LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2012

Receivables [Abstract]

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

NOTE 3. 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 December 31, 2012 and 2011.

(Dollars in thousands)	2012			2011
Construction	$	108,051		$	119,883
Residential real estate		288,011			321,604
Commercial real estate		314,941			315,439
Commercial		60,786			69,485
Consumer		13,293			14,639
Total loans		785,082			841,050
Allowance for credit losses		(15,991	)		(14,288	)
Total loans, net	$	769,091		$	826,762

In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectibility. As of December 31, 2012 and 2011, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $26.0 million and $22.4 million, respectively. During 2012 and 2011, loan additions were approximately $9.7 million and $4.4 million, respectively, and loan repayments were approximately $6.1 million and $2.0 million, respectively.

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

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2012
Loans individually evaluated for impairment	$	37,029	$	18,549	$	32,447	$	715	$	87	$	-	$	88,827
Loans collectively evaluated for impairment		71,022		269,462		282,494		60,071		13,206		-		696,255
Total loans	$	108,051	$	288,011	$	314,941	$	60,786	$	13,293	$	-	$	785,082
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	941	$	598	$	614	$	-	$	48	$	-	$	2,201
Loans collectively evaluated for impairment		3,446		4,596		3,520		1,682		359		187		13,790
Total allowance for credit losses	$	4,387	$	5,194	$	4,134	$	1,682	$	407	$	187	$	15,991

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2011
Loans individually evaluated for impairment	$	27,336	$	23,898	$	23,578	$	1,738	$	28	$	-	$	76,578
Loans collectively evaluated for impairment		92,547		297,706		291,861		67,747		14,611		-		764,472
Total loans	$	119,883	$	321,604	$	315,439	$	69,485	$	14,639	$	-	$	841,050
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	170	$	1,296	$	-	$	-	$	-	$	-	$	1,466
Loans collectively evaluated for impairment		3,575		3,718		3,415		1,498		594		22		12,822
Total allowance for credit losses	$	3,745	$	5,014	$	3,415	$	1,498	$	594	$	22	$	14,288

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2012 and 2011. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment
December 31, 2012
Impaired nonaccrual loans:
Construction	$	14,288	$	3,371	$	6,323	$	941	$	12,428
Residential real estate		17,975		9,469		2,063		598		17,472
Commercial real estate		19,515		11,838		2,729		614		12,975
Commercial		1,556		594		-		-		1,538
Consumer		92		39		48		48		55
Total		53,426		25,311		11,163		2,201		44,468
Impaired accruing restructured loans:
Construction		27,335		27,335		-		-		21,193
Residential real estate		7,017		7,017		-		-		5,064
Commercial real estate		17,880		17,880		-		-		16,252
Commercial		121		121		-		-		87
Consumer		-		-		-		-		-
Total		52,353		52,353		-		-		42,596
Total impaired loans:
Construction		41,623		30,706		6,323		941		33,621
Residential real estate		24,992		16,486		2,063		598		22,536
Commercial real estate		37,395		29,718		2,729		614		29,227
Commercial		1,677		715		-		-		1,625
Consumer		92		39		48		48		55
Total	$	105,779	$	77,664	$	11,163	$	2,201	$	87,064

(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 December 31, 2012 and 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:
December 31, 2012
Construction		18	$	33,174	$	28,782
Residential real estate		32		15,659		9,187
Commercial real estate		22		24,673		20,478
Commercial		3		150		121
Consumer		1		30		27
Total		76	$	73,686	$	58,595
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):
December 31, 2012
Construction		6	$	1,447
Residential real estate		10		2,295
Commercial real estate		6		3,398
Commercial		-		-
Consumer		1		27
Total		23	$	7,167
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 or doubtful are adversely rated. They are assigned higher risk ratings than favorably rated loans in the calculation of the formula portion of the allowance for credit losses.

The following tables provide information on loan risk ratings as of December 31, 2012 and 2011.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Nonaccrual		Total
December 31, 2012
Construction	$	45,385	$	30,817	$	22,155	$	-	$	9,694	$	108,051
Residential real estate		237,299		23,657		15,090		433		11,532		288,011
Commercial real estate		257,418		21,554		21,402		-		14,567		314,941
Commercial		55,432		3,062		1,639		59		594		60,786
Consumer		13,147		-		59		-		87		13,293
Total	$	608,681	$	79,090	$	60,345	$	492	$	36,474	$	785,082

(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 December 31, 2012 and 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
December 31, 2012
Construction	$	98,221		$	136		$	-		$	-		$	136		$	9,694		$	108,051
Residential real estate		272,311			3,116			762			290			4,168			11,532			288,011
Commercial real estate		298,522			887			800			165			1,852			14,567			314,941
Commercial		59,746			380			66			-			446			594			60,786
Consumer		13,125			57			19			5			81			87			13,293
Total	$	741,925		$	4,576		$	1,647		$	460		$	6,683		$	36,474		$	785,082
Percent of total loans		94.5	%		0.6	%		0.2	%		0.1	%		0.9	%		4.6	%

	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
Percent of total loans		90.5	%		2.0	%		1.1	%		0.3	%		3.4	%		6.1	%

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for 2012 and 2011.

Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated		Total
2012
Allowance for credit losses:
Beginning balance	$	3,745		$	5,014		$	3,415		$	1,498		$	594		$	22	$	14,288
Charge-offs		(7,826	)		(9,838	)		(2,954	)		(5,451	)		(576	)		-		(26,645	)
Recoveries		6			102			166			304			25			-		603
Net charge-offs		(7,820	)		(9,736	)		(2,788	)		(5,147	)		(551	)		-		(26,042	)
Provision		8,462			9,916			3,507			5,331			364			165		27,745
Ending balance	$	4,387		$	5,194		$	4,134		$	1,682		$	407		$	187	$	15,991

(Dollars in thousands)	Construction			Residential real estate			Commercial real estate			Commercial			Consumer			Unallocated			Total
2011
Allowance for credit losses:
Beginning balance	$	3,327		$	4,833		$	3,665		$	1,422		$	637		$	343		$	14,227
Charge-offs		(4,236	)		(7,693	)		(5,037	)		(3,388	)		(202	)		-			(20,556	)
Recoveries		49			120			361			549			68			-			1,147
Net charge-offs		(4,187	)		(7,573	)		(4,676	)		(2,839	)		(134	)		-			(19,409	)
Provision		4,605			7,754			4,426			2,915			91			(321	)		19,470
Ending balance	$	3,745		$	5,014		$	3,415		$	1,498		$	594		$	22		$	14,288