Loans and allowance for credit losses

3 Months Ended

Mar. 31, 2014

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, 2014 and December 31, 2013. At December 31, 2013, $3.5 million of nonaccrual construction loans were classified as held for sale. During the first quarter of 2014, these loans held for sale were reclassified to loans.

(Dollars in thousands)	March 31, 2014		December 31, 2013
Construction	$	66,812	$	64,591
Residential real estate		270,480		274,857
Commercial real estate		302,147		304,605
Commercial		54,014		57,195
Consumer		10,184		10,671
Total loans		703,637		711,919
Allowance for credit losses		(10,069)		(10,725)
Total loans, net	$	693,568	$	701,194

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 (i.e., interest income is no longer accrued) 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. Once the amount of impairment has been determined, the uncollectible portion is charged off. 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 impaired loans unless the likelihood of further loss is remote. The allowance for credit losses may include specific reserves related to impaired loans. Specific reserves remain until charge offs are made. 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. See additional discussion under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. All loans designated as troubled debt restructurings (“TDRs”) are considered impaired loans and may be on either accrual or nonaccrual status.

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2014 and December 31, 2013.

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
March 31, 2014
Loans individually evaluated for impairment	$	9,517	$	19,791	$	14,296	$	843	$	42	$	-	$	44,489
Loans collectively evaluated for impairment		57,295		250,689		287,851		53,171		10,142		-		659,148
Total loans	$	66,812	$	270,480	$	302,147	$	54,014	$	10,184	$	-	$	703,637

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	341	$	258	$	1,510	$	72	$	27	$	-	$	2,208
Loans collectively evaluated for impairment		1,656		1,828		3,074		605		281		417		7,861
Total allowance for credit losses	$	1,997	$	2,086	$	4,584	$	677	$	308	$	417	$	10,069

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2013
Loans individually evaluated for impairment	$	5,569	$	19,748	$	14,462	$	887	$	48	$	-	$	40,714
Loans collectively evaluated for impairment		59,022		255,109		290,143		56,308		10,623		-		671,205
Total loans	$	64,591	$	274,857	$	304,605	$	57,195	$	10,671	$	-	$	711,919

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	204	$	285	$	44	$	245	$	5	$	-	$	783
Loans collectively evaluated for impairment		1,756		3,569		2,985		1,021		238		373		9,942
Total allowance for credit losses	$	1,960	$	3,854	$	3,029	$	1,266	$	243	$	373	$	10,725

The following tables provide information on impaired loans and any related allowance by loan class as of March 31, 2014 and December 31, 2013. 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		Year-to-date average recorded investment
March 31, 2014
Impaired nonaccrual loans:
Construction	$	12,805	$	4,383	$	3,828	$	340	$	7,969
Residential real estate		5,064		3,363		382		115		6,393
Commercial real estate		6,792		2,566		3,811		1,504		5,162
Commercial		1,991		710		71		63		686
Consumer		50		15		27		27		14
Total		26,702		11,037		8,119		2,049		20,224

Impaired accruing TDRs:
Construction		1,306		1,214		92		1		1,463
Residential real estate		16,046		13,555		2,491		143		15,314
Commercial real estate		7,919		7,140		779		6		8,855
Commercial		62		9		53		9		79
Consumer		-		-		-		-		-
Total		25,333		21,918		3,415		159		25,711

Total impaired loans:
Construction		14,111		5,597		3,920		341		9,432
Residential real estate		21,110		16,918		2,873		258		21,707
Commercial real estate		14,711		9,706		4,590		1,510		14,017
Commercial		2,053		719		124		72		765
Consumer		50		15		27		27		14
Total	$	52,035	$	32,955	$	11,534	$	2,208	$	45,935

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Year-to-date average recorded investment
December 31, 2013
Impaired nonaccrual loans:
Construction	$	6,787	$	3,709	$	240	$	203	$	7,270
Residential real estate		7,692		3,862		1,304		225		10,240
Commercial real estate		5,218		4,261		410		38		7,829
Commercial		1,801		547		245		245		619
Consumer		56		43		5		5		48
Total		21,554		12,422		2,204		716		26,006

Impaired accruing TDRs:
Construction		1,620		1,527		93		1		14,405
Residential real estate		14,582		13,177		1,405		60		11,101
Commercial real estate		9,791		9,006		785		6		13,308
Commercial		95		95		-		-		105
Consumer		-		-		-		-		-
Total		26,088		23,805		2,283		67		38,919

Total impaired loans:
Construction		8,407		5,236		333		204		21,675
Residential real estate		22,274		17,039		2,709		285		21,341
Commercial real estate		15,009		13,267		1,195		44		21,137
Commercial		1,896		642		245		245		724
Consumer		56		43		5		5		48
Total	$	47,642	$	36,227	$	4,487	$	783	$	64,925

The following tables provide information on loans that were modified and considered TDRs during the three months ended March 31, 2014 and March 31, 2013.

(Dollars in thousands)	Number of contracts	Premodification outstanding recorded investment		Postmodification outstanding recorded investment		Related allowance
TDRs:
For the three months ended March 31, 2014
Construction	-	$	-	$	-	$	-
Residential real estate	-		-		-		-
Commercial real estate	-		-		-		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	-	$	-	$	-	$	-

For the three months ended March 31, 2013
Construction	2	$	123	$	123	$	-
Residential real estate	2		525		536		-
Commercial real estate	-		-		-		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	4	$	648	$	659	$	-

The following tables provide information on TDRs that defaulted during the three months ended March 31, 2014 and March 31, 2013. Generally, a loan is considered in default when principal or interest is past due 90 days or more.

(Dollars in thousands)	Number of contracts	Recorded investment		Related allowance
TDRs that subsequently defaulted (1):
For the three months ended March 31, 2014
Construction	-	$	-	$	-
Residential real estate	-		-		-
Commercial real estate	-		-		-
Commercial	-		-		-
Consumer	-		-		-
Total	-	$	-	$	-

TDRs that subsequently defaulted (2):
For the three months ended March 31, 2013
Construction	-	$	-	$	-
Residential real estate	2		177		-
Commercial real estate	1		1,741		74
Commercial	-		-		-
Consumer	-		-		-
Total	3	$	1,918	$	74

(1) These loans were classified as TDRs during 2013.

(2) These loans were classified as TDRs during 2012.

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 March 31, 2014 and December 31, 2013.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Total
March 31, 2014
Construction	$	39,893	$	15,871	$	11,048	$	-	$	66,812
Residential real estate		235,953		23,263		11,264		-		270,480
Commercial real estate		250,195		31,651		20,301		-		302,147
Commercial		49,265		3,797		362		590		54,014
Consumer		10,095		47		42		-		10,184
Total	$	585,401	$	74,629	$	43,017	$	590	$	703,637

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Total
December 31, 2013
Construction	$	39,268	$	15,884	$	9,439	$	-	$	64,591
Residential real estate		235,054		22,638		17,114		51		274,857
Commercial real estate		255,280		30,105		19,210		10		304,605
Commercial		52,032		3,691		972		500		57,195
Consumer		10,451		48		172		-		10,671
Total	$	592,085	$	72,366	$	46,907	$	561	$	711,919

The following tables provide information on the aging of the loan portfolio as of March 31, 2014 and December 31, 2013.

	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
March 31, 2014
Construction	$	57,666		$	935		$	-		$	-		$	935		$	8,211		$	66,812
Residential real estate		261,491			4,246			998			-			5,244			3,745			270,480
Commercial real estate		293,871			1,027			755			117			1,899			6,377			302,147
Commercial		52,894			201			134			4			339			781			54,014
Consumer		10,004			120			18			-			138			42			10,184
Total	$	675,926		$	6,529		$	1,905		$	121		$	8,555		$	19,156		$	703,637
Percent of total loans		96.1	%		0.9	%		0.3	%		-	%		1.2	%		2.7	%

	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, 2013
Construction	$	60,642		$	-		$	-		$	-		$	-		$	3,949		$	64,591
Residential real estate		265,182			2,765			1,724			20			4,509			5,166			274,857
Commercial real estate		299,295			639			-			-			639			4,671			304,605
Commercial		55,576			330			247			250			827			792			57,195
Consumer		10,469			23			131			-			154			48			10,671
Total	$	691,164		$	3,757		$	2,102		$	270		$	6,129		$	14,626		$	711,919
Percent of total loans		97.1	%		0.5	%		0.3	%		-	%		0.8	%		2.1	%

Management evaluates the adequacy of the allowance for credit losses at least quarterly and adjusts the provision for credit losses based on this analysis. 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, 2014 and 2013. 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
For the three months ended March 31, 2014
Allowance for credit losses:
Beginning balance	$	1,960	$	3,854	$	3,029	$	1,266	$	243	$	373	$	10,725

Charge-offs		(17)		(672)		(90)		(842)		(127)		-		(1,748)
Recoveries		10		43		6		50		8		-		117
Net charge-offs		(7)		(629)		(84)		(792)		(119)		-		(1,631)

Provision		44		(1,139)		1,639		203		184		44		975
Ending balance	$	1,997	$	2,086	$	4,584	$	677	$	308	$	417	$	10,069

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
For the three months ended March 31, 2013
Allowance for credit losses:
Beginning balance	$	4,387	$	5,194	$	4,134	$	1,682	$	407	$	187	$	15,991

Charge-offs		(707)		(793)		(1,075)		(87)		(49)		-		(2,711)
Recoveries		1		239		3		52		10		-		305
Net charge-offs		(706)		(554)		(1,072)		(35)		(39)		-		(2,406)

Provision		435		224		1,312		113		(38)		104		2,150
Ending balance	$	4,116	$	4,864	$	4,374	$	1,760	$	330	$	291	$	15,735

- 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.

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