	$	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 nine months ended September 30, 2017 and September 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 September 30, 2017
	Commercial		Commercial Real Estate-Construction			Commercial Real Estate-Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,628,672	$	52,763		$	1,382,919		$	771,853		$	91,308		$	3,927,515
Charge-offs		—		—			—			(80,787	)		(2,489	)		(83,276	)
Recoveries		—		—			—			21,000			1,720			22,720
Provisions		403,920		(7,235	)		(209,108	)		(150,697	)		(16,880	)		20,000
Ending Balance	$	2,032,592	$	45,528		$	1,173,811		$	561,369		$	73,659		$	3,886,959

Nine Months Ended September 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		—		—			—			(80,786	)		(4,863	)		(85,649	)
Recoveries		—		—			—			63,000			5,491			68,491
Provisions		487,404		(5,941	)		(200,895	)		(147,236	)		(80,832	)		52,500
Ending Balance	$	2,032,592	$	45,528		$	1,173,811		$	561,369		$	73,659		$	3,886,959

Three Months Ended September 30, 2016
	Commercial		Commercial Real Estate-Construction			Commercial Real Estate-Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning Balance	$	1,490,327	$	57,374		$	1,186,524		$	629,773		$	148,448		$	3,512,446
Charge-offs		—		—			—			—			—			—
Recoveries		1,500		—			20,000			—			1,165			22,665
Provisions		4,512		524			98,398			119,044			(12,478	)		210,000
Ending Balance	$	1,496,339	$	57,898		$	1,304,922		$	748,817		$	137,135		$	3,745,111

Nine Months Ended September 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		2,784			—			44,000			—			2,151			48,935
Provisions		629,746			(1,963	)		(84,172	)		(110,638	)		(37,973	)		395,000
Ending Balance	$	1,496,339		$	57,898		$	1,304,922		$	748,817		$	137,135		$	3,745,111

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

September 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	$	1,621,074	$	—	$	268,347	$	43,119	$	34,107	$	1,966,647
Collectively evaluated for impairment		411,518		45,528		905,464		518,250		39,552		1,920,312
Total Allowance for Losses	$	2,032,592	$	45,528	$	1,173,811	$	561,369	$	73,659	$	3,886,959
Loans Receivable
Individually evaluated for impairment	$	1,829,520	$	—	$	2,224,537	$	494,437	$	34,107	$	4,582,601
Collectively evaluated for impairment		51,518,844		1,842,668		132,554,669		73,759,950		4,873,899		264,550,030
Total Loans Receivable	$	53,348,364	$	1,842,668	$	134,779,206	$	74,254,387	$	4,908,006	$	269,132,631

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

	September 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	$	161,880	$	161,880	$	—	$	250,040	$	250,040	$	—
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		1,283,137		1,283,137		—		2,174,770		2,174,770		—
Consumer Real Estate		451,318		451,318		—		1,243,008		1,243,008		—
Consumer Other		—		—		—		—		—		—
	$	1,896,335	$	1,896,335	$	—	$	3,667,818	$	3,667,818	$	—

With an allowance recorded:
Commercial	$	1,667,640	$	1,667,640	$	1,621,074	$	1,051,219	$	1,051,219	$	1,051,219
Commercial Real Estate- Construction		—		—		—		—		—		—
Commercial Real Estate-Other		941,400		941,400		268,347		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		34,107		34,107		34,107		89,047		89,047		89,047
	$	2,686,266	$	2,686,266	$	1,966,647	$	2,233,966	$	2,233,966	$	1,507,972

Total
Commercial	$	1,829,520	$	1,829,520	$	1,621,074	$	1,301,259	$	1,301,259	$	1,051,219
Commercial Real Estate-Construction		—		—		—		—		—		—
Commercial Real Estate-Other		2,224,537		2,224,537		268,347		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		34,107		34,107		34,107		89,047		89,047		89,047
	$	4,582,601	$	4,582,601	$	1,966,647	$	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 September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	165,274	$	2,429	$	380,933	$	4,674
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,276,906		9,999		2,253,994		19,738
Consumer Real Estate		451,318		5,972		1,243,008		16,205
Consumer Other		—		—		—		—
	$	1,893,498	$	18,400	$	3,877,935	$	40,617

With an allowance recorded:

Commercial	$	1,685,930	$	26,484	$	1,085,201	$	19,406
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		933,243		2,792		1,068,622		5,330
Consumer Real Estate		43,119		462		71,963		770
Consumer Other		34,579		463		95,367		473
	$	2,696,871	$	30,201	$	2,321,153	$	25,979

Total

Commercial	$	1,851,204	$	28,913	$	1,466,134	$	24,080
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		2,210,149		12,791		3,322,617		25,068
Consumer Real Estate		494,437		6,434		1,314,971		16,975
Consumer Other		34,579		463		95,367		473
	$	4,590,369	$	48,601	$	6,199,088	$	66,596

	For the Nine Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	173,964	$	7,416	$	392,826	$	15,393
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		1,275,402		23,084		2,263,927		69,962
Consumer Real Estate		451,025		16,938		1,242,373		43,220
Consumer Other		—		—		—		—
	$	1,900,391	$	47,438	$	3,899,126	$	128,575

With an allowance recorded:

Commercial	$	1,711,259	$	76,544	$	1,095,411	$	49,770
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		930,420		5,367		1,070,048		12,008
Consumer Real Estate		43,119		1,296		72,025		1,776
Consumer Other		36,056		1,419		99,864		3,777
	$	2,720,854	$	84,626	$	2,337,348	$	67,331

Total

Commercial	$	1,885,223	$	83,960	$	1,488,237	$	65,163
Commercial Real Estate-Construction		—		—		—		—
Commercial Real Estate-Other		2,205,822		28,451		3,333,976		81,970
Consumer Real Estate		494,144		18,234		1,314,398		44,996
Consumer Other		36,056		1,419		99,864		3,777
	$	4,621,245	$	132,064	$	6,236,474	$	195,906

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. As of September 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 September 30, 2017 and December 31, 2016, respectively. There were no additional loans identified as a TDR during the three or nine months ended September 30, 2017 or 2016. No TDRs defaulted during the three or nine months ended September 30, 2017 and 2016, which were modified within the previous twelve months.