Loans and Allowance for Credit Losses

9 Months Ended

Sep. 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 September 30, 2015 and December 31, 2014.

	September 30,		December 31,
(Dollars in thousands)	2015		2014
Construction	$	86,548	$	69,157
Residential real estate		303,137		273,336
Commercial real estate		323,160		305,788
Commercial		57,129		52,671
Consumer		7,088		9,794
Total loans		777,062		710,746
Allowance for credit losses		(8,098)		(7,695)
Total loans, net	$	768,964	$	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 September 30, 2015 and December 31, 2014.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
September 30, 2015
Loans individually evaluated for impairment	$	11,766	$	10,753	$	6,768	$	165	$	122	$	-	$	29,574
Loans collectively evaluated for impairment		74,782		292,384		316,392		56,964		6,966		-		747,488
Total loans	$	86,548	$	303,137	$	323,160	$	57,129	$	7,088	$	-	$	777,062

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	676	$	363	$	189	$	-	$	-	$	-	$	1,228
Loans collectively evaluated for impairment		1,166		1,928		2,622		499		156		499		6,870
Total allowance for credit losses	$	1,842	$	2,291	$	2,811	$	499	$	156	$	499	$	8,098

			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 September 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
September 30, 2015
Impaired nonaccrual loans:
Construction	$	11,999	$	4,796	$	2,889	$	643	$	8,025	$	8,121
Residential real estate		4,399		3,591		487		156		3,812		2,710
Commercial real estate		1,451		884		209		9		2,137		2,511
Commercial		177		165		-		-		170		105
Consumer		128		122		-		-		123		123
Total		18,154		9,558		3,585		808		14,267		13,570

Impaired accruing TDRs:
Construction		4,081		3,273		808		33		4,099		4,076
Residential real estate		6,675		3,350		3,325		207		7,520		7,084
Commercial real estate		5,675		4,300		1,375		180		5,687		6,065
Commercial		-		-		-		-		27		38
Consumer		-		-		-		-		-		-
Total		16,431		10,923		5,508		420		17,333		17,263

Total impaired loans:
Construction		16,080		8,069		3,697		676		12,124		12,197
Residential real estate		11,074		6,941		3,812		363		11,332		9,794
Commercial real estate		7,126		5,184		1,584		189		7,824		8,576
Commercial		177		165		-		-		197		143
Consumer		128		122		-		-		123		123
Total	$	34,585	$	20,481	$	9,093	$	1,228	$	31,600	$	30,833

									September 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	$	-	$	-	$	7,492	$	7,918
Residential real estate		4,664		1,053		2,982		799		2,604		4,014
Commercial real estate		4,703		2,842		280		100		3,132		4,443
Commercial		1,372		136		5		1		389		558
Consumer		129		99		25		3		124		55
Total		20,145		10,175		3,292		903		13,741		16,988

Impaired accruing TDRs:
Construction		4,022		3,196		826		41		3,404		2,301
Residential real estate		6,368		668		5,700		300		16,190		16,131
Commercial real estate		6,237		4,774		1,463		29		5,459		6,826
Commercial		47		47		-		-		54		62
Consumer		-		-		-		-		-		-
Total		16,674		8,685		7,989		370		25,107		25,320

Total impaired loans:
Construction		13,299		9,241		826		41		10,896		10,219
Residential real estate		11,032		1,721		8,682		1,099		18,794		20,145
Commercial real estate		10,940		7,616		1,743		129		8,591		11,269
Commercial		1,419		183		5		1		443		620
Consumer		129		99		25		3		124		55
Total	$	36,819	$	18,860	$	11,281	$	1,273	$	38,848	$	42,308

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

	1/1/15								Reclassification/				9/30/15
	TDR		New		Disbursements		Charge		Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		In/(Out)		Payoffs		Balance		Allowance
For the nine months ended 9/30/2015
Accruing TDRs
Construction	$	4,022	$	-	$	(83)	$	-	$	142	$	-	$	4,081	$	33
Residential Real Estate		6,368		1,837		(206)		-		(1,324)		-		6,675		207
Commercial Real Estate		6,237		-		(562)		-		-		-		5,675		180
Commercial		47		-		(6)		-		(41)		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	16,674	$	1,837	$	(857)	$	-	$	(1,223)	$	-	$	16,431	$	420

Nonaccrual TDRs
Construction	$	3,321	$	-	$	(207)	$	(1,058)	$	2,911	$	-	$	4,967	$	643
Residential Real Estate		3,382		-		(21)		-		(2,911)		-		450		89
Commercial Real Estate		346		-		(4)		(40)		(302)		-		-		-
Commercial		-		-		-		-		-		-		-		-
Consumer		25		-		(2)		-		-		-		23		-
Total	$	7,074	$	-	$	(234)	$	(1,098)	$	(302)	$	-	$	5,440	$	732

Total TDRs	$	23,748	$	1,837	$	(1,091)	$	(1,098)	$	*(1,525)	$	-	$	21,871	$	1,152

	1/1/14								Reclassification/				9/30/14
	TDR		New		Disbursements				Transfers				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		Charge offs		In/(Out)		Payoffs		Balance		Allowance
For the nine months ended 9/30/2014
Accruing TDRs
Construction	$	1,620	$	-	$	(52)	$	(538)	$	2,643	$	(270)	$	3,403	$	1
Residential Real Estate		14,582		-		1,324		-		478		(158)		16,226		168
Commercial Real Estate		9,791		-		(71)		(549)		(2,508)		(1,097)		5,566		6
Commercial		95		-		(19)		-		-		(24)		52		-
Consumer		-		-		-		-		-		-		-		-
Total	$	26,088	$	-	$	1,182	$	(1,087)	$	613	$	(1,549)	$	25,247	$	175

Nonaccrual TDRs
Construction	$	3,561	$	-	$	(12)	$	(235)	$	760	$	-	$	4,074	$	-
Residential Real Estate		1,884		-		(40)		(203)		(1,037)		(123)		481		-
Commercial Real Estate		842		-		(91)		(65)		(336)		-		350		-
Commercial		-		-		-		-		-		-		-		-
Consumer		26		-		(1)		-		-		-		25		25
Total	$	6,313	$	-	$	(144)	$	(503)	$	(613)	$	(123)	$	4,930	$	25

Total TDRs	$	32,401	$	-	$	1,038	$	(1,590)	$	-	$	(1,672)	$	30,177	$	200

* $1.3 million in subsequently modified TDRs were transferred from accruing TDR classification to accrual status during the period, thus removing the TDR designation. In accordance with ASC 310-40-50-2 “Creditor Disclosure of Troubled Debt Restructurings,” an impaired loan that has been subsequently restructured in a troubled debt restructuring involving modification of terms need not be included in the disclosures in years after the restructuring if both of the following conditions exist: a) the subsequent restructuring agreement specifies an interest rate equal to or greater than the rate that the creditor was willing to accept at the time of the restructuring for a new loan with comparable risk; and b) the loan is not impaired based on the terms specified by the restructuring agreement. During the period ended September 30, 2015, three loans totaling $1.3 million met the conditions stipulated in ASC 310-40-50-2, and after a careful evaluation of well supported documentation by management, these loans were upgraded to accrual status.

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

		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For the nine months ended September 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 nine months ended September 30, 2014
Construction	-	$	-	$	-	$	-
Residential real estate	-		-		-		-
Commercial real estate	-		-		-		-
Commercial	-		-		-		-
Consumer	-		-		-		-
Total	-	$	-	$	-	$	-

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

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

			Special
(Dollars in thousands)	Pass/Performing		mention		Substandard		Doubtful		Total
September 30, 2015
Construction	$	69,344	$	5,525	$	11,679	$	-	$	86,548
Residential real estate		283,551		7,823		11,763		-		303,137
Commercial real estate		294,148		20,261		8,542		209		323,160
Commercial		55,282		1,632		215		-		57,129
Consumer		6,930		35		123		-		7,088
Total	$	709,255	$	35,276	$	32,322	$	209	$	777,062

			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 September 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
September 30, 2015
Construction	$	78,863		$	-		$	-		$	-		$	-		$	7,685		$	86,548
Residential real estate		296,151			2,274			634			-			2,908			4,078			303,137
Commercial real estate		320,934			1,133			-			-			1,133			1,093			323,160
Commercial		56,901			21			42			-			63			165			57,129
Consumer		6,874			79			9			4			92			122			7,088
Total	$	759,723		$	3,507		$	685		$	4		$	4,196		$	13,143		$	777,062
Percent of total loans		97.7	%		0.5	%		0.1	%		-	%		0.6	%		1.7	%

	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 nine months ended September 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 September 30, 2015
Allowance for credit losses:
Beginning balance	$	1,852	$	2,318	$	2,616	$	505	$	168	$	458	$	7,917

Charge-offs		(479)		(26)		-		(136)		-		-		(641)
Recoveries		9		102		233		60		8		-		412
Net charge-offs		(470)		76		233		(76)		8		-		(229)

Provision		460		(103)		(38)		70		(20)		41		410
Ending balance	$	1,842	$	2,291	$	2,811	$	499	$	156	$	499	$	8,098

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Unallocated		Total
For the three months ended September 30, 2014
Allowance for credit losses:
Beginning balance	$	2,248	$	2,354	$	2,652	$	858	$	306	$	658	$	9,076

Charge-offs		(213)		(242)		(35)		(1,019)		(6)		-		(1,515)
Recoveries		1		229		9		24		7		-		270
Net charge-offs		(212)		(13)		(26)		(995)		1		-		(1,245)

Provision		(206)		47		115		935		(39)		(77)		775
Ending balance	$	1,830	$	2,388	$	2,741	$	798	$	268	$	581	$	8,606

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

Charge-offs		(1,058)		(283)		(320)		(285)		(45)		-		(1,991)
Recoveries		116		247		248		142		41		-		794
Net charge-offs		(942)		(36)		(72)		(143)		(4)		-		(1,197)

Provision		1,481		(507)		504		194		(69)		(3)		1,600
Ending balance	$	1,842	$	2,291	$	2,811	$	499	$	156	$	499	$	8,098

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

Charge-offs		(454)		(1,229)		(1,648)		(1,956)		(153)		-		(5,440)
Recoveries		12		335		22		231		21		-		621
Net charge-offs		(442)		(894)		(1,626)		(1,725)		(132)		-		(4,819)

Provision		312		(572)		1,338		1,257		157		208		2,700
Ending balance	$	1,830	$	2,388	$	2,741	$	798	$	268	$	581	$	8,606

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $581 thousand as of September 30, 2015.