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Loans and Allowance
 12 Months Ended
Dec. 31, 2012
Receivables [Abstract]  
Loans and Allowance

Note 4. Loans and Allowance

 

Major categories of loans are as follows:

 

    2012     2011     2010  
Mortgage:                        
Residential   $ 107,728,972     $ 107,664,598     $ 102,199,134  
Commercial     71,381,029       67,655,908       72,669,909  
Construction and land development     3,915,299       5,091,870       5,363,232  
Demand and time     4,901,107       7,193,074       7,193,070  
Installment     66,096,285       50,118,030       46,860,351  
      254,022,692       237,723,480       234,285,696  
Unearned income on loans     (1,083,247 )     (1,058,299 )     (1,035,292 )
      252,939,445       236,665,181       233,250,404  
Allowance for credit losses     (3,307,920 )     (3,930,924 )     (3,399,516 )
                         
    $ 249,631,525     $ 232,734,257     $ 229,850,888  

 

The Bank has an automotive indirect lending program where vehicle collateralized loans made by dealers to consumers are acquired by the Bank. The Bank’s installment loan portfolio included approximately $47,427,000, $31,907,000, and $30,286,000 of such loans at December 31, 2012, 2011, and 2010, respectively.

 

The Bank makes loans to customers located primarily in Anne Arundel County and surrounding areas of Central Maryland. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

  

Executive officers, directors, and their affiliated interests enter into loan transactions with the Bank in the ordinary course of business. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers. They do not involve more than normal risk of collectibility or present other unfavorable terms. At December 31, 2012, 2011, and 2010, the amounts of such loans outstanding totaled $354,257, $4,887,753, and $5,109,539, respectively. During 2012, loan additions and repayments totaled $300,085 and $4,833,581, respectively.

 

Allowance for Loan Losses

 

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Bank has segmented the loan portfolio into the following classifications:

 

· Commercial and Industrial;
· Commercial Real Estate;
· Consumer and Indirect;
· Residential Real Estate.

 

Each of these segments are reviewed and analyzed quarterly using the average historical charge-offs over a current three year period for their respective segments as well as the following qualitative factors:

 

· Changes in the levels and trends in delinquencies, nonaccruals, classified assets and troubled debt restructurings
· Changes in the nature and volume of the portfolio
· Effects of any changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices
· Changes in the experience, ability, and depth of management and staff
· Changes in national and local economic conditions and developments, including the condition of various market segments
· Changes in the concentration of credits within each pool
· Changes in the quality of the Bank’s loan review system and the degree of oversight by the Board
· Changes in external factors such as competition and the legal environment including Regulation B (Equal Opportunity Credit)
· Changes in the underlying collateral for collateral dependent loans

 

The above factors result in a FAS 5, as codified in FASB ASC 450-10- 20, calculated reserve for environmental factors.

 

All credit exposures graded at or above a rating of “4” with outstanding balances (see ratings on page 21) are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. The determination for a specific reserve is evaluated relative to the general reserve factor for assets of the same type and grade. If a specific reserve is appropriate and exceeds the general reserve factor, a specific reserve is to be established. Otherwise, the asset is included in the portfolio of assets that comprise the base upon which the general reserve is calculated. The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon anticipated events. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio as of December 31, 2012.

  

The following table presents the total allowance by loan segment:

 

    Commercial           Consumer                    
    and     Commercial     and     Residential              
2012   Industrial     Real Estate     Indirect     Real Estate     Unallocated     Total  
                                     
Balance, beginning of year   $ 557,169     $ 2,012,962     $ 888,614     $ 595,812     $ (123,633 )   $ 3,930,924  
Provision for credit losses     29,282       (919,161 )     357,622       525,897       256,360       250,000  
Recoveries     10,558       89,439       286,564       5,714       -       392,275  
Loans charged off     (55,093 )     -       (475,269 )     (734,917 )     -       (1,265,279 )
                                                 
Balance, end of year   $ 541,916     $ 1,183,240     $ 1,057,531     $ 392,506     $ 132,727     $ 3,307,920  
                                                 
Individually evaluated for impairment:                                        
Balance in allowance   $ 451,126     $ 807,735     $ 20,000     $ 35,916     $ -     $ 1,314,777  
Related loan balance     796,511       4,980,503       76,251       1,545,028       -       7,398,293  
                                                 
Collectively evaluated for impairment:                                        
Balance in allowance   $ 90,790     $ 375,505     $ 1,037,531     $ 356,590     $ 132,727     $ 1,993,143  
Related loan balance     4,104,596       67,898,601       66,020,034       108,601,168       -       246,624,399  

 

    Commercial           Consumer                    
    and     Commercial     and     Residential              
2011   Industrial     Real Estate     Indirect     Real Estate     Unallocated     Total  
                                     
Balance, beginning of year   $ 263,251     $ 2,108,223     $ 829,517     $ 196,275     $ 2,250     $ 3,399,516  
Provision for credit losses     295,525       (165,691 )     256,886       402,163       (125,883 )     663,000  
Recoveries     4,010       70,430       408,889       1,475       -       484,804  
Loans charged off     (5,617 )     -       (606,678 )     (4,101 )     -       (616,396 )
                                                 
Balance, end of year   $ 557,169     $ 2,012,962     $ 888,614     $ 595,812     $ (123,633 )   $ 3,930,924  
                                                 
Individually evaluated for impairment:                                        
Balance in allowance   $ 455,735     $ 1,641,711     $ 44,235     $ 411,423     $ -     $ 2,553,104  
Related loan balance     1,248,279       7,538,638       125,455       1,963,886       -       10,876,258  
                                                 
Collectively evaluated for impairment:                                        
Balance in allowance   $ 101,434     $ 371,251     $ 844,379     $ 184,389     $ (123,633 )   $ 1,377,820  
Related loan balance     5,944,795       63,535,256       49,992,575       107,374,596       -       226,847,222  

 

 

    Commercial           Consumer                    
    and     Commercial     and     Residential              
2010   Industrial     Real Estate     Indirect     Real Estate     Unallocated     Total  
                                     
Balance, beginning of year   $ 237,461     $ 2,380,024     $ 842,901     $ 162,142     $ (50,000 )   $ 3,572,528  
Provision for credit losses     (7,822 )     542,416       448,197       14,959       52,250       1,050,000  
Recoveries     45,731       10,593       497,479       85,195       -       638,998  
Loans charged off     (12,119 )     (824,810 )     (959,060 )     (66,021 )     -       (1,862,010 )
                                                 
Balance, end of year   $ 263,251     $ 2,108,223     $ 829,517     $ 196,275     $ 2,250     $ 3,399,516  
                                                 
Individually evaluated for impairment:                                        
Balance in allowance   $ 180,736     $ 1,691,887     $ 20,000     $ 32,146     $ -     $ 1,924,769  
Related loan balance     1,335,332       8,999,390       466,575       658,151       -       11,459,448  
                                                 
Collectively evaluated for impairment:                                        
Balance in allowance   $ 82,515     $ 416,336     $ 809,517     $ 164,129     $ 2,250     $ 1,474,747  
Related loan balance     5,857,738       67,450,241       46,393,776       103,124,493       -       222,826,248  

 

As of December 31, 2012 and 2010, the allowance for loan losses included an unallocated excess amount of $132,727 and $2,250, respectively. Management is comfortable with these amounts as they feel the amounts are adequate to absorb additional inherent potential losses in the loan portfolio.

 

As of December 31, 2011, the allowance for loan losses included an unallocated shortfall of $123,633. This shortfall was due to a special reserve on a commercial real estate property that was based on an old appraisal. Management is comfortable with this shortfall as they believe the appraisal value is low based on sales of a portion of the property.

 

Credit Quality Information

 

The following table represents credit exposures by creditworthiness category for the year ending December 31, 2012. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Bank’s internal creditworthiness is based on experience with similarly graded credits. Loans that trend upward toward higher credit grades typically have less credit risk and loans that migrate downward typically have more credit risk.

 

The Bank’s internal risk ratings are as follows:

 

1 Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)
2 Above Average – low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)
3 Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)
4 Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)
5 Other Assets Especially Mentioned – moderately high risk. (possesses deficiencies which corrective action by the bank would remedy; potential watch list)
6 Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)
7 Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)
8 Loss – (of little value; not warranted as a bankable asset)

 

Loans rated 1-4 are considered “Pass” for purposes of the risk rating chart below.

 

Risk ratings of loans by categories of loans are as follows:

 

    Commercial           Consumer              
    and     Commercial     and     Residential        
2012   Industrial     Real Estate     Indirect     Real Estate     Total  
                               
Pass   $ 4,296,139     $ 63,297,427     $ 64,160,355     $ 107,943,667     $ 239,697,588  
Special mention     183,507       5,970,942       1,485,366       1,189,613       8,829,428  
Substandard     421,461       3,610,735       360,672       1,012,916       5,405,784  
Doubtful     -       -       89,892       -       89,892  
Loss     -       -       -       -       -  
                                         
    $ 4,901,107     $ 72,879,104     $ 66,096,285     $ 110,146,196     $ 254,022,692  
                                         
Non-accrual     17,286       2,645,320       237,193       1,108,866       4,008,665  
Troubled debt restructures     -       1,369,768       -       832,500       2,202,268  
Number of TDRs contracts     -       1       -       1       2  
Non-performing TDRs     -       1,369,768       -       832,500       2,202,268  
Number of TDR accounts     -       1       -       1       2  

 

    Commercial           Consumer              
    and     Commercial     and     Residential        
2011   Industrial     Real Estate     Indirect     Real Estate     Total  
                               
Pass   $ 5,882,615     $ 58,798,799     $ 48,528,582     $ 106,301,944     $ 219,511,940  
Special mention     327,048       4,736,458       1,324,580       1,333,217       7,721,303  
Substandard     983,411       7,538,637       190,044       1,703,321       10,415,413  
Doubtful     -       -       74,824       -       74,824  
Loss     -       -       -       -       -  
                                         
    $ 7,193,074     $ 71,073,894     $ 50,118,030     $ 109,338,482     $ 237,723,480  
                                         
Non-accrual     20,286       4,484,260       74,824       481,323       5,060,693  
Troubled debt restructures     9,491       2,818,295       -       1,280,423       4,108,209  
Number of TDRs accounts     1       1       -       1       3  
Non-performing TDRs     -       2,818,295       -       -       2,818,295  
Number of TDR accounts     -       1       -       -       1  

 

 

    Commercial           Consumer              
    and     Commercial     and     Residential        
2010   Industrial     Real Estate     Indirect     Real Estate     Total  
                               
Pass   $ 5,852,779     $ 66,763,903     $ 44,931,931     $ 102,281,090     $ 219,829,703  
Special mention     642,248       686,338       1,543,756       809,127       3,681,469  
Substandard     698,043       8,999,390       259,939       692,427       10,649,799  
Doubtful     -       -       124,725       -       124,725  
Loss     -       -       -       -       -  
                                         
    $ 7,193,070     $ 76,449,631     $ 46,860,351     $ 103,782,644     $ 234,285,696  
                                         
Non-accrual     1,359,554       4,522,246       124,925       976,279       6,983,004  
Troubled debt restructures     35,711       2,808,466       -       -       2,844,177  
Number of TDRs accounts     1       1       -       -       2  

 

At December 31, 2012, the recorded investment in new 2012 troubled debt restructurings totaled $0. The TDR of $1,280,423 from 2011 did not perform under the terms of the 2011 restructuring and is now included in impaired and non-accrual loans. The remaining recorded balance after a recent charge-off was $832,500. In addition, during 2012, a loan that had been classified as being a TDR in the amount of $9,491 was paid off and another non-performing TDR from 2010 was paid down to $1,369,768 by the partial sale of collateral.

 

At December 31, 2011, the recorded investment in new troubled debt restructurings totaled $1,280,423. During 2011, this troubled debt restructuring continued to perform under the terms of the modified agreement.

 

At December 31, 2010, the recorded investment in new troubled debt restructurings totaled $0. During 2010, one troubled debt restructuring transpired totaling $2,808,466, however did not perform under the terms of the modified agreement and is included in impaired and nonaccrual loans.

 

The Bank has no commitments to loan additional funds to the borrowers of restructured, impaired, or non-accrual loans.

  

Current, past due, and nonaccrual loans by categories of loans are as follows:

 

                90 Days or              
          30-89 Days     More and              
2012   Current     Past Due     Still Accruing     Nonaccrual     Total  
                               
Commercial and industrial   $ 4,678,297     $ 205,524     $ -     $ 17,286     $ 4,901,107  
Commercial real estate     68,879,791       -       1,353,993       2,645,320       72,879,104  
Consumer and indirect     64,427,468       1,431,624       -       237,193       66,096,285  
Residential real estate     108,545,538       233,045       258,747       1,108,866       110,146,196  
                                         
    $ 246,531,094     $ 1,870,193     $ 1,612,740     $ 4,008,665     $ 254,022,692  

 

                90 Days or              
          30-89 Days     More and              
2011   Current     Past Due     Still Accruing     Nonaccrual     Total  
                               
Commercial and industrial   $ 7,134,672     $ 38,116     $ -     $ 20,286     $ 7,193,074  
Commercial real estate     66,589,634       -       -       4,484,260       71,073,894  
Consumer and indirect     48,744,945       1,298,261       -       74,824       50,118,030  
Residential real estate     108,703,963       134,591       18,605       481,323       109,338,482  
                                         
    $ 231,173,214     $ 1,470,968     $ 18,605     $ 5,060,693     $ 237,723,480  

 

                90 Days or              
          30-89 Days     More and              
2010   Current     Past Due     Still Accruing     Nonaccrual     Total  
                               
Commercial and industrial   $ 5,735,517     $ 97,999     $ -     $ 1,359,554     $ 7,193,070  
Commercial real estate     70,675,983       1,251,402       -       4,522,246       76,449,631  
Consumer and indirect     45,155,344       1,580,082       -       124,925       46,860,351  
Residential real estate     102,706,757       99,608       -       976,279       103,782,644  
                                         
    $ 224,273,601     $ 3,029,091     $ -     $ 6,983,004     $ 234,285,696  

 

Loans on which the accrual of interest has been discontinued totaled $4,008,665, $5,060,693, and $6,983,004 at December 31, 2012, 2011, and 2010, respectively. Interest that would have been accrued under the terms of these loans totaled $273,974, $268,407, and $145,148 for the years ended December 31, 2012, 2011, and 2010, respectively. Loans past due 90 days or more and still accruing interest totaled $1,612,740, $18,605 and $0 at December 31, 2012, 2011 and 2010, respectively.

 

Non-accrual loans with specific reserves at December 31, 2012 are comprised of:

 

Commercial loans – Three loans to two borrowers totaling $164,587 with $46,952 of specific reserves established.

 

Commercial Real Estate – One loan to one borrower in the amount of $1,271,937 secured by commercial and/or residential properties with specific reserves of $371,937 established for the loans.

  

Impaired Loans

 

When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases management used the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

 

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

 

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable. Management determined the specific reserve in the allowance based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the remaining source of repayment for the loan is the operation or liquidation of the collateral. In those cases, the current fair value of the collateral, less selling costs was used to determine the specific allowance recorded.

 

Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method.

 

2012   Recorded
Investment		     Unpaid
Principal
Balance		     Interest
Income
Recognized		     Specific
Reserve		     Average
Recorded
Investment		  
Impaired loans with specific reserves:                                        
Real-estate - mortgage:                                        
Residential   $ 180,416     $ 180,416     $ 11,838     $ 35,916     $ 182,019  
Commercial     3,610,735       4,210,735       99,079       807,735       3,642,095  
Consumer     75,513       75,513       7,759       20,000       76,098  
Installment     147,301       147,301       7,806       29,666       147,574  
Home Equity     -       -       -       -       -  
Commercial     421,460       421,460       20,463       421,460       432,174  
Total impaired loans with specific reserves   $ 4,435,425     $ 5,035,425     $ 146,945     $ 1,314,777     $ 4,479,960  
                                         
Impaired loans with no specific reserve:                                        
Real-estate - mortgage:                                        
Residential   $ 1,364,612     $ 1,812,535     $ 75,050        n/a     $ 1,794,861  
Commercial     1,369,768       1,369,768       -        n/a       2,440,982  
Consumer     738       -       -        n/a       -  
Installment     227,750       -       -        n/a       -  
Home Equity     -       -       -        n/a       -  
Commercial     -       -       -        n/a       -  
Total impaired loans with no specific reserve   $ 2,962,868     $ 3,182,303     $ 75,050       -     $ 4,235,843  

 

 

2011   Recorded
Investment		     Unpaid
Principal
Balance		     Interest
Income
Recognized		     Specific
Reserve		     Average
Recorded
Investment		  
Impaired loans with specific reserves:                                        
Real-estate - mortgage:                                        
Residential   $ 1,703,322     $ 1,703,322     $ 62,320     $ 411,423     $ 1,708,158  
Commercial     6,502,986       7,102,986       218,564       1,641,711       6,559,298  
Consumer     100,455       100,455       10,423       44,235       103,733  
Installment     -       -       -       -       -  
Home Equity     -       -       -       -       -  
Commercial     730,061       730,061       40,445       455,735       755,371  
Total impaired loans with specific reserves   $ 9,036,824     $ 9,636,824     $ 331,752     $ 2,553,104     $ 9,126,560  
                                         
Impaired loans with no specific reserve:                                        
Real-estate - mortgage:                                        
Residential   $ 260,564     $ 260,564     $ 7,149        n/a     $ 245,128  
Commercial     1,035,652       1,035,652       50,036        n/a       1,051,139  
Consumer     25,000       25,000       -        n/a       -  
Installment     264,868       264,868       -        n/a       -  
Home Equity     -       -       -        n/a       -  
Commercial     253,350       253,350       20,937        n/a       303,606  
Total impaired loans with no specific reserve   $ 1,839,434     $ 1,839,434     $ 78,122       -     $ 1,599,873  

 

2010   Recorded
Investment		     Unpaid
Principal
Balance		     Interest
Income
Recognized		     Specific
Reserve		     Average
Recorded
Investment		  
Impaired loans with specific reserves:                                        
Real-estate - mortgage:                                        
Residential   $ 427,204     $ 427,204     $ 19,326     $ 32,146     $ 431,575  
Commercial     6,605,317       7,205,317       417,554       1,691,887       6,513,982  
Consumer     77,358       77,358       2,605       20,000       77,358  
Installment     -       -       -       -       -  
Home Equity     -       -       -       -       -  
Commercial     481,847       481,847       30,651       180,736       502,870  
Total impaired loans with specific reserves   $ 7,591,726     $ 8,191,726     $ 470,136     $ 1,924,769     $ 7,525,785  
                                         
Impaired loans with no specific reserve:                                        
Real-estate - mortgage:                                        
Residential   $ 230,947     $ 230,947     $ 12,204        n/a     $ 231,090  
Commercial     2,394,073       2,394,073       67,082        n/a       3,285,175  
Consumer     389,217       389,217       -        n/a       513,901  
Installment     -       -       -        n/a       -  
Home Equity     -       -       -        n/a       -  
Commercial     853,485       853,485       45,407        n/a       973,839  
Total impaired loans with no specific reserve   $ 3,867,722     $ 3,867,722     $ 124,693       -     $ 5,004,005