Loans and allowance for credit losses

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

Financing Receivables [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, 2012 and December 31, 2011.

(Dollars in thousands)	September 30, 2012			December 31, 2011
Construction	$	108,721		$	119,883
Residential real estate		302,449			321,604
Commercial real estate		321,817			315,439
Commercial		61,531			69,485
Consumer		13,512			14,639
Total loans		808,030			841,050
Allowance for credit losses		(12,955	)		(14,288	)
Total loans, net	$	795,075		$	826,762

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. As seen in the table below, the difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken. In some cases, a specific allocation within the allowance for credit losses is made until such time that a charge-off is made.

A loan is considered a troubled debt restructuring if a borrower is experiencing financial difficulties and a creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2012 and December 31, 2011.

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Year-to-date average recorded investment		Quarter-to-date average recorded investment
September 30, 2012
Impaired nonaccrual loans:
Construction	$	15,509	$	11,456	$	19	$	19	$	13,717	$	12,770
Residential real estate		20,424		14,440		-		-		18,920		17,092
Commercial real estate		16,149		11,916		-		-		12,567		11,446
Commercial		2,124		1,557		-		-		1,760		1,572
Consumer		58		54		-		-		50		55
Total		54,264		39,423		19		19		47,014		42,935
Impaired accruing restructured loans:
Construction		28,479		28,479		-		-		17,304		22,779
Residential real estate		5,231		5,231		-		-		4,258		5,120
Commercial real estate		16,986		16,986		-		-		14,173		16,032
Commercial		89		89		-		-		74		79
Consumer		-		-		-		-		-		-
Total		50,785		50,785		-		-		35,809		44,010
Total impaired loans:
Construction		43,988		39,935		19		19		31,021		35,549
Residential real estate		25,655		19,671		-		-		23,178		22,212
Commercial real estate		33,135		28,902		-		-		26,740		27,478
Commercial		2,213		1,646		-		-		1,834		1,651
Consumer		58		54		-		-		50		55
Total	$	105,049	$	90,208	$	19	$	19	$	82,823	$	86,945

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Year-to-date average recorded investment		Quarter-to-date average recorded investment
December 31, 2011
Impaired nonaccrual loans:
Construction	$	22,883	$	14,005	$	1,550	$	170	$	16,555	$	16,367
Residential real estate		22,431		16,925		3,181		1,296		15,430		18,118
Commercial real estate		17,372		14,012		-		-		14,624		13,545
Commercial		2,119		1,669		-		-		2,539		1,680
Consumer		30		28		-		-		32		34
Total		64,835		46,639		4,731		1,466		49,180		49,744
Impaired accruing restructured loans:
Construction		11,781		11,781		-		-		10,663		10,930
Residential real estate		3,792		3,792		-		-		6,093		3,156
Commercial real estate		9,566		9,566		-		-		7,960		9,949
Commercial		69		69		-		-		111		35
Consumer		-		-		-		-		-		-
Total		25,208		25,208		-		-		24,827		24,070
Total impaired loans:
Construction		34,664		25,786		1,550		170		27,218		27,297
Residential real estate		26,223		20,717		3,181		1,296		21,523		21,274
Commercial real estate		26,938		23,578		-		-		22,584		23,494
Commercial		2,188		1,738		-		-		2,650		1,715
Consumer		30		28		-		-		32		34
Total	$	90,043	$	71,847	$	4,731	$	1,466	$	74,007	$	73,814

The following tables provide information on troubled debt restructurings by loan class as of September 30, 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:
September 30, 2012
Construction		19	$	33,277	$	29,518
Residential real estate		28		14,145		7,614
Commercial real estate		22		24,065		20,418
Commercial		3		149		126
Consumer		1		30		27
Total		73	$	71,666	$	57,703
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 (1):
September 30, 2012
Construction		7	$	2,129
Residential real estate		13		2,902
Commercial real estate		6		3,433
Commercial		1		36
Consumer		1		27
Total		28	$	8,527
December 31, 2011
Construction		3	$	758
Residential real estate		10		7,353
Commercial real estate		5		6,751
Commercial		-		-
Consumer		-		-
Total		18	$	14,862

(1) Generally, a loan is considered in default when principal or interest is past due 30 days or more.

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, 2012 and December 31, 2011.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
September 30, 2012
Construction	$	43,334	$	31,359	$	22,553	$	-	$	11,475	$	108,721
Residential real estate		246,805		24,191		16,580		433		14,440		302,449
Commercial real estate		254,339		30,873		24,689		-		11,916		321,817
Commercial		54,488		3,870		1,556		60		1,557		61,531
Consumer		13,252		120		86		-		54		13,512
Total	$	612,218	$	90,413	$	65,464	$	493	$	39,442	$	808,030

(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 September 30, 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			Nonaccrual			Total
September 30, 2012
Construction	$	96,156		$	1,090		$	-		$	-		$	1,090		$	11,475		$	108,721
Residential real estate		281,610			4,274			1,113			1,012			6,399			14,440			302,449
Commercial real estate		303,008			971			2,371			3,551			6,893			11,916			321,817
Commercial		59,756			69			82			67			218			1,557			61,531
Consumer		13,228			174			11			45			230			54			13,512
Total	$	753,758		$	6,578		$	3,577		$	4,675		$	14,830		$	39,442		$	808,030
Percent of total loans		93.3	%		0.8	%		0.4	%		0.6	%		1.8	%		4.9	%

	Accruing
(Dollars in thousands)	Current			30-59 days past due			60-89 days past due			90 days or more past due			Total past due			Nonaccrual			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
Percent of total loans		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 September 30, 2012 and 2011.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
For the three months ended September 30, 2012
Allowance for credit losses:
Beginning balance	$	2,845		$	4,237		$	3,952		$	1,063		$	485		$	408		$	12,990
Charge-offs		(3,222	)		(2,323	)		(742	)		(73	)		(31	)		-			(6,391	)
Recoveries		5			5			116			22			8			-			156
Net charge-offs		(3,217	)		(2,318	)		(626	)		(51	)		(23	)		-			(6,235	)
Provision		3,699			2,268			275			524			(158	)		(408	)		6,200
Ending balance	$	3,327		$	4,187		$	3,601		$	1,536		$	304		$	-		$	12,955

(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

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, 2012 and 2011.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
For the nine months ended September 30, 2012
Allowance for credit losses:
Beginning balance	$	3,745		$	5,014		$	3,415		$	1,498		$	594		$	22		$	14,288
Charge-offs		(5,008	)		(7,996	)		(2,177	)		(4,513	)		(208	)		-			(19,902	)
Recoveries		5			99			123			230			17			-			474
Net charge-offs		(5,003	)		(7,897	)		(2,054	)		(4,283	)		(191	)		-			(19,428	)
Provision		4,585			7,070			2,240			4,321			(99	)		(22	)		18,095
Ending balance	$	3,327		$	4,187		$	3,601		$	1,536		$	304		$	-		$	12,955

(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

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2012 and 2011.

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
September 30, 2012
Loans individually evaluated for impairment	$	39,954	$	19,671	$	28,902	$	1,646	$	54	$	-	$	90,227
Loans collectively evaluated for impairment		68,767		282,778		292,915		59,885		13,458		-		717,803
Total loans	$	108,721	$	302,449	$	321,817	$	61,531	$	13,512	$	-	$	808,030
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	19	$	-	$	-	$	-	$	-	$	-	$	19
Loans collectively evaluated for impairment		3,308		4,187		3,601		1,536		304		-		12,936
Total allowance for credit losses	$	3,327	$	4,187	$	3,601	$	1,536	$	304	$	-	$	12,955

(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