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Loans and Allowance

12 Months Ended

Dec. 31, 2013

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

Note 4. Loans and Allowance

Major categories of loans are as follows:


	2013			2012			2011
Mortgage:
Residential	$	123,645,939		$	107,728,972		$	107,664,598
Commercial		67,195,806			71,381,029			67,655,908
Construction and land development		6,582,553			3,915,299			5,091,870
Demand and time		4,172,747			4,901,107			7,193,074
Installment		73,230,433			66,096,285			50,118,030
		274,827,478			254,022,692			237,723,480
Unearned income on loans		(1,171,339	)		(1,083,247	)		(1,058,299	)
		273,656,139			252,939,445			236,665,181
Allowance for credit losses		(2,972,019	)		(3,307,920	)		(3,930,924	)

	$	270,684,120		$	249,631,525		$	232,734,257

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 $55,400,000, $47,427,000, and $31,907,000 of such loans at December 31, 2013, 2012, and 2011, 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, 2013, 2012, and 2011, the amounts of such loans outstanding totaled $1,078,577, $354,257, and $4,887,753, respectively. During 2013, loan additions and repayments totaled $1,711,000 and $986,681, 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, 2013.

The following table presents the total allowance by loan segment:


	Commercial						Consumer
	and			Commercial			and			Residential
2013	Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year	$	541,916		$	1,183,240		$	1,057,531		$	392,506		$	132,727		$	3,307,920
Provision for credit losses		46,303			(374,067	)		468,559			372,251			(253,046	)		260,000
Recoveries		26,804			89,189			313,795			7,714			-			437,502
Loans charged off		(202,114	)		-			(652,281	)		(179,008	)		-			(1,033,403	)

Balance, end of year	$	412,909		$	898,362		$	1,187,604		$	593,463		$	(120,319	)	$	2,972,019

Individually evaluated for impairment:
Balance in allowance	$	278,786		$	550,794		$	178,657		$	155,330		$	-		$	1,163,567
Related loan balance		278,786			3,364,193			636,174			1,629,643			-			5,908,796

Collectively evaluated for impairment:
Balance in allowance	$	134,123		$	347,568		$	1,008,947		$	438,133		$	(120,319	)	$	1,808,452
Related loan balance		3,893,961			65,414,415			72,594,259			127,016,047			-			268,918,682


	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

As of December 31, 2013 and 2011, the allowance for loan losses included an unallocated shortfall of $120,319 and $123,633, respectively. The 2013 shortfall is well within the internal Bank policy of 5% tolerance for actual to required reserves. The 2011 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.

As of December 31, 2012 the allowance for loan losses included an unallocated excess amount of $132,727. Management is comfortable with this amount as they feel the amount is adequate to absorb additional inherent potential losses in the loan portfolio.

Credit Quality Information

The following table represents credit exposures by creditworthiness category for the year ending December 31, 2013. 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:

Superior – minimal risk. (normally supported by pledged deposits, United States government securities, etc.)

Above Average – low risk. (all of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Average – moderately low risk. (most of the risks associated with this credit based on each of the bank’s creditworthiness criteria are minimal)

Acceptable – moderate risk. (the weighted overall risk associated with this credit based on each of the bank’s creditworthiness criteria is acceptable)

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
2013	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	3,594,809	$	59,914,422	$	71,554,400	$	126,774,441	$	261,838,072
Special mention		299,152		5,499,993		1,102,091		1,312,103		8,213,339
Substandard		278,786		3,364,193		508,243		559,146		4,710,368
Doubtful		-		-		65,699		-		65,699
Loss		-		-		-		-		-

	$	4,172,747	$	68,778,608	$	73,230,433	$	128,645,690	$	274,827,478

Non-accrual		14,286		1,237,647		338,212		1,123,248		2,713,393
Troubled debt restructures		-		-		-		-		-
Number of TDRs contracts		-		-		-		-		-
Non-performing TDRs		-		-		-		-		-
Number of TDR accounts		-		-		-		-		-


	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 accounts		-		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

At December 31, 2013, the recorded investment in new 2013 troubled debt restructuring totaled $0. The TDR from 2011 that was at a balance of $832,500 at year-end 2012, is now on the books as OREO. The TDR from 2010 that was at a balance of $1,369,768 at year-end 2012, was paid off in the fourth quarter of 2013.

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.

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
2013	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,158,461	$	-	$	-	$	14,286	$	4,172,747
Commercial real estate		66,191,062		173,000		1,176,899		1,237,647		68,778,608
Consumer and indirect		71,755,109		1,137,112		-		338,212		73,230,433
Residential real estate		126,934,475		157,123		430,844		1,123,248		128,645,690

	$	269,039,107	$	1,467,235	$	1,607,743	$	2,713,393	$	274,827,478


					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

Loans on which the accrual of interest has been discontinued totaled $2,713,393, $4,008,665, and $5,060,693 at December 31, 2013, 2012, and 2011, respectively. Interest that would have been accrued under the terms of these loans totaled $180,770, $273,974, and $268,407 for the years ended December 31, 2013, 2012, and 2011, respectively. Loans past due 90 days or more and still accruing interest totaled $1,607,743, $1,612,740, and $18,605 at December 31, 2013, 2012 and 2011, respectively.

Non-accrual loans with specific reserves at December 31, 2013 are comprised of:

Commercial loans – Two loans to one borrower totaling $14,286 with $14,286 of specific reserves established for the loans.

Commercial Real Estate – Two loans to two borrowers in the amount of $1,237,647 secured by commercial and/or residential properties with specific reserves of $268,647 established for the loans.

Residential Real Estate – Two loans to two borrowers in the amount of $382,058 secured by residential properties with specific reserves of $122,742 established for the loans.

Consumer and Indirect Loans – Four loans to four borrowers in the amount of $319,158 with $158,658 of specific reserves 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.


2013	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	559,146	$	559,146	$	15,768	$	155,330	$	563,961
Commercial		2,187,294		2,187,294		55,535		550,794		2,271,949
Consumer		393,740		393,740		20,767		178,657		394,356
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		278,786		278,786		11,541		278,786		286,433
Total impaired loans with specific reserves	$	3,418,966	$	3,418,966	$	103,611	$	1,163,567	$	3,516,699

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	1,070,497	$	1,070,497	$	39,257		n/a	$	1,071,479
Commercial		1,176,899		1,176,899		46,583		n/a		1,231,505
Consumer		10,602		10,602		-		n/a		-
Installment		180,204		180,204		-		n/a		-
Home Equity		51,628		51,628		-		n/a		50,999
Commercial		-		-		-		n/a		-
Total impaired loans with no specific reserve	$	2,489,830	$	2,489,830	$	85,840		-	$	2,353,983

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

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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