Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2015

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 June 30, 2015 and December 31, 2014.

	June 30,		December 31,
(Dollars in thousands)	2015		2014
Construction	$	80,715	$	69,157
Residential real estate		278,598		273,336
Commercial real estate		317,131		305,788
Commercial		57,300		52,671
Consumer		7,286		9,794
Total loans		741,030		710,746
Allowance for credit losses		(7,917)		(7,695)
Total loans, net	$	733,113	$	703,051

Loans are stated at their principal amount outstanding net of any purchase premiums, 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 June 30, 2015 and December 31, 2014.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
June 30, 2015
Loans individually evaluated for impairment	$	12,400	$	10,726	$	8,896	$	217	$	123	$	-	$	32,362
Loans collectively evaluated for impairment		68,315		267,872		308,235		57,083		7,163		-		708,668
Total loans	$	80,715	$	278,598	$	317,131	$	57,300	$	7,286	$	-	$	741,030

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	696	$	336	$	21	$	9	$	-	$	-	$	1,062
Loans collectively evaluated for impairment		1,156		1,982		2,595		496		168		458		6,855
Total allowance for credit losses	$	1,852	$	2,318	$	2,616	$	505	$	168	$	458	$	7,917

(Dollars in thousands)	Construction		Residential real estate		Commercial 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 June 30, 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
June 30, 2015

Impaired nonaccrual loans:
Construction	$	12,101	$	2,657	$	5,618	$	661	$	8,478	$	8,169
Residential real estate		3,124		2,697		69		69		2,041		2,159
Commercial real estate		4,460		2,668		-		-		2,707		2,698
Commercial		187		155		22		9		95		72
Consumer		129		123		-		-		123		123
Total		20,001		8,300		5,709		739		13,444		13,221

Impaired accruing TDRs:
Construction		4,125		3,312		813		35		4,109		4,064
Residential real estate		7,960		2,396		5,564		267		7,393		6,866
Commercial real estate		6,228		4,731		1,497		21		6,238		6,255
Commercial		40		40		-		-		41		43
Consumer		-		-		-		-		-		-
Total		18,353		10,479		7,874		323		17,781		17,228

Total impaired loans:
Construction		16,226		5,969		6,431		696		12,587		12,233
Residential real estate		11,084		5,093		5,633		336		9,434		9,025
Commercial real estate		10,688		7,399		1,497		21		8,945		8,953
Commercial		227		195		22		9		136		115
Consumer		129		123		-		-		123		123
Total	$	38,354	$	18,779	$	13,583	$	1,062	$	31,225	$	30,449

									June 30, 2014
			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	$	-	$	-	$	8,040	$	8,131
Residential real estate		4,664		1,053		2,982		799		3,299		4,719
Commercial real estate		4,703		2,842		280		100		5,034		5,098
Commercial		1,372		136		5		1		598		642
Consumer		129		99		25		3		28		21
Total		20,145		10,175		3,292		903		16,999		18,611

Impaired accruing TDRs:
Construction		4,022		3,196		826		41		2,157		1,749
Residential real estate		6,368		668		5,700		300		16,080		16,102
Commercial real estate		6,237		4,774		1,463		29		7,023		7,509
Commercial		47		47		-		-		59		66
Consumer		-		-		-		-		-		-
Total		16,674		8,685		7,989		370		25,319		25,426

Total impaired loans:
Construction		13,299		9,241		826		41		10,197		9,880
Residential real estate		11,032		1,721		8,682		1,099		19,379		20,821
Commercial real estate		10,940		7,616		1,743		129		12,057		12,607
Commercial		1,419		183		5		1		657		708
Consumer		129		99		25		3		28		21
Total	$	36,819	$	18,860	$	11,281	$	1,273	$	42,318	$	44,037

The following tables provide a roll-forward for troubled debt restructurings as of June 30, 2015 and June 30, 2014.

	1/1/15								Reclassification/				6/30/15
	TDR		New		Disbursements		Charge		Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		In/(Out)		Payoffs		Balance		Allowance
For the six months ended 6/30/2015
Accruing TDRs
Construction	$	4,022	$	-	$	(39)	$	-	$	142	$	-	$	4,125	$	35
Residential Real Estate		6,368		1,837		(245)		-		(78)		-		7,882		267
Commercial Real Estate		6,237		-		(9)		-		-		-		6,228		21
Commercial		47		-		(7)		-		-		-		40		-
Consumer		-		-		-		-		-		-		-		-
Total	$	16,674	$	1,837	$	(300)	$	-	$	64	$	-	$	18,275	$	323

Nonaccrual TDRs
Construction	$	3,321	$	-	$	(100)	$	(579)	$	2,911	$	-	$	5,553	$	661
Residential Real Estate		3,382		-		(18)		-		(2,911)		-		453		-
Commercial Real Estate		346		-		(4)		(40)		(302)		-		-		-
Commercial		-		-		-		-		-		-		-		-
Consumer		25		-		(1)		-		-		-		24		-
Total	$	7,074	$	-	$	(123)	$	(619)	$	(302)	$	-	$	6,030	$	661

Total TDRs	$	23,748	$	1,837	$	(423)	$	(619)	$	(238)	$	-	$	24,305	$	984

	1/1/14								Reclassification/				6/30/14
	TDR		New		Disbursements				Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		Charge offs		In/(Out)		Payoffs		Balance		Allowance
For the six months ended 6/30/2014
Accruing TDRs
Construction	$	1,620	$	-	$	(51)	$	(314)	$	2,643	$	-	$	3,898	$	1
Residential Real Estate		14,582		-		1,373		-		398		(158)		16,195		185
Commercial Real Estate		9,791		-		(48)		(549)		(2,844)		(1,097)		5,253		6
Commercial		95		-		(15)		-		-		(24)		56		-
Consumer		-		-		-		-		-		-		-		-
Total	$	26,088	$	-	$	1,259	$	(863)	$	197	$	(1,279)	$	25,402	$	192

Nonaccrual TDRs
Construction	$	3,561	$	-	$	(5)	$	(35)	$	760	$	-	$	4,281	$	-
Residential Real Estate		1,884		-		(31)		(203)		(957)		(73)		620		-
Commercial Real Estate		842		-		(81)		(65)		-		-		696		-
Commercial		-		-		-		-		-		-		-		-
Consumer		26		-		(1)		-		-		-		25		-
Total	$	6,313	$	-	$	(118)	$	(303)	$	(197)	$	(73)	$	5,622	$	-

Total TDRs	$	32,401	$	-	$	1,141	$	(1,166)	$	-	$	(1,352)	$	31,024	$	192

The following tables provide information on loans that were modified and considered TDRs during the six months ended June 30, 2015 and June 30, 2014.

			Premodification		Postmodification
			outstanding		outstanding
	Number of		recorded		recorded		Related
(Dollars in thousands)	contracts		investment		investment		allowance
TDRs:
For the six months ended June 30, 2015
Construction		-	$	-	$	-	$	-
Residential real estate		10		1,835		1,837		19
Commercial real estate		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		10	$	1,835	$	1,837	$	19

For the six months ended June 30, 2014
Construction		-	$	-	$	-	$	-
Residential real estate		-		-		-		-
Commercial real estate		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		-	$	-	$	-	$	-

The following tables provide information on TDRs that defaulted during the six months ended June 30, 2015 and June 30, 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 six months ended June 30, 2015
Construction		-	$	-	$	-
Residential real estate		-		-		-
Commercial real estate		2		279		-
Commercial		-		-		-
Consumer		-		-		-
Total		2	$	279	$	-

TDRs that subsequently defaulted:
For the six months ended June 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 June 30, 2015 and December 31, 2014.

			Special
(Dollars in thousands)	Pass/Performing		mention		Substandard		Doubtful		Total
June 30, 2015
Construction	$	64,209	$	4,164	$	12,342	$	-	$	80,715
Residential real estate		257,937		9,905		10,756		-		278,598
Commercial real estate		285,881		21,487		9,029		734		317,131
Commercial		55,280		1,790		230		-		57,300
Consumer		7,126		38		122		-		7,286
Total	$	670,433	$	37,384	$	32,479	$	734	$	741,030

			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 June 30, 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
June 30, 2015
Construction	$	72,440		$	-		$	-		$	-		$	-		$	8,275		$	80,715
Residential real estate		271,659			2,874			1,264			35			4,173			2,766			278,598
Commercial real estate		313,958			-			505			-			505			2,668			317,131
Commercial		57,019			104			-			-			104			177			57,300
Consumer		7,095			68			-			-			68			123			7,286
Total	$	722,171		$	3,046		$	1,769		$	35		$	4,850		$	14,009		$	741,030
Percent of total loans		97.5	%		0.4	%		0.2	%		-	%		0.6	%		1.9	%

	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 and six months ended June 30, 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 June 30,2015
Allowance for credit losses:
Beginning balance	$	1,884	$	2,124	$	2,339	$	441	$	180	$	830	$	7,798

Charge-offs		(216)		(142)		(280)		(25)		(35)		-		(698)
Recoveries		104		121		2		35		15		-		277
Net charge-offs		(112)		(21)		(278)		10		(20)		-		(421)

Provision		80		215		555		54		8		(372)		540
Ending balance	$	1,852	$	2,318	$	2,616	$	505	$	168	$	458	$	7,917

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For the three months ended June 30, 2014
Allowance for credit losses:
Beginning balance	$	1,997	$	2,086	$	4,584	$	677	$	308	$	417	$	10,069

Charge-offs		(224)		(315)		(1,523)		(95)		(20)		-		(2,177)
Recoveries		1		63		7		157		6		-		234
Net charge-offs		(223)		(252)		(1,516)		62		(14)		-		(1,943)

Provision		474		520		(416)		119		12		241		950
Ending balance	$	2,248	$	2,354	$	2,652	$	858	$	306	$	658	$	9,076

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For the six months ended June 30, 2015
Allowance for credit losses:
Beginning balance	$	1,303	$	2,834	$	2,379	$	448	$	229	$	502	$	7,695

Charge-offs		(579)		(257)		(320)		(149)		(45)		-		(1,350)
Recoveries		107		145		15		82		33		-		382
Net charge-offs		(472)		(112)		(305)		(67)		(12)		-		(968)

Provision		1,021		(404)		542		124		(49)		(44)		1,190
Ending balance	$	1,852	$	2,318	$	2,616	$	505	$	168	$	458	$	7,917

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For the six months ended June 30, 2014
Allowance for credit losses:
Beginning balance	$	1,960	$	3,854	$	3,029	$	1,266	$	243	$	373	$	10,725

Charge-offs		(241)		(987)		(1,613)		(937)		(147)		-		(3,925)
Recoveries		11		106		13		207		14		-		351
Net charge-offs		(230)		(881)		(1,600)		(730)		(133)		-		(3,574)

Provision		518		(619)		1,223		322		196		285		1,925
Ending balance	$	2,248	$	2,354	$	2,652	$	858	$	306	$	658	$	9,076

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $514 thousand as of June 30, 2015.