Loans and allowance for credit losses

9 Months Ended

Sep. 30, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4 – Loans and allowance for credit losses

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Talbot County, Queen Anne’s County, Kent County, Caroline County and Dorchester County in Maryland and in Kent County, Delaware.  The following table provides information about the principal classes of the loan portfolio at September 30, 2011 and December 31, 2010:

(Dollars in thousands)	September 30, 2011			December 31, 2010
Construction	$	127,019		$	143,952
Residential real estate		327,755			333,738
Commercial real estate		321,544			318,726
Commercial		71,482			82,787
Consumer		14,766			16,201
Total loans		862,566			895,404
Allowance for credit losses		(13,540	)		(14,227	)
Total loans, net	$	849,026		$	881,177

Loans include deferred costs net of deferred fees of $151 thousand at September 30, 2011 and $38 thousand at December 31, 2010.

A loan is considered impaired if it is probable that the Company will not collect all principal and interest payments according to the loan’s contractual terms.  An impaired loan may show deficiencies in the borrower’s overall financial condition, payment history, support available from financial guarantors and/or the fair market value of collateral.  The impairment of a loan is measured at the present value of expected future cash flows using the loan’s effective interest rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.  Generally, the Company measures impairment on such loans by reference to the fair value of the collateral.  Income on impaired loans is recognized on a cash basis, and payments are first applied against the principal balance outstanding (i.e.,  placing impaired loans on nonaccrual status).  Impaired loans do not include groups of smaller balance homogenous loans such as residential mortgage and consumer installment loans that are evaluated collectively for impairment.  Reserves for probable credit losses related to these loans are based on historical loss ratios and are included in the allowance for credit losses.

Loans are evaluated on a case-by-case basis for impairment.  Once the amount of impairment has been determined, the uncollectible portion is charged off.  In some cases, a specific allocation within the allowance for credit losses is made until such time a charge-off is made.  Impaired nonaccrual loans were $49.6 million and $36.2 million at the end of September 2011 and December 2010, respectively.  At September 30, 2011, impaired nonaccrual loans had been reduced by partial charge-offs totaling $12.4 million, or 19.9% of the aggregate unpaid principal balance.  In addition, a $90 thousand impaired loan had a specific reserve established against it for the total amount of our recorded investment.  At December 31, 2010, impaired nonaccrual loans had been reduced by partial charge-offs totaling $8.3 million, or 18.6% of the aggregate unpaid principal balance.  In addition, $203 thousand in specific reserves were established against $837 thousand of impaired nonaccrual loans.

A loan is considered a troubled debt restructuring if a concession is granted due to deterioration in a borrower’s financial condition.  At September 30, 2011 and December 31, 2010, the Company had impaired accruing troubled debt restructurings of $22.9 million and $25.2 million, respectively.

Gross interest income of $1.9 million for the first nine months of 2011, $2.1 million for fiscal year 2010 and $1.6 million for the first nine months of 2010 would have been recorded if impaired loans had been current and performing in accordance with their original terms.  No interest was recorded on such loans for the first nine months of 2011 or 2010.

The following tables provide information on impaired loans by loan class as of September 30, 2011 and December 31, 2010:

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
September 30, 2011
Impaired nonaccrual loans:
Construction	$	23,909	$	17,348	$	-	$	-	$	17,024
Residential real estate		20,386		17,335		90		90		13,220
Commercial real estate		15,147		13,078		-		-		12,405
Commercial		2,450		1,690		-		-		3,083
Consumer		41		40		-		-		32
Total		61,933		49,491		90		90		45,764
Impaired accruing restructured loans:
Construction		10,078		10,078		-		-		10,446
Residential real estate		2,519		2,519		-		-		6,535
Commercial real estate		10,332		10,332		-		-		7,605
Commercial		-		-		-		-		226
Consumer		-		-		-		-		-
Total		22,929		22,929		-		-		24,812
Total impaired loans:
Construction		33,987		27,426		-		-		27,470
Residential real estate		22,905		19,854		90		90		19,755
Commercial real estate		25,479		23,410		-		-		20,010
Commercial		2,450		1,690		-		-		3,309
Consumer		41		40		-		-		32
Total	$	84,862	$	72,420	$	90	$	90	$	70,576

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
December 31, 2010
Impaired nonaccrual loans:
Construction	$	22,643	$	17,261	$	-	$	-	$	19,380
Residential real estate		11,983		9,132		837		203		8,788
Commercial real estate		5,558		5,133		-		-		3,827
Commercial		4,305		3,845		-		-		3,191
Consumer		30		30		-		-		56
Total		44,519		35,401		837		203		35,242
Impaired accruing restructured loans:
Construction		10,914		10,914		-		-		3,110
Residential real estate		5,561		5,561		-		-		4,658
Commercial real estate		8,147		8,147		-		-		2,129
Commercial		529		529		-		-		171
Consumer		-		-		-		-		-
Total		25,151		25,151		-		-		10,068
Total impaired loans:
Construction		33,557		28,175		-		-		22,490
Residential real estate		17,544		14,693		837		203		13,446
Commercial real estate		13,705		13,280		-		-		5,956
Commercial		4,834		4,374		-		-		3,362
Consumer		30		30		-		-		56
Total	$	69,670	$	60,552	$	837	$	203	$	45,310

The following tables provide information on troubled debt restructurings by loan class as of September 30, 2011 and December 31, 2010.  The amounts include nonaccrual troubled debt restructurings.

(Dollars in thousands)	Number of contracts		Premodification outstanding recorded investment		Postmodification outstanding recorded investment
Troubled debt restructurings:
September 30, 2011
Construction		5	$	11,216	$	10,846
Residential real estate		23		12,533		10,840
Commercial real estate		19		15,814		14,754
Commercial		-		-		-
Consumer		-		-		-
Total		47	$	39,463	$	36,440
December 31, 2010
Construction		5	$	11,075	$	10,926
Residential real estate		31		7,986		7,388
Commercial real estate		16		9,424		9,417
Commercial		3		529		529
Consumer		-		-		-
Total		55	$	29,014	$	28,260

(Dollars in thousands)	Number of contracts		Recorded investment
Troubled debt restructurings that subsequently defaulted:
September 30, 2011
Construction		3	$	768
Residential real estate		13		8,321
Commercial real estate		5		5,317
Commercial		-		-
Consumer		-		-
Total		21	$	14,406
December 31, 2010
Construction		1	$	12
Residential real estate		13		2,752
Commercial real estate		6		4,103
Commercial		-		-
Consumer		-		-
Total		20	$	6,867

Management uses risk ratings as part of its monitoring of the credit quality in the Company’s loan portfolio.  Loans that are identified as special mention, substandard and doubtful are adversely rated and are assigned higher risk ratings than favorably rated loans.

The following tables provide information on loan risk ratings as of September 30, 2011 and December 31, 2010:

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Total
September 30, 2011
Pass/Performing	$	55,478	$	266,163	$	261,056	$	63,592	$	14,632	$	660,921
Special mention		30,596		20,486		14,601		1,729		33		67,445
Substandard		23,597		22,725		32,809		4,388		61		83,580
Doubtful		-		956		-		83		-		1,039
Nonaccrual		17,348		17,425		13,078		1,690		40		49,581
Total	$	127,019	$	327,755	$	321,544	$	71,482	$	14,766	$	862,566

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Total
December 31, 2010
Pass/Performing	$	83,344	$	283,895	$	260,040	$	73,502	$	16,043	$	716,824
Special mention		23,090		23,847		17,821		2,249		-		67,007
Substandard		20,257		13,752		35,732		3,088		128		72,957
Doubtful		-		2,275		-		103		-		2,378
Nonaccrual		17,261		9,969		5,133		3,845		30		36,238
Total	$	143,952	$	333,738	$	318,726	$	82,787	$	16,201	$	895,404

The following tables provide information on the aging of the loan portfolio as of September 30, 2011 and December 31, 2010:

	Accruing
(Dollars in thousands)	Current		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Non-accrual		Total
September 30, 2011
Construction	$	107,552	$	1,710	$	-	$	409	$	2,119	$	17,348	$	127,019
Residential real estate		298,461		2,092		1,421		8,356		11,869		17,425		327,755
Commercial real estate		302,470		1,918		2,368		1,710		5,996		13,078		321,544
Commercial		69,435		175		155		27		357		1,690		71,482
Consumer		14,593		68		51		14		133		40		14,766
Total	$	792,511	$	5,963	$	3,995	$	10,516	$	20,474	$	49,581	$	862,566

	Accruing
(Dollars in thousands)	Current		30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Non-accrual		Total
December 31, 2010
Construction	$	124,892	$	1,691	$	108	$	-	$	1,799	$	17,261	$	143,952
Residential real estate		314,914		4,046		1,355		3,454		8,855		9,969		333,738
Commercial real estate		306,497		3,393		2,717		986		7,096		5,133		318,726
Commercial		77,833		470		465		174		1,109		3,845		82,787
Consumer		15,572		486		25		88		599		30		16,201
Total	$	839,708	$	10,086	$	4,670	$	4,702	$	19,458	$	36,238	$	895,404

	Accruing
	Current			30-59 days past due			60-89 days past due			90 days or more past due			Total past due			Non-accrual
September 30, 2011
Construction		84.7	%		1.3	%		-	%		0.3	%		1.6	%		13.7	%
Residential real estate		91.2			0.6			0.4			2.5			3.5			5.3
Commercial real estate		94.1			0.6			0.7			0.5			1.8			4.1
Commercial		97.2			0.2			0.2			-			0.4			2.4
Consumer		98.8			0.5			0.3			0.1			0.9			0.3
Total		91.9			0.7			0.5			1.2			2.4			5.7

	Accruing
	Current			30-59 days past due			60-89 days past due			90 days or more past due			Total past due			Non-accrual
December 31, 2010
Construction		86.8	%		1.1	%		0.1	%		-	%		1.2	%		12.0	%
Residential real estate		94.4			1.2			0.4			1.0			2.6			3.0
Commercial real estate		96.2			1.0			0.9			0.3			2.2			1.6
Commercial		94.0			0.6			0.6			0.2			1.4			4.6
Consumer		96.1			3.0			0.2			0.5			3.7			0.2
Total		93.8			1.2			0.5			0.5			2.2			4.0

We have established an allowance for credit losses, which is increased by provisions charged against earnings and recoveries of previously charged-off debts and is decreased by current period charge-offs of uncollectible debts.  Management evaluates the adequacy of the allowance for credit losses on a quarterly basis and adjusts the provision for credit losses based upon this analysis.  Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended September 30, 2011 and 2010:

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
For the three months ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	3,533		$	4,184		$	5,251		$	2,710		$	605		$	75	$	16,358
Charge-offs		(1,005	)		(2,859	)		(1,385	)		(1,519	)		(33	)		-		(6,801	)
Recoveries		-			38			229			47			19			-		333
Net charge-offs		(1,005	)		(2,821	)		(1,156	)		(1,472	)		(14	)		-		(6,468	)
Provision		870			2,679			(404	)		315			19			171		3,650
Ending balance	$	3,398		$	4,042		$	3,691		$	1,553		$	610		$	246	$	13,540

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
For the three months ended September 30, 2010
Allowance for credit losses:
Beginning balance	$	3,799		$	3,581		$	3,230		$	1,789		$	441		$	449	$	13,289
Charge-offs		(1,931	)		(1,305	)		(242	)		(1,060	)		(102	)		-		(4,640	)
Recoveries		-			138			6			116			51			-		311
Net charge-offs		(1,931	)		(1,167	)		(236	)		(944	)		(51	)		-		(4,329	)
Provision		1,035			1,839			508			651			160			-		4,193
Ending balance	$	2,903		$	4,253		$	3,502		$	1,496		$	550		$	449	$	13,153

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the nine months ended September 30, 2011 and 2010:

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
For the nine months ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	3,327		$	4,833		$	3,665		$	1,422		$	637		$	343		$	14,227
Charge-offs		(2,419	)		(7,340	)		(3,878	)		(3,290	)		(148	)		-			(17,075	)
Recoveries		49			106			234			504			60			-			953
Net charge-offs		(2,370	)		(7,234	)		(3,644	)		(2,786	)		(88	)		-			(16,122	)
Provision		2,441			6,443			3,670			2,917			61			(97	)		15,435
Ending balance	$	3,398		$	4,042		$	3,691		$	1,553		$	610		$	246		$	13,540

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
For the nine months ended September 30, 2010
Allowance for credit losses:
Beginning balance	$	2,630		$	1,528		$	3,947		$	2,132		$	515		$	124	$	10,876
Charge-offs		(6,121	)		(4,821	)		(288	)		(3,448	)		(413	)		-		(15,091	)
Recoveries		13			212			108			172			136			-		641
Net charge-offs		(6,108	)		(4,609	)		(180	)		(3,276	)		(277	)		-		(14,450	)
Provision		6,381			7,334			(265	)		2,640			312			325		16,727
Ending balance	$	2,903		$	4,253		$	3,502		$	1,496		$	550		$	449	$	13,153

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2011 and 2010:

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
September 30, 2011
Loans individually evaluated for impairment	$	27,426	$	19,944	$	23,410	$	1,690	$	40	$	-	$	72,510
Loans collectively evaluated for impairment		99,593		307,811		298,134		69,792		14,726		-		790,056
Total loans	$	127,019	$	327,755	$	321,544	$	71,482	$	14,766	$	-	$	862,566
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	-	$	90	$	-	$	-	$	-	$	-	$	90
Loans collectively evaluated for impairment		3,398		3,952		3,691		1,553		610		246		13,450
Total allowance for credit losses	$	3,398	$	4,042	$	3,691	$	1,553	$	610	$	246	$	13,540

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
September 30, 2010
Loans individually evaluated for impairment	$	19,261	$	16,316	$	3,465	$	4,007	$	94	$	-	$	43,143
Loans collectively evaluated for impairment		129,879		315,754		319,899		82,226		15,589		-		863,347
Total loans	$	149,140	$	332,070	$	323,364	$	86,233	$	15,683	$	-	$	906,490
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	20	$	203	$	-	$	-	$	-	$	-	$	223
Loans collectively evaluated for impairment		2,883		4,050		3,502		1,496		550		449		12,930
Total allowance for credit losses	$	2,903	$	4,253	$	3,502	$	1,496	$	550	$	449	$	13,153