LOANS AND ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2015

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, 2015 and 2014.

(Dollars in thousands)	2015		2014
Construction	$	85,632	$	69,157
Residential real estate		307,063		273,336
Commercial real estate		330,253		305,788
Commercial		64,911		52,671
Consumer		7,255		9,794
Total loans		795,114		710,746
Allowance for credit losses		(8,316)		(7,695)
Total loans, net	$	786,798	$	703,051

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, 2015 and 2014, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $22.0 million and $18.7 million, respectively. During 2015 and 2014, loan additions were approximately $5.5 million and $1.8 million, respectively, and loan repayments were approximately $2.4 million and $6.2 million, respectively.

In the normal course of banking business, risks related to specific loan categories are as follows:

Construction loans – Construction loans generally finance the construction of residential real estate for builders and individuals for single family dwellings. In addition, the bank periodically finances the construction of commercial projects. Credit risk factors include the borrower’s ability to successfully complete the construction on time and within budget, changing market conditions which could affect the value and marketability of projects, changes in the borrower’s ability or willingness to repay the loan and potentially rising interest rates which can impact both the borrower’s ability to repay and the collateral value.

Residential real estate – Residential real estate loans are typically made to consumers and are secured by residential real estate. Credit risk arises from the borrower’s continuing financial stability, which can be adversely impacted by job loss, divorce, illness, or personal bankruptcy, among other factors. Also impacting credit risk would be a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default or subsequent liquidation of the real estate collateral.

Commercial real estate – Commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. These loans are subject to adverse changes in the local economy and commercial real estate markets. Credit risk associated with owner occupied properties arises from the borrower’s financial stability and the ability of the borrower and the business to repay the loan. Non-owner occupied properties carry the risk of a tenant’s deteriorating credit strength, lease expirations in soft markets and sustained vacancies which can adversely impact cash flow.

Commercial – Commercial loans are secured or unsecured loans for business purposes. Loans are typically secured by accounts receivable, inventory, equipment and/or other assets of the business. Credit risk arises from the successful operation of the business which may be affected by competition, rising interest rates, regulatory changes and adverse conditions in the local and regional economy.

Consumer – Consumer loans include home equity loans and lines, installment loans and personal lines of credit. Credit risk is similar to residential real estate loans above as it is subject to the borrower’s continuing financial stability and the value of the collateral securing the loan.

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

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
December 31, 2015
Loans individually evaluated for impairment	$	11,598	$	7,945	$	7,762	$	161	$	122	$	-	$	27,588
Loans collectively evaluated for impairment		74,034		299,118		322,491		64,750		7,133		-		767,526
Total loans	$	85,632	$	307,063	$	330,253	$	64,911	$	7,255	$	-	$	795,114
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	619	$	435	$	340	$	-	$	7	$	-	$	1,401
Loans collectively evaluated for impairment		1,027		1,746		2,659		558		149		776		6,915
Total allowance for credit losses	$	1,646	$	2,181	$	2,999	$	558	$	156	$	776	$	8,316

(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 December 31, 2015 and 2014. 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		Interest income recognized
December 31, 2015
Impaired nonaccrual loans:
Construction	$	11,850	$	4,647	$	2,882	$	588	$	8,176	$	-
Residential real estate		2,563		1,773		487		208		2,767		-
Commercial real estate		2,988		1,813		209		9		2,159		-
Commercial		175		161		-		-		126		-
Consumer		128		98		23		7		122		-
Total		17,704		8,492		3,601		812		13,350		-
Impaired accruing TDRs:
Construction		4,069		3,266		803		31		4,080		84
Residential real estate		5,686		2,380		3,306		227		6,947		312
Commercial real estate		5,740		1,702		4,038		331		5,943		254
Commercial		-		-		-		-		27		1
Consumer		-		-		-		-		-		-
Total		15,495		7,348		8,147		589		16,997		651
Total impaired loans:
Construction		15,919		7,913		3,685		619		12,256		84
Residential real estate		8,249		4,153		3,793		435		9,714		312
Commercial real estate		8,728		3,515		4,247		340		8,102		254
Commercial		175		161		-		-		153		1
Consumer		128		98		23		7		122		-
Total	$	33,199	$	15,840	$	11,748	$	1,401	$	30,347	$	651

(Dollars in thousands)	Unpaid principal balance		Recorded investment with no allowance		Recorded investment with an allowance		Related allowance		Average recorded investment		Interest income recognized
December 31, 2014
Impaired nonaccrual loans:
Construction	$	9,277	$	6,045	$	-	$	-	$	7,739	$	-
Residential real estate		4,664		1,053		2,982		799		3,322		-
Commercial real estate		4,703		2,842		280		100		3,889		-
Commercial		1,372		136		5		1		437		-
Consumer		129		99		25		3		79		-
Total		20,145		10,175		3,292		903		15,466		-
Impaired accruing TDRs:
Construction		4,022		3,196		826		41		2,743		68
Residential real estate		6,368		668		5,700		300		15,123		372
Commercial real estate		6,237		4,774		1,463		29		6,574		254
Commercial		47		47		-		-		55		2
Consumer		-		-		-		-		-		-
Total		16,674		8,685		7,989		370		24,495		696
Total impaired loans:
Construction		13,299		9,241		826		41		10,482		68
Residential real estate		11,032		1,721		8,682		1,099		18,445		372
Commercial real estate		10,940		7,616		1,743		129		10,463		254
Commercial		1,419		183		5		1		492		2
Consumer		129		99		25		3		79		-
Total	$	36,819	$	18,860	$	11,281	$	1,273	$	39,961	$	696

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

(Dollars in thousands)	1/1/15 TDR Balance		New TDRs		Disbursements (Payments)		Charge offs		Reclassification/ Transfers In/(Out)		Payoffs		12/31/15 TDR Balance		Related Allowance
For the year ended 12/31/2015
Accruing TDRs
Construction	$	4,022	$	-	$	(95)	$	-	$	142	$	-	$	4,069	$	31
Residential Real Estate		6,368		1,837		(1,195)		-		(1,324)		-		5,686		227
Commercial Real Estate		6,237		-		(497)		-		-		-		5,740		331
Commercial		47		-		(6)		-		(41)		-		-		-
Consumer		-		-		-		-		-		-		-		-
Total	$	16,674	$	1,837	$	(1,793)	$	-	$	(1,223)	$	-	$	15,495	$	589
Nonaccrual TDRs
Construction	$	3,321	$	-	$	(214)	$	(1,058)	$	2,911	$	-	$	4,960	$	588
Residential Real Estate		3,382		-		(26)		-		(2,911)		-		445		141
Commercial Real Estate		346		-		(4)		(40)		(302)		-		-		-
Commercial		-		-		-		-		-		-		-		-
Consumer		25		-		(2)		-		-		-		23		7
Total	$	7,074	$	-	$	(246)	$	(1,098)	$	(302)	$	-	$	5,428	$	736
Total TDRs	$	23,748	$	1,837	$	(2,039)	$	(1,098)	$	*(1,525)	$	-	$	20,923	$	1,325

(Dollars in thousands)	1/1/14 TDR Balance		New TDRs		Disbursements (Payments)		Charge offs		Reclassification/ Transfers In/(Out)		Payoffs		12/31/14 TDR Balance		Related Allowance
For the year ended 12/31/2014
Accruing TDRs
Construction	$	1,620	$	-	$	(186)	$	(538)	$	3,396	$	(270)	$	4,022	$	41
Residential Real Estate		14,582		-		(1,150)		(3,614)		(3,136)		(314)		6,368		300
Commercial Real Estate		9,791		-		(99)		(549)		(1,805)		(1,101)		6,237		29
Commercial		95		-		(24)		-		-		(24)		47		-
Consumer		-		-		-		-		-		-		-		-
Total	$	26,088	$	-	$	(1,459)	$	(4,701)	$	(1,545)	$	(1,709)	$	16,674	$	370
Nonaccrual TDRs
Construction	$	3,561	$	-	$	(12)	$	(235)	$	7	$	-	$	3,321	$	-
Residential Real Estate		1,884		-		(50)		(203)		1,874		(123)		3,382		724
Commercial Real Estate		842		-		(95)		(65)		(336)		-		346		100
Commercial		-		-		-		-		-		-		-		-
Consumer		26		-		(1)		-		-		-		25		3
Total	$	6,313	$	-	$	(158)	$	(503)	$	1,545	$	(123)	$	7,074	$	827
Total TDRs	$	32,401	$	-	$	(1,617)	$	(5,204)	$	-	$	(1,832)	$	23,748	$	1,197

* $1.3 million in subsequently modified TDRs were transferred from accruing TDR classification to accrual status during the third quarter of 2015, 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 December 31, 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 2015 and 2014.

(Dollars in thousands)	Number of contracts		Premodification outstanding recorded investment		Postmodification outstanding recorded investment		Related allowance
TDRs:
For the year ended December 31, 2015
Construction		-	$	-	$	-	$	-
Residential real estate		10		1,835		1,837		19
Commercial real estate		1		2,262		2,347		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		11	$	4,097	$	4,184	$	19
For the year ended December 31, 2014
Construction		-	$	-	$	-	$	-
Residential real estate		-		-		-		-
Commercial real estate		-		-		-		-
Commercial		-		-		-		-
Consumer		-		-		-		-
Total		-	$	-	$	-	$	-

The following tables provide information on TDRs that defaulted during 2015 and 2014. 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:
For the year ended December 31, 2015
Construction		-	$	-	$	-
Residential real estate		-		-		-
Commercial real estate		2		279		-
Commercial		-		-		-
Consumer		-		-		-
Total		2	$	279	$	-
TDRs that subsequently defaulted:
For the year ended December 31, 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. At December 31, 2015, there were no nonaccrual loans classified as special mention or doubtful and $12.1 million of nonaccrual loans were identified as substandard. The comparable amounts at December 31, 2014 were special mention $0, substandard $13.4 million and doubtful $89 thousand, respectively.

The following tables provide information on loan risk ratings as of December 31, 2015 and 2014.

(Dollars in thousands)	Pass/Performing		Special mention		Substandard		Doubtful		Total
December 31, 2015
Construction	$	70,214	$	3,903	$	11,515	$	-	$	85,632
Residential real estate		290,857		8,837		7,369		-		307,063
Commercial real estate		302,438		18,699		9,116		-		330,253
Commercial		63,628		1,075		208		-		64,911
Consumer		7,107		26		122		-		7,255
Total	$	734,244	$	32,540	$	28,330	$	-	$	795,114

(Dollars in thousands)	Pass/Performing		Special 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 December 31, 2015 and 2014.

	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, 2015
Construction	$	78,082		$	21		$	-		$	-		$	21		$	7,529		$	85,632
Residential real estate		300,563			2,139			2,102			-			4,241			2,259			307,063
Commercial real estate		327,370			-			861			-			861			2,022			330,253
Commercial		64,670			49			31			-			80			161			64,911
Consumer		7,107			13			6			7			26			122			7,255
Total	$	777,792		$	2,222		$	3,000		$	7		$	5,229		$	12,093		$	795,114
Percent of total loans		97.8	%		0.3	%		0.4	%		-	%		0.7	%		1.5	%		100	%

	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, 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	%		100	%

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

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
2015
Allowance for credit losses:
Beginning balance	$	1,303	$	2,834	$	2,379	$	448	$	229	$	502	$	7,695
Charge-offs		(1,058)		(283)		(920)		(396)		(67)		-		(2,724)
Recoveries		125		398		379		319		49		-		1,270
Net charge-offs		(933)		115		(541)		(77)		(18)		-		(1,454)
Provision		1,276		(768)		1,161		187		(55)		274		2,075
Ending balance	$	1,646	$	2,181	$	2,999	$	558	$	156	$	776	$	8,316

(Dollars in thousands)	Construction		Residential real estate		Commercial real estate		Commercial		Consumer		Unallocated		Total
2014
Allowance for credit losses:
Beginning balance	$	1,960	$	3,854	$	3,029	$	1,266	$	243	$	373	$	10,725
Charge-offs		(725)		(2,407)		(1,648)		(2,389)		(163)		-		(7,332)
Recoveries		149		376		58		341		28		-		952
Net charge-offs		(576)		(2,031)		(1,590)		(2,048)		(135)		-		(6,380)
Provision		(81)		1,011		940		1,230		121		129		3,350
Ending balance	$	1,303	$	2,834	$	2,379	$	448	$	229	$	502	$	7,695

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $581 thousand and $54 thousand as of December 31, 2015 and 2014.