Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2015

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, 2015 and December 31, 2014.

	March 31,		December 31,
(Dollars in thousands)	2015		2014
Construction	$	77,697	$	69,157
Residential real estate		264,424		273,336
Commercial real estate		316,389		305,788
Commercial		55,079		52,671
Consumer		8,016		9,794
Total loans		721,605		710,746
Allowance for credit losses		(7,798)		(7,695)
Total loans, net	$	713,807	$	703,051

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 (“TDR”) 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. Loans are identified to be restructured when signs of impairment arise such as borrower interest rate reduction request, slowness to pay, or when an inability to repay becomes evident. The terms being offered are evaluated to determine if they are more liberal than those that would be indicated by policy or industry standards for similar, untroubled credits. In those situations where the terms or the interest rates are considered to be more favorable than industry standards or the current underwriting guidelines of the Company’s banking subsidiaries, the loan is classified as a TDR. All loans designated as TDRs are considered impaired loans and may be on either accrual or nonaccrual status. In instances where the loan has been placed on nonaccrual status, six consecutive months of timely payments are required prior to returning the loan to accrual status.

All loans classified as TDRs which are restructured and accrue interest under revised terms require a full and comprehensive review of the borrower’s financial condition, capacity for repayment, realistic assessment of collateral values, and the assessment of risk entered into any workout agreement. Current financial information on the borrower, guarantor, and underlying collateral is analyzed to determine if it supports the ultimate collection of principal and interest. For commercial loans, the cash flows are analyzed, both for the underlying project and globally. For consumer loans, updated salary, credit history and cash flow information is obtained. Current market conditions are also considered. Following a full analysis, the determination of the appropriate loan structure is made.

The following tables include impairment information relating to loans and the allowance for credit losses as of March 31, 2015 and December 31, 2014.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
March 31, 2015
Loans individually evaluated for impairment	$	12,601	$	7,975	$	8,761	$	99	$	123	$	-	$	29,559
Loans collectively evaluated for impairment		65,096		256,449		307,628		54,980		7,893		-		692,046
Total loans	$	77,697	$	264,424	$	316,389	$	55,079	$	8,016	$	-	$	721,605
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	729	$	350	$	23	$	-	$	-	$	-	$	1,102
Loans collectively evaluated for impairment		1,155		1,774		2,316		441		180		830		6,696
Total allowance for credit losses	$	1,884	$	2,124	$	2,339	$	441	$	180	$	830	$	7,798

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
December 31, 2014
Loans individually evaluated for impairment	$	10,067	$	10,403	$	9,359	$	188	$	124	$	-	$	30,141
Loans collectively evaluated for impairment		59,090		262,933		296,429		52,483		9,670		-		680,605
Total loans	$	69,157	$	273,336	$	305,788	$	52,671	$	9,794	$	-	$	710,746
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	41	$	1,099	$	129	$	1	$	3	$	-	$	1,273
Loans collectively evaluated for impairment		1,262		1,735		2,250		447		226		502		6,422
Total allowance for credit losses	$	1,303	$	2,834	$	2,379	$	448	$	229	$	502	$	7,695

The following tables provide information on impaired loans and any related allowance by loan class as of March 31, 2015 and December 31, 2014. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken.

			Recorded		Recorded				Quarter-to-		Year-to-date
	Unpaid		investment		investment				date average		average
	principal		with no		with an		Related		recorded		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment
March 31, 2015
Impaired nonaccrual loans:
Construction	$	12,188	$	5,681	$	2,904	$	690	$	7,861	$	7,861
Residential real estate		2,178		1,557		95		95		2,276		2,276
Commercial real estate		3,994		2,500		-		-		2,689		2,689
Commercial		63		54		-		-		49		49
Consumer		129		123		-		-		123		123
Total		18,552		9,915		2,999		785		12,998		12,998
Impaired accruing TDRs:
Construction		4,016		3,196		820		39		4,019		4,019
Residential real estate		6,322		659		5,663		255		6,338		6,338
Commercial real estate		6,261		4,754		1,507		23		6,272		6,272
Commercial		45		45		-		-		46		46
Consumer		-		-		-		-		-		-
Total		16,644		8,654		7,990		317		16,675		16,675
Total impaired loans:
Construction		16,204		8,877		3,724		729		11,880		11,880
Residential real estate		8,500		2,217		5,758		350		8,614		8,614
Commercial real estate		10,255		7,254		1,507		23		8,961		8,961
Commercial		108		99		-		-		95		95
Consumer		129		123		-		-		123		123
Total	$	35,196	$	18,570	$	10,989	$	1,102	$	29,673	$	29,673

			Recorded		Recorded				Quarter-to-		Year-to-date
	Unpaid		investment		investment				date average		average
	principal		with no		with an		Related		recorded		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment
December 31, 2014
Impaired nonaccrual loans:
Construction	$	9,277	$	6,045	$	-	$	-	$	7,364	$	7,739
Residential real estate		4,664		1,053		2,982		799		2,681		3,322
Commercial real estate		4,703		2,842		280		100		2,455		3,889
Commercial		1,372		136		5		1		141		437
Consumer		129		99		25		3		124		79
Total		20,145		10,175		3,292		903		12,765		15,466
Impaired accruing TDRs:
Construction		4,022		3,196		826		41		3,609		2,743
Residential real estate		6,368		668		5,700		300		12,401		15,123
Commercial real estate		6,237		4,774		1,463		29		6,342		6,574
Commercial		47		47		-		-		48		55
Consumer		-		-		-		-		-		-
Total		16,674		8,685		7,989		370		22,400		24,495
Total impaired loans:
Construction		13,299		9,241		826		41		10,973		10,482
Residential real estate		11,032		1,721		8,682		1,099		15,082		18,445
Commercial real estate		10,940		7,616		1,743		129		8,797		10,463
Commercial		1,419		183		5		1		189		492
Consumer		129		99		25		3		124		79
Total	$	36,819	$	18,860	$	11,281	$	1,273	$	35,165	$	39,961

The following tables provide a roll-forward for troubled debt restructurings as of March 31, 2015 and March 31, 2014.

	1/1/15								Reclassification/				3/31/15
	TDR		New		Disbursements		Charge		Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		In/(Out)		Payoffs		Balance		Allowance
For the three months ended 3/31/2015
Accruing TDRs
Construction	$	4,022	$	-	$	(6)	$	-	$	-	$	-	$	4,016	$	39
Residential Real Estate		6,368		-		(46)		-		-		-		6,322		255
Commercial Real Estate		6,237		-		24		-		-		-		6,261		23
Commercial		47		-		(2)		-		-		-		45		-
Consumer		-		-		-		-		-		-		-		-
Total	$	16,674	$	-	$	(30)	$	-	$	-	$	-	$	16,644	$	317
Nonaccrual TDRs
Construction	$	3,321	$	-	$	(7)	$	(363)	$	2,911	$	-	$	5,862	$	690
Residential Real Estate		3,382		-		(9)		-		(2,911)		-		462		-
Commercial Real Estate		346		-		(2)		(40)		(238)		-		66		-
Commercial		-		-		-		-		-		-		-		-
Consumer		25		-		(1)		-		-		-		24		-
Total	$	7,074	$	-	$	(19)	$	(403)	$	(238)	$	-	$	6,414	$	690
Total TDRs	$	23,748	$	-	$	(49)	$	(403)	$	(238)	$	-	$	23,058	$	1,007

	1/1/14								Reclassification/				3/31/14
	TDR		New		Disbursements		Charge		Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		In/(Out)		Payoffs		Balance		Allowance
For the three months ended 3/31/2014
Accruing TDRs
Construction	$	1,620	$	-	$	(314)	$	-	$	-	$	-	$	1,306	$	1
Residential Real Estate		14,582		-		1,421		-		201		(158)		16,046		143
Commercial Real Estate		9,791		-		(25)		(549)		(201)		(1,097)		7,919		6
Commercial		95		-		(9)		-		-		(24)		62		9
Consumer		-		-		-		-		-		-		-		-
Total	$	26,088	$	-	$	1,073	$	(549)	$	-	$	(1,279)	$	25,333	$	159
Nonaccrual TDRs
Construction	$	3,561	$	-	$	(2)	$	(17)	$	760	$	-	$	4,302	$	-
Residential Real Estate		1,884		-		(20)		(70)		(760)		-		1,034		-
Commercial Real Estate		842		-		(72)		(65)		-		-		705		-
Commercial		-		-		-		-		-		-		-		-
Consumer		26		-		(1)		-		-		-		25		-
Total	$	6,313	$	-	$	(95)	$	(152)	$	-	$	-	$	6,066	$	-
Total TDRs	$	32,401	$	-	$	978	$	(701)	$	-	$	(1,279)	$	31,399	$	159

No loans were modified and considered TDRs during the three months ended March 31, 2015 and March 31, 2014.

The following tables provide information on TDRs that defaulted during the three months ended March 31, 2015 and March 31, 2014. Generally, a loan is considered in default when principal or interest is past due 90 days or more.

	Number of		Recorded		Related
(Dollars in thousands)	contracts		investment		allowance
TDRs that subsequently defaulted:
For the three months ended March 31, 2015
Construction		-	$	-	$	-
Residential real estate		-		-		-
Commercial real estate		2		279		-
Commercial		-		-		-
Consumer		-		-		-
Total		2	$	279	$	-
TDRs that subsequently defaulted:
For the three months ended March 30, 2014
Construction		-	$	-	$	-
Residential real estate		-		-		-
Commercial real estate		-		-		-
Commercial		-		-		-
Consumer		-		-		-
Total		-	$	-	$	-

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, 2015 and December 31, 2014.

			Special
(Dollars in thousands)	Pass/Performing		mention		Substandard		Doubtful		Total
March 31, 2015
Construction	$	60,330	$	3,472	$	13,895	$	-	$	77,697
Residential real estate		245,964		7,646		10,790		24		264,424
Commercial real estate		286,695		20,047		9,647		-		316,389
Commercial		53,076		1,896		107		-		55,079
Consumer		7,852		41		123		-		8,016
Total	$	653,917	$	33,102	$	34,562	$	24	$	721,605

			Special
(Dollars in thousands)	Pass/Performing		mention		Substandard		Doubtful		Total
December 31, 2014
Construction	$	52,241	$	5,643	$	11,273	$	-	$	69,157
Residential real estate		252,643		6,675		14,018		-		273,336
Commercial real estate		275,573		20,040		10,175		-		305,788
Commercial		50,583		1,885		114		89		52,671
Consumer		9,658		13		123		-		9,794
Total	$	640,698	$	34,256	$	35,703	$	89	$	710,746

The following tables provide information on the aging of the loan portfolio as of March 31, 2015 and December 31, 2014.

	Accruing
				30-59			60-89			90 days
				days			days past			or more			Total past
(Dollars in thousands)	Current			past due			due			past due			due			Nonaccrual			Total
March 31, 2015
Construction	$	68,844		$	268		$	-		$	—		$	268		$	8,585		$	77,697
Residential real estate		257,818			1,933			3,012			9			4,954			1,652			264,424
Commercial real estate		311,204			1,555			1,130			-			2,685			2,500			316,389
Commercial		54,798			70			157			-			227			54			55,079
Consumer		7,825			35			6			27			68			123			8,016
Total	$	700,489		$	3,861		$	4,305		$	36		$	8,202		$	12,914		$	721,605
Percent of total loans		97.1	%		0.5	%		0.6	%		-	%		1.1	%		1.8	%

	Accruing
				30-59			60-89			90 days or
				days			days past			more past			Total past
(Dollars in thousands)	Current			past due			due			due			due			Nonaccrual			Total
December 31, 2014
Construction	$	61,325		$	1,786		$	-		$	-		$	1,786		$	6,046		$	69,157
Residential real estate		263,165			3,351			2,702			83			6,136			4,035			273,336
Commercial real estate		301,695			459			513			-			972			3,121			305,788
Commercial		52,352			47			131			-			178			141			52,671
Consumer		9,619			11			37			4			52			123			9,794
Total	$	688,156		$	5,654		$	3,383		$	87		$	9,124		$	13,466		$	710,746
Percent of total loans		96.8	%		0.8	%		0.5	%		-	%		1.3	%		1.9	%

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, 2015 and 2014. Allocation of a portion of the allowance to one loan class does not preclude its availability to absorb losses in other loan classes.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For the three months ended March 31, 2015
Allowance for credit losses:
Beginning balance	$	1,303	$	2,834	$	2,379	$	448	$	229	$	502	$	7,695
Charge-offs		(363)		(114)		(40)		(124)		(10)		-		(651)
Recoveries		3		23		13		47		18		-		104
Net charge-offs		(360)		(91)		(27)		(77)		8		-		(547)
Provision		941		(619)		(13)		70		(57)		328		650
Ending balance	$	1,884	$	2,124	$	2,339	$	441	$	180	$	830	$	7,798

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		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

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $27 thousand as of March 31, 2015.