Loans and allowance for credit losses

3 Months Ended

Mar. 31, 2012

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 March 31, 2012 and December 31, 2011.

(Dollars in thousands)	March 31, 2012			December 31, 2011
Construction	$	114,390		$	119,883
Residential real estate		309,234			321,604
Commercial real estate		315,565			315,439
Commercial		64,347			69,485
Consumer		15,479			14,639
Total loans		819,015			841,050
Allowance for credit losses		(13,544	)		(14,288	)
Total loans, net	$	805,471		$	826,762

Loans include deferred costs net of deferred fees of $182 thousand at March 31, 2012 and $188 thousand at December 31, 2011.

Loans are stated at their principal amount outstanding net of any deferred fees and costs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized substantially on the interest method over the term of the loan. A loan is placed on nonaccrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more, unless the loan is well secured and in the process of collection. Any unpaid interest previously accrued on those loans is reversed from income. Interest payments received on nonaccrual loans are applied as a reduction of the loan principal balance unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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). Generally, interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. The allowance for credit losses includes specific reserves related to impaired loans. 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 formula portion of 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 that a charge-off is made. Impaired nonaccrual loans decreased $2.0 million to $49.4 million at the end of March 2012 from $51.4 million at the end of December 2011. At March 31, 2012, impaired nonaccrual loans had been reduced by partial charge-offs totaling $17.9 million, or 26.6% of the aggregate unpaid principal balance. In addition, $1.7 million in specific reserves were established against $6.9 million of impaired nonaccrual loans. At December 31, 2011, impaired nonaccrual loans had been reduced by partial charge-offs totaling $13.5 million, or 20.8% of the aggregate unpaid principal balance. In addition, $1.5 million in specific reserves were established against $4.7 million 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 March 31, 2012 and December 31, 2011, the Company had impaired accruing troubled debt restructurings of $30.0 million and $25.2 million, respectively.

Gross interest income of $632 thousand for the first three months of 2012, $2.6 million for fiscal year 2011 and $720 thousand for the first three months of 2011 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 three months of 2012 or 2011.

The following tables provide information on impaired loans by loan class as of March 31, 2012 and December 31, 2011.

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
March 31, 2012
Impaired nonaccrual loans:
Construction	$	21,170	$	12,450	$	308	$	132	$	16,635
Residential real estate		27,693		17,076		4,634		878		18,626
Commercial real estate		15,541		10,907		1,437		193		14,232
Commercial		2,873		2,018		517		487		2,317
Consumer		61		58		-		-		41
Total		67,338		42,509		6,896		1,690		51,851
Impaired accruing restructured loans:
Construction		11,879		11,879		-		-		10,954
Residential real estate		3,000		3,000		-		-		4,306
Commercial real estate		15,063		15,063		-		-		9,908
Commercial		68		68		-		-		34
Consumer		-		-		-		-		-
Total		30,010		30,010		-		-		25,202
Total impaired loans:
Construction		33,049		24,329		308		132		27,589
Residential real estate		30,693		20,076		4,634		878		22,932
Commercial real estate		30,604		25,970		1,437		193		24,140
Commercial		2,941		2,086		517		487		2,351
Consumer		61		58		-		-		41
Total	$	97,348	$	72,519	$	6,896	$	1,690	$	77,053

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
December 31, 2011
Impaired nonaccrual loans:
Construction	$	22,883	$	14,005	$	1,550	$	170	$	16,555
Residential real estate		22,431		16,925		3,181		1,296		15,430
Commercial real estate		17,372		14,012		-		-		14,624
Commercial		2,119		1,669		-		-		2,539
Consumer		30		28		-		-		32
Total		64,835		46,639		4,731		1,466		49,180
Impaired accruing restructured loans:
Construction		11,781		11,781		-		-		10,663
Residential real estate		3,792		3,792		-		-		6,093
Commercial real estate		9,566		9,566		-		-		7,960
Commercial		69		69		-		-		111
Consumer		-		-		-		-		-
Total		25,208		25,208		-		-		24,827
Total impaired loans:
Construction		34,664		25,786		1,550		170		27,218
Residential real estate		26,223		20,717		3,181		1,296		21,523
Commercial real estate		26,938		23,578		-		-		22,584
Commercial		2,188		1,738		-		-		2,650
Consumer		30		28		-		-		32
Total	$	90,043	$	71,847	$	4,731	$	1,466	$	74,007

The following tables provide information on troubled debt restructurings by loan class as of March 31, 2012 and December 31, 2011. The amounts include nonaccrual troubled debt restructurings.

(Dollars in thousands)	Number of contracts		Premodification outstanding recorded investment		Postmodification outstanding recorded investment
Troubled debt restructurings:
March 31, 2012
Construction		10	$	13,028	$	12,636
Residential real estate		22		11,958		10,736
Commercial real estate		18		21,753		18,750
Commercial		1		73		68
Consumer		1		30		28
Total		52	$	46,842	$	42,218
December 31, 2011
Construction		9	$	12,981	$	12,539
Residential real estate		20		11,471		10,359
Commercial real estate		20		15,874		14,175
Commercial		1		69		69
Consumer		-		-		-
Total		50	$	40,395	$	37,142

(Dollars in thousands)	Number of contracts		Recorded investment
Troubled debt restructurings that subsequently defaulted:
March 31, 2012
Construction		4	$	1,424
Residential real estate		11		7,820
Commercial real estate		4		3,688
Commercial		-		-
Consumer		1		28
Total		20	$	12,960
December 31, 2011
Construction		3	$	758
Residential real estate		10		7,353
Commercial real estate		5		6,751
Commercial		-		-
Consumer		-		-
Total		18	$	14,862

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 March 31, 2012 and December 31, 2011.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
March 31, 2012
Construction	$	48,839	$	24,886	$	27,907	$	-	$	12,758	$	114,390
Residential real estate		251,710		17,049		18,326		439		21,710		309,234
Commercial real estate		257,036		20,348		25,837		-		12,344		315,565
Commercial		56,126		3,971		1,647		68		2,535		64,347
Consumer		15,103		257		61		-		58		15,479
Total	$	628,814	$	66,511	$	73,778	$	507	$	49,405	$	819,015

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
December 31, 2011
Construction	$	50,403	$	30,373	$	23,552	$	-	$	15,555	$	119,883
Residential real estate		261,910		13,467		25,676		445		20,106		321,604
Commercial real estate		257,247		16,001		28,179		-		14,012		315,439
Commercial		59,178		3,813		4,748		77		1,669		69,485
Consumer		14,520		32		59		-		28		14,639
Total	$	643,258	$	63,686	$	82,214	$	522	$	51,370	$	841,050

The following tables provide information on the aging of the loan portfolio as of March 31, 2012 and December 31, 2011.

	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
March 31, 2012
Construction	$	99,096	$	1,541	$	995	$	-	$	2,536	$	12,758	$	114,390
Residential real estate		279,946		3,759		1,623		2,196		7,578		21,710		309,234
Commercial real estate		295,210		4,420		2,048		1,543		8,011		12,344		315,565
Commercial		61,508		226		49		29		304		2,535		64,347
Consumer		15,111		256		26		28		310		58		15,479
Total	$	750,871	$	10,202	$	4,741	$	3,796	$	18,739	$	49,405	$	819,015

	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, 2011
Construction	$	102,441	$	1,246	$	316	$	325	$	1,887	$	15,555	$	119,883
Residential real estate		289,459		4,417		5,291		2,331		12,039		20,106		321,604
Commercial real estate		289,760		10,073		1,594		-		11,667		14,012		315,439
Commercial		64,581		1,350		1,819		66		3,235		1,669		69,485
Consumer		14,492		112		6		1		119		28		14,639
Total	$	760,733	$	17,198	$	9,026	$	2,723	$	28,947	$	51,370	$	841,050

	Accruing
	Current			30-59 days past due			60-89 days past due			90 days or more past due		Total past due			Non- accrual
March 31, 2012
Construction		86.6	%		1.3	%		0.9	%		-  %		2.2	%		11.2	%
Residential real estate		90.6			1.2			0.5			0.7		2.4			7.0
Commercial real estate		93.6			1.4			0.6			0.5		2.5			3.9
Commercial		95.6			0.4			0.1			-		0.5			3.9
Consumer		97.5			1.7			0.2			0.2		2.1			0.4
Total		91.7			1.2			0.6			0.5		2.3			6.0

	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, 2011
Construction		85.4	%		1.0	%		0.3	%		0.3	%		1.6	%		13.0	%
Residential real estate		90.0			1.4			1.6			0.7			3.7			6.3
Commercial real estate		91.9			3.2			0.5			-			3.7			4.4
Commercial		93.0			1.9			2.6			0.1			4.6			2.4
Consumer		99.0			0.8			-			-			0.8			0.2
Total		90.5			2.0			1.1			0.3			3.4			6.1

The Company has 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 on 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 March 31, 2012 and 2011.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
For the three months ended March 31, 2012
Allowance for credit losses:
Beginning balance	$	3,745		$	5,014		$	3,415		$	1,498		$	594		$	22	$	14,288
Charge-offs		(1,072	)		(4,119	)		(690	)		(3,355	)		(15	)		-		(9,251	)
Recoveries		-			51			7			75			4			-		137
Net charge-offs		(1,072	)		(4,068	)		(683	)		(3,280	)		(11	)		-		(9,114	)
Provision		671			3,502			817			3,321			(2	)		61		8,370
Ending balance	$	3,344		$	4,448		$	3,549		$	1,539		$	581		$	83	$	13,544

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
For the three months ended March 31, 2011
Allowance for credit losses:
Beginning balance	$	3,327		$	4,833		$	3,665		$	1,422		$	637		$	343		$	14,227
Charge-offs		(686	)		(2,091	)		(228	)		(246	)		(75	)		-			(3,326	)
Recoveries		49			34			-			77			20			-			180
Net charge-offs		(637	)		(2,057	)		(228	)		(169	)		(55	)		-			(3,146	)
Provision		634			2,644			1,843			1,523			9			(263	)		6,390
Ending balance	$	3,324		$	5,420		$	5,280		$	2,776		$	591		$	80		$	17,471

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2012 and 2011.

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
March 31, 2012
Loans individually evaluated for impairment	$	24,637	$	24,710	$	27,407	$	2,603	$	58	$	-	$	79,415
Loans collectively evaluated for impairment		89,753		284,524		288,158		61,744		15,421		-		739,600
Total loans	$	114,390	$	309,234	$	315,565	$	64,347	$	15,479	$	-	$	819,015
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	132	$	878	$	193	$	487	$	-	$	-	$	1,690
Loans collectively evaluated for impairment		3,212		3,570		3,356		1,052		581		83		11,854
Total allowance for credit losses	$	3,344	$	4,448	$	3,549	$	1,539	$	581	$	83	$	13,544

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
March 31, 2011
Loans individually evaluated for impairment	$	15,359	$	13,298	$	16,266	$	3,808	$	29	$	-	$	48,760
Loans collectively evaluated for impairment		119,995		319,151		306,730		74,516		15,563		-		835,955
Total loans	$	135,354	$	332,449	$	322,996	$	78,324	$	15,592	$	-	$	884,715
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	-	$	1,053	$	1,022	$	1,147	$	-	$	-	$	3,222
Loans collectively evaluated for impairment		3,324		4,367		4,258		1,629		591		80		14,249
Total allowance for credit losses	$	3,324	$	5,420	$	5,280	$	2,776	$	591	$	80	$	17,471