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Loans and Allowance

12 Months Ended

Dec. 31, 2016

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

Note 4. Loans and Allowance

Major categories of loans are as follows:

	2016			2015			2014
Mortgage:
Residential	$	105,878,368		$	116,027,206		$	120,933,420
Commercial		66,756,432			62,469,425			62,601,469
Construction and land development		5,210,949			5,518,588			7,073,720
Demand and time		4,679,475			4,539,701			3,518,752
Installment		83,581,052			75,302,771			84,103,142
		266,106,276			263,857,691			278,230,503
Unearned income on loans		(1,048,808	)		(1,070,734	)		(1,126,396	)
		265,057,468			262,786,957			277,104,107
Allowance for credit losses		(2,483,865	)		(3,150,251	)		(3,117,870	)

	$	262,573,603		$	259,636,706		$	273,986,237

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 $69,902,000, $60,607,000, and $67,551,000 of such loans at December 31, 2016, 2015 and 2014, 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 collectability or present other unfavorable terms. At December 31, 2016, 2015, and 2014, the amounts of such loans outstanding totaled $444,568, $787,894, and $556,188 respectively. During 2016, loan additions and repayments/transfers totaled $607,000 and $950,326, 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 four year period for their respective segments as well as the following qualitative factors:

·

Changes in asset quality including past due (30-89 days) loans, nonaccrual loans, classified assets, watch list loans all in relation to total loans. Also policy exception in relationship to loan volume.

·

Changes in the rate and direction of the loan volume of the portfolio.

·

Concentration of credit including the percentage, changes, and relative to goals.

·

Changes in macro economic factors including the rates and direction of unemployment, median income and population.

·

Changes in internal factors including external loan review required reserve changes, internal review penetration, internal required reserve changes and weighted required reserve trends.

·

Changes in the charge offs / recoveries adjusting with rate and direction.

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 “5” with outstanding balances (see ratings on page F-21) are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. 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, 2016.

The following table presents the total allowance by loan segment:

	Commercial						Consumer
	and			Commercial			and			Residential
2016	Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year	$	305,323		$	261,663		$	803,902		$	1,630,898		$	148,465		$	3,150,251
Provision for credit losses		(29,619	)		361,024			431,428			239,803			(134,294	)		868,342
Recoveries		8,615			-			335,464			34,336			-			378,415
Loans charged off		-			(363,822	)		(695,242	)		(854,079	)		-			(1,913,143	)

Balance, end of year	$	284,319		$	258,865		$	875,552		$	1,050,958		$	14,171		$	2,483,865

Individually evaluated for impairment:
Balance in allowance	$	228,500		$	-		$	49,509		$	251,504		$	-		$	529,513
Related loan balance		228,500			1,412,914			503,460			2,871,898			-			5,016,772

Collectively evaluated for impairment:
Balance in allowance	$	55,819		$	258,865		$	826,043		$	799,454		$	14,171		$	1,954,352
Related loan balance		4,450,975			68,008,950			83,077,591			105,551,988			-			261,089,504

	Commercial						Consumer
	and			Commercial			and			Residential
2015	Industrial			Real Estate			Indirect			Real Estate			Unallocated			Total

Balance, beginning of year	$	385,631		$	335,009		$	1,281,222		$	1,169,627		$	(53,619	)	$	3,117,870
Provision for credit losses		(78,901	)		(23,814	)		296,437			1,299,194			202,084			1,695,000
Recoveries		1,400			13,468			486,776			10,473			-			512,117
Loans charged off		(2,807	)		(63,000	)		(1,260,533	)		(848,396	)		-			(2,174,736	)

Balance, end of year	$	305,323		$	261,663		$	803,902		$	1,630,898		$	148,465		$	3,150,251

Individually evaluated for impairment:
Balance in allowance	$	240,500		$	100,745		$	65,353		$	697,088		$	-		$	1,103,686
Related loan balance		240,500			1,143,317			950,722			2,792,239			-			5,126,778

Collectively evaluated for impairment:
Balance in allowance	$	64,823		$	160,918		$	738,549		$	933,810		$	148,465		$	2,046,565
Related loan balance		4,299,201			63,128,304			74,352,049			116,951,359			-			258,730,913

	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

As of December 31, 2016, the allowance for loan losses included an unallocated portion in the amount of $14,171. The unallocated portion for 2015 and 2014 was $148,465 and ($53,619), respectively. The unallocated portion of the allowance for credit losses is available to absorb further losses that may not necessarily be accounted for in the current model. Management believes the allowance for credit losses is at an appropriate level to absorb inherent probable losses in the portfolio.

Following is a sheet showing activity for non-accrual loans during the years 2016, 2015, and 2014.

	Commercial						Consumer
	and			Commercial			and			Residential
	Industrial			Real Estate			Indirect			Real Estate			Totals

December 31, 2013 Balance		14,286			1,237,647			338,212			1,123,248			2,713,393
Transfers into non-accrual		261,500			1,460,146			1,325,078			488,136			3,534,860
Transfers to OREO		-			-			-			(45,175	)		(45,175	)
Loans paid down/payoffs		(246,648	)		(1,357,287	)		(308,926	)		(165,958	)		(2,078,819	)
Loans returned to accrual status		-			-			-			-			-
Loans charged off		(29,138	)		(243,394	)		(839,012	)		(234,811	)		(1,346,355	)

December 31, 2014 Balance		-			1,097,112			515,352			1,165,440			2,777,904
Transfers into non-accrual		2,807			-			1,910,251			4,229,549			6,142,607
Transfers to OREO		-			-			-			(74,400	)		(74,400	)
Loans paid down/payoffs		-			(734,000	)		(568,741	)		(1,588,885	)		(2,891,626	)
Loans returned to accrual status		-			-			-			-			-
Loans charged off		(2,807	)		(63,000	)		(1,260,533	)		(848,396	)		(2,174,736	)

December 31, 2015 Balance		-			300,112			596,329			2,883,308			3,779,749
Transfers into non-accrual		-			840,300			968,536			1,461,106			3,269,942
Transfers to OREO		-			(113,893	)		-			(126,205	)		(240,098	)
Loans paid down/payoffs		-			(15,392	)		(102,038	)		(209,702	)		(327,132	)
Loans returned to accrual status					-			(311,953	)		(506,443	)		(818,396	)
Loans charged off		-			(363,822	)		(695,242	)		(854,079	)		(1,913,143	)

December 31, 2016 Balance		-			647,305			455,632			2,647,985			3,750,922

Credit Quality Information

The following table represents credit exposures by creditworthiness category for the year ending December 31, 2016. 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.

The Bank contracts with an independent 3^rd party loan review firm that reviews and validates the internal credit risk program on an annual 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
2016	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	4,357,475	$	64,207,732	$	82,942,573	$	105,225,879	$	256,733,659
Special mention		93,500		3,801,217		276,012		527,189		4,697,918
Substandard		228,500		1,412,915		326,653		2,492,601		4,460,669
Doubtful		-		-		35,814		178,216		214,030
Loss		-		-		-		-		-

	$	4,679,475	$	69,421,864	$	83,581,052	$	108,423,885	$	266,106,276

Non-accrual		-		647,305		455,632		2,647,985		3,750,922
Troubled debt restructures		228,500		-		35,814		48,131		312,445
Number of TDRs accounts		1		-		1		1		3
Non-performing TDRs		-		-		35,814		48,131		83,945
Number of TDR accounts		-		-		1		1		2

	Commercial				Consumer
	and		Commercial		and		Residential
2015	Industrial		Real Estate		Indirect		Real Estate		Total

Pass	$	3,878,588	$	58,706,189	$	72,975,858	$	116,323,949	$	251,884,584
Special mention		168,113		4,422,115		1,652,579		539,483		6,782,290
Substandard		493,000		1,443,429		509,211		2,048,338		4,493,978
Doubtful		-		-		165,123		531,716		696,839
Loss		-		-		-		-		-

	$	4,539,701	$	64,571,733	$	75,302,771	$	119,443,486	$	263,857,691

Non-accrual		-		300,112		596,329		2,883,308		3,779,749
Troubled debt restructures		240,500		-		-		49,868		290,368
Number of TDRs accounts		1		-		-		1		2
Non-performing TDRs		-		-		-		-		-
Number of TDR accounts		-		-		-		-		-

The chart for 2015 has been changed since originally submitted to reflect changes in the non-accrual amount for commercial real estate (an increase of $300,112) and a decrease in the residential real estate amount of $300,112. There has also been an increase in the residential real estate amount for the substandard of $272,500, which has decreased the residential real estate Pass amount by $272,500.

	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		-		-		-		-		-

At December 31, 2016, the recorded investment in TDR’s reflected one loan in the amount of $228,500 which is performing under the terms of the modified agreement and two loans in the amount of $83,945 which are on nonaccrual. At December 31, 2015, the recorded investment in TDR’s reflected one loan in the amount of $240,500 which is performing under the terms of the modified agreement and one loan in the amount of $49,868 which is on nonaccrual. At December 31, 2014, the recorded investment in TDR’s reflected one loan in the amount of $252,500 which is still performing 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
2016	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,679,475	$	-	$	-	$	-	$	4,679,475
Commercial real estate		68,774,559		-		-		647,305		69,421,864
Consumer and indirect		82,133,896		991,524		-		455,632		83,581,052
Residential real estate		103,941,243		1,798,391		36,266		2,647,985		108,423,885

	$	259,529,173	$	2,789,915	$	36,266	$	3,750,922	$	266,106,276

					90 Days or
			30-89 Days		More and
2015	Current		Past Due		Still Accruing		Nonaccrual		Total

Commercial and industrial	$	4,539,701	$	-	$	-	$	-	$	4,539,701
Commercial real estate		64,270,345		1,276		-		300,112		64,571,733
Consumer and indirect		73,568,010		1,122,155		16,277		596,329		75,302,771
Residential real estate		115,715,127		806,566		38,485		2,883,308		119,443,486

	$	258,093,183	$	1,929,997	$	54,762	$	3,779,749	$	263,857,691

The 2015 chart has changed from the original submitted in 2016 in order to agree to another chart that has changed. The change was a reclassification to include $300,112 in non-accrual for commercial real estate, which was removed from the residential real estate amount for non-accrual. Total nonaccruals in 2015 has not changed.

					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

Loans on which the accrual of interest has been discontinued totaled $3,750,922, $3,779,749, and $2,777,904 at December 31, 2016, 2015, and 2014, respectively. Interest that would have been accrued under the terms of these loans totaled $213,452, $239,038, and $255,682 for the years ended December 31, 2016, 2015, and 2014, respectively. Loans past due 90 days or more and still accruing interest totaled $36,266, $54,762, and $196,772 at December 31, 2016, 2015, and 2014, 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, 2016 are comprised of:

Residential Real Estate – Three loans to three borrowers in the amount of $1,393,327 secured by residential properties with specific reserves of $251,504 established for the loans.

Consumer and Indirect Loans – Two loans to two borrowers in the amount of $128,151 with $49,509 of specific reserves established for the loans.

Commercial Real Estate – One Loan to one borrower in the amount of $228,500 secured by commercial and or residential properties with specific reserves of $228,500 established for the loan.

Impaired Loans

A loan is evaluated for individual impairment if it meets one or more of the following criteria:

(1) In a non-accrual status

(2) Risk rated substandard and not paying according to contractual terms

(3) Risk rated substandard and in default of loan agreement

(4) Risk rated doubtful

(5) Classified as TDR

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. Loans that are identified to be individually evaluated for impairment where the allowance measure is zero but continue to meet the criteria above, are considered non-performing, are in a collection status and remain under continuous monitoring for potential impairment. These loans are not returned to the pool of loans collectively evaluated for impairment.

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.

2016	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	1,393,327	$	1,421,965	$	58,115	$	251,504	$	1,442,544
Commercial		-		-		-		-		-
Consumer		128,151		128,151		-		49,509		166,841
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		228,500		228,500		8,014		228,500		234,579
Total impaired loans with specific reserves	$	1,749,978	$	1,778,616	$	66,129	$	529,513	$	1,843,964

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	1,478,571	$	2,218,332	$	20,983		n/a	$	2,463,089
Commercial		1,412,914		1,565,219		58,797		n/a		1,593,903
Consumer		182,320		182,320		109		n/a		74,880
Installment		192,989		192,989		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		-		-		-		n/a		-
Total impaired loans with no specific reserve	$	3,266,794	$	4,158,860	$	79,889		-	$	4,131,872

2015	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded Investment
Impaired loans with specific reserves:
Real-estate - mortgage:
Residential	$	1,809,429	$	1,809,429	$	56,804	$	697,088	$	1,820,233
Commercial		300,112		300,112		-		100,745		314,929
Consumer		145,874		145,874		-		65,353		170,499
Installment		-		-		-		-		-
Home Equity		-		-		-		-		-
Commercial		240,500		240,500		10,517		240,500		246,571
Total impaired loans with specific reserves	$	2,495,915	$	2,495,915	$	67,321	$	1,103,686	$	2,552,232

Impaired loans with no specific reserve:
Real-estate - mortgage:
Residential	$	982,810	$	1,115,579	$	14,664		n/a	$	1,170,747
Commercial		843,205		843,205		37,786		n/a		876,376
Consumer		364,695		449,370		1,696		n/a		452,682
Installment		440,153		440,153		-		n/a		-
Home Equity		-		-		-		n/a		-
Commercial		-		-		-		n/a		-
Total impaired loans with no specific reserve	$	2,630,863	$	2,848,307	$	54,146		-	$	2,499,805

2014	Recorded Investment		Unpaid Principal Balance		Interest Income Recognized		Specific Reserve		Average Recorded 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

- 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.

+ References + Details