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Loans and Allowance

12 Months Ended

Dec. 31, 2014

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

Note 4. Loans and Allowance

Major categories of loans are as follows:

	2014			2013			2012
Mortgage:
Residential	$	120,933,420		$	123,645,939		$	107,728,972
Commercial		62,601,469			67,195,806			71,381,029
Construction and land development		7,073,720			6,582,553			3,915,299
Demand and time		3,518,752			4,172,747			4,901,107
Installment		84,103,142			73,230,433			66,096,285
		278,230,503			274,827,478			254,022,692
Unearned income on loans		(1,126,396	)		(1,171,339	)		(1,083,247	)
		277,104,107			273,656,139			252,939,445
Allowance for credit losses		(3,117,870	)		(2,972,019	)		(3,307,920	)

	$	273,986,237		$	270,684,120		$	249,631,525

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 $67,551,000, $55,400,000, and $47,427,000 of such loans at December 31, 2014, 2013, and 2012, 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, 2014, 2013, and 2012, the amounts of such loans outstanding totaled $556,188, $1,078,577, and $354,257 respectively. During 2014, loan additions and repayments/transfers totaled $126,500 and $648,889, 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 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, 2014.

The following table presents the total allowance by loan segment:

	Commercial							Consumer
		and			Commercial			and			Residential
2014		Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year		$	412,909		$	898,362		$	1,187,604		$	593,463		$	(120,319	)	$	2,972,019
Provision for credit losses			(4,580	)		(448,027	)		601,522			805,261			66,700			1,020,876
Recoveries			6,440			128,068			331,108			5,714			-			471,330
Loans charged off			(29,138	)		(243,394	)		(839,012	)		(234,811	)		-			(1,346,355	)

Balance, end of year		$	385,631		$	335,009		$	1,281,222		$	1,169,627		$	(53,619	)	$	3,117,870

Individually evaluated for impairment:
Balance in allowance		$	252,500		$	148,791		$	186,226		$	682,642		$	-		$	1,270,159
Related loan balance			252,500			2,155,816			1,106,217			2,931,143			-			6,445,676

Collectively evaluated for impairment:
Balance in allowance		$	133,131		$	186,218		$	1,094,996		$	486,985		$	(53,619	)	$	1,847,711
Related loan balance			3,266,252			63,486,816			82,996,925			122,034,834			-			271,784,827

	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

As of December 31, 2014 and 2013, the allowance for loan losses included an unallocated shortfall of $53,619 and $120,319, respectively. The 2014 and 2013 shortfall is well within the internal Bank policy of 5% tolerance for actual to required reserves. As of December 31, 2012 the allowance for loan losses included an unallocated excess amount of $132,727. Management is comfortable with these amounts as they feel the amounts are adequate to absorb 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, 2014. 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)

Substandard – (the bank is inadequately protected and there exists the distinct possibility of sustaining some loss if not corrected)

Doubtful – (weaknesses make collection or liquidation in full, based on currently existing facts, improbable)

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.

The Bank contracts with an independent 3rd party loan review firm that reviews and validates the credit risk program on a quarterly basis. Results of these reviews are presented to the Audit Committee for approval and then to management for implementation. The loan review process compliments and reinforces the risk identification and assessment decisions made by the lenders and credit personnel as well as the Bank’s policies and procedures.

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

	Commercial				Consumer
	and		Commercial		and		Residential
2014	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	3,177,639	$	58,837,254	$	80,501,928	$	121,244,374	$	263,761,195
Special mention		88,613		4,649,562		2,555,654		832,546		8,126,375
Substandard		252,500		2,155,816		882,600		2,726,156		6,017,072
Doubtful		-		-		162,960		-		162,960
Loss		-		-		-		162,901		162,901

	$	3,518,752	$	65,642,632	$	84,103,142	$	124,965,977	$	278,230,503

Non-accrual		-		1,097,112		515,352		1,165,440		2,777,904
Troubled debt restructures		252,500		-		-		-		252,500
Number of TDRs accounts		1		-		-		-		1
Non-performing TDRs		-		-		-		-		-
Number of TDR accounts		-		-		-		-		-

	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

At December 31, 2014, the recorded investment in TDR’s reflected one loan in the amount of $252,500 which is performing under the terms of the modified agreement. The TDR from 2012 that had a balance of $832,500 was brought into OREO in 2013 and later sold in 2014. The remaining TDR from 2012 in the amount of $1,369,768 was paid off in 2013.

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
2014	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	3,518,752	$	-	$	-	$	-	$	3,518,752
Commercial real estate		64,545,207		313		-		1,097,112		65,642,632
Consumer and indirect		81,315,689		2,272,101		-		515,352		84,103,142
Residential real estate		123,284,983		318,782		196,772		1,165,440		124,965,977

	$	272,664,631	$	2,591,196	$	196,772	$	2,777,904	$	278,230,503


					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

Loans on which the accrual of interest has been discontinued totaled $2,777,904, $2,713,393, and $4,008,665 at December 31, 2014, 2013, and 2012, respectively. Interest that would have been accrued under the terms of these loans totaled $255,682, $180,770, and $273,974 for the years ended December 31, 2014, 2013, and 2012, respectively. Loans past due 90 days or more and still accruing interest totaled $196,772, $1,607,743, and $1,612,740 at December 31, 2014, 2013 and 2012, respectively. Management believes these particular loans are well secured and in the process of full collection of all amounts owed.

Non-accrual loans with specific reserves at December 31, 2014 are comprised of:

Commercial Real Estate – Two loans to two borrowers in the amount of $1,094,708 secured by commercial and/or residential properties with specific reserves of $148,791 established for the loans.

Residential Real Estate – Three loans to three borrowers in the amount of $622,584 secured by residential properties with specific reserves of $193,605 established for the loans.

Consumer and Indirect Loans – Four loans to four borrowers in the amount of $538,248 with $166,226 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.

			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
2014	Investment		Balance		Recognized		Reserve		Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	2,726,247	$	2,726,247	$	177,707	$	682,642	$	2,747,299
Commercial		1,094,708		1,094,708		783		148,791		1,162,367
Consumer		611,728		611,728		30,903		186,226		622,854
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		252,500		252,500		11,027		252,500		258,577
Total impaired loans with specific reserves	$	4,685,183	$	4,685,183	$	220,420	$	1,270,159	$	4,791,097

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	204,896	$	266,091	$	2,641		n/a	$	340,435
Commercial		1,061,108		1,061,108		48,548		n/a		1,089,641
Consumer		60,656		60,656		-		n/a		-
Installment		433,833		433,833		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		-		-		-		n/a		-
Total impaired loans with no specific reserve	$	1,760,493	$	1,821,688	$	51,189		-	$	1,430,076

			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
2013	Investment		Balance		Recognized		Reserve		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

			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
2012	Investment		Balance		Recognized		Reserve		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

- 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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