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Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2019

Note 3: Loans and Allowance for Loan Losses

Major classifications of loans (net of deferred loan fees of $163,692 at March 31, 2019 and $156,309 at December 31, 2018) are as follows:

	March 31, 2019			December 31, 2018
Commercial	$	51,839,425		$	54,829,078
Commercial real estate:
Construction		9,268,042			7,304,300
Other		146,860,487			143,703,401
Consumer:
Real estate		62,069,547			63,787,411
Other		5,060,773			5,040,077
		275,098,274			274,664,267
Allowance for loan losses		(3,989,422	)		(4,214,331	)
Loans, net	$	271,108,852		$	270,449,936

We had $98.7 million and $101.9 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2019 and at December 31, 2018, 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 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 tables illustrate credit quality by class and internally assigned grades at March 31, 2019 and December 31, 2018. “Pass” includes loans internally graded as excellent, good and satisfactory.

March 31, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total

Pass	$	47,384,980	$	9,268,042	$	139,813,221	$	58,219,334	$	4,695,662	$	259,381,239
Watch		2,556,253		—		5,020,580		2,548,457		345,668		10,470,958
OAEM		172,196		—		665,531		422,004		—		1,259,731
Sub-standard		1,725,996		—		1,361,155		879,752		19,443		3,986,346
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	51,839,425	$	9,268,042	$	146,860,487	$	62,069,547	$	5,060,773	$	275,098,274

December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total

Pass	$	50,663,356	$	7,304,300	$	136,804,420	$	60,480,317	$	4,726,494	$	259,978,887
Watch		1,973,675		—		4,938,711		2,077,341		226,117		9,215,844
OAEM		157,300		—		590,294		350,000		—		1,097,594
Sub-standard		2,034,747		—		1,369,976		879,753		87,466		4,371,942
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—
Total	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

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

March 31, 2019
	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	$	49,220	$	347,824	$	—	$	397,044	$	51,442,381	$	51,839,425	$	—
Commercial Real Estate Construction		—		—		—		—		9,268,042		9,268,042		—
Commercial Real Estate Other		209,880		—		571,292		781,172		146,079,315		146,860,487		—
Consumer Real Estate		3,539		—		—		3,539		62,066,008		62,069,547		—
Consumer Other		26,199		19,112		1,076		46,387		5,014,386		5,060,773		—
Total	$	288,838	$	366,936	$	572,368	$	1,228,142	$	273,870,132	$	275,098,274	$	—

December 31, 2018
	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	$	266,567	$	17,492	$	229,395	$	513,454	$	54,315,624	$	54,829,078	$	—
Commercial Real Estate Construction		—		—		—		—		7,304,300		7,304,300		—
Commercial Real Estate Other		35,000		215,049		571,292		821,341		142,882,060		143,703,401		—
Consumer Real Estate		—		—		—		—		63,787,411		63,787,411		—
Consumer Other		24,621		—		—		24,621		5,015,456		5,040,077		—
Total	$	326,188	$	232,541	$	800,687	$	1,359,416	$	273,304,851	$	274,664,267	$	—

There were no loans as of March 31, 2019 and December 31, 2018 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, 2019		December 31, 2018
Commercial	$	16,148	$	251,219
Commercial Real Estate Construction		—		—
Commercial Real Estate Other		571,292		571,292
Consumer Real Estate		—		—
Consumer Other		1,076		1,023
Total	$	588,516	$	823,534

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, 2019 and March 31, 2018. 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, 2019
	Commercial			Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning balance	$	1,665,413		$	63,876	$	1,292,346	$	386,585		$	806,111		$	4,214,331
Charge-offs		(229,395	)		—		—		—			(6,334	)		(235,729	)
Recoveries		500			—		—		—			320			820
Provisions		92,059			17,171		26,572		(8,944	)		(116,858	)		10,000
Ending balance	$	1,528,577		$	81,047	$	1,318,918	$	377,641		$	683,239		$	3,989,422

March 31, 2018
	Commercial			Commercial Real Estate Construction			Commercial Real Estate Other			Consumer Real Estate			Consumer Other			Total
Allowance for Loan Losses
Beginning balance	$	1,403,588		$	23,638		$	1,549,755		$	796,918		$	101,499		$	3,875,398
Charge-offs		(31,250	)		—			—			—			(71,843	)		(103,093	)
Recoveries		1,500			—			1,575			—			140			3,215
Provisions		(47,592	)		(12,502	)		(510,242	)		(229,843	)		855,179			55,000
Ending balance	$	1,326,246		$	11,136		$	1,041,088		$	567,075		$	884,975		$	3,830,520

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, 2019
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	877,419	$	—	$	34,249	$	—	$	9,258	$	920,926
Collectively evaluated for impairment		651,158		81,047		1,284,669		377,641		673,981		3,068,496
Total Allowance for Loan Losses	$	1,528,577	$	81,047	$	1,318,918	$	377,641	$	683,239	$	3,989,422
Loans Receivable
Individually evaluated for impairment	$	1,725,995	$	—	$	1,370,606	$	879,753	$	19,444	$	3,995,798
Collectively evaluated for impairment		50,113,430		9,268,042		145,489,881		61,189,794		5,041,329		271,102,476
Total Loans Receivable	$	51,839,425	$	9,268,042	$	146,860,487	$	62,069,547	$	5,060,773	$	275,098,274

December 31, 2018
	Commercial		Commercial Real Estate Construction		Commercial Real Estate Other		Consumer Real Estate		Consumer Other		Total
Allowance for Loan Losses
Individually evaluated for impairment	$	1,132,805	$	—	$	37,416	$	—	$	21,324	$	1,191,545
Allowance for Loan Losses		532,608		63,876		1,254,930		386,585		784,787		3,022,786
Total Allowance for Loan Losses	$	1,665,413	$	63,876	$	1,292,346	$	386,585	$	806,111	$	4,214,331
Loans Receivable
Individually evaluated for impairment	$	1,996,579	$	—	$	1,280,890	$	879,753	$	21,324	$	4,178,546
Collectively evaluated for impairment		52,832,499		7,304,300		142,422,511		62,907,658		5,018,753		270,485,721
Total Loans Receivable	$	54,829,078	$	7,304,300	$	143,703,401	$	63,787,411	$	5,040,077	$	274,664,267

As of March 31, 2019 and December 31, 2018, loans individually evaluated and considered impaired are presented in the following table:

Impaired and Restructured Loans As of
	March 31, 2019						December 31, 2018
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial	$	124,115	$	124,115	$	—	$	115,983	$	115,983	$	—
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		867,530		967,331		—		974,249		974,249		—
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		—		—		—		—		—		—
		1,871,398		1,971,199		—		1,969,985		1,969,985		—

With an allowance recorded:
Commercial		1,601,880		1,601,880		877,419		1,880,596		1,880,596		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		503,076		303,474		34,249		406,442		306,641		37,416
Consumer Real Estate		—		—		—		—		—		—
Consumer Other		19,444		19,444		9,258		21,324		21,324		21,324
		2,142,400		1,924,798		920,926		2,308,362		2,208,561		1,191,545

Total
Commercial		1,725,995		1,725,995		877,419		1,996,579		1,996,579		1,132,805
Commercial Real Estate Construction		—		—		—		—		—		—
Commercial Real Estate Other		1,370,606		1,270,805		34,249		1,380,691		1,280,890		37,416
Consumer Real Estate		879,753		879,753		—		879,753		879,753		—
Consumer Other		19,444		19,444		9,258		21,324		21,324		21,324
	$	3,995,798	$	3,895,997	$	920,926	$	4,278,347	$	4,178,546	$	1,191,545

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,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	128,965	$	2,286	$	186,580	$	2,411
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		970,774		10,346		1,055,999		7,006
Consumer Real Estate		879,753		14,100		249,754		3,702
Consumer Other		—		—		—		—
		1,979,492		26,732		1,492,333		13,119

With an allowance recorded:
Commercial		1,614,020		26,114		1,570,019		25,663
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		504,566		2,763		529,297		2,995
Consumer Real Estate		—		—		—		—
Consumer Other		19,653		254		31,411		439
		2,138,239		29,131		2,130,727		29,097

Total
Commercial		1,742,985		28,400		1,756,599		28,074
Commercial Real Estate Construction		—		—		—		—
Commercial Real Estate Other		1,375,539		13,109		1,585,296		10,001
Consumer Real Estate		879,753		14,100		249,754		3,702
Consumer Other		19,653		254		31,411		439
	$	4,017,930	$	55,863	$	3,623,060	$	42,216

In general, the modification or restructuring of a loan 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 March 31, 2019, there was one TDR with a balance of $2,185, compared to no TDRs as of December 31, 2018. This TDR was granted extended payment terms and a lower payment at renewal. No TDRs defaulted during the three months ended March 31, 2019 and 2018, which were modified within the previous twelve months.