La integración de las directivas: la consolidación de una hegemonía

Credit Quality Indicators. As part of the on-going monitoring of the quality of the Bank’s loan portfolio management tracks certain credit quality indicators.

The Bank does not credit score new loans but does utilize a risk grading system for non-consumer loans. Loans are risk rated on the scale listed below:

Grade 1 and 2 – These grades include “pass grade” loans to borrowers of acceptable credit quality and risk.

Grade 3 – This grade includes loans that are on Management’s “watch list” and are classified as “Pass Watch”. It is management’s intent to utilize this rating on a temporary basis for pass grade borrowers where a significant risk- modifying action is anticipated in the near future.

Grade 4 – This grade is for “Other Assets Especially Mentioned” or “Special Mention” in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation. This grade may include loans not fully secured where a specific valuation allowance may be warranted.

Grade 5 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which accrual of interest may have stopped. This grade includes loans that are past due or not fully secured where a specific valuation allowance may be warranted.

The following table illustrates classified loans at March 31, 2012 and December 31, 2011. Classified loans include loans in Risk Grades 3, 4, and 5.

Special

Pass Watch Mention Substandard Total March 31, 2012

Construction, development and other land $ 1,474,943 $ 675,000 $ 1,134,216 $ 3,284,159 Commercial real estate and farmland 10,444,458 3,285,583 4,104,205 17,834,246 Residential real estate 1,336,313 1,755,703 1,133,845 4,225,861 Commercial and lease financing 2,370,700 1,687,602 - 4,058,302 Mobile home 42,925 - 136,507 179,432 Other consumer 2,933 - - 2,933

15,672,272

$ $ 7,403,888 $ 6,508,773 $ 29,584,933

December 31, 2011

Construction, development and other land $ 2,586,508 $ - $ 1,699,597 $ 4,286,105 Commercial real estate and farmland 10,499,485 3,037,793 4,662,905 18,200,183 Residential real estate 1,349,198 1,766,342 1,351,241 4,466,781 Commercial and lease financing 2,552,286 1,689,055 - 4,241,341 Mobile home 43,101 - 137,209 180,310 Other consumer 4,672 - - 4,672

17,035,250

Harford Bank and Subsidiary

Notes to Consolidated Financial Statements

F-14

4. Loans - continued

The following table presents allowance for loan losses activity allocated by loan class for three- and twelve-month periods ended March 31, 2012 and December 31, 2011, respectively, and the allocation of allowance for loan losses for loans that were individually and collectively evaluated for impairment at March 31, 2012 and December 31, 2011, and the loan balances by loan class for loans that were individually and collectively evaluated for impairment at March 31, 2012 and December 31, 2011.

C o ns truc tio n C o m m e rc ia l C o m m e rc ia l

De ve lo pm e nt R e a l Es ta te & R e s ide ntia l & Le a s e M o bile Othe r

Una llo c a te d & Othe r La nd F a rm la nd R e a l Es ta te F ina nc ing Ho m e C o ns um e r Ove rdra fts To ta l M a rc h 31, 2012 Allo wa nc e fo r Lo a n Lo s s e s B e ginning ba la nc e $ 34,606 $ 728,405 $ 725,074 $ 446,235 $ 113,964 $ 146,649 $ 45,037 $ 4,743 $ 2,244,713 C ha rge -o ffs - (29,409) (268,691) - (56,934) (1,659) (10,668) (2,832) (370,193) R e c o ve rie s - - - 9,000 1,000 - 53 - 10,053 P ro vis io n 26,769 (95,422) 399,077 8,655 77,764 (3,841) 10,049 1,949 425,000 Ending ba la nc e $ 61,375 $ 603,574 $ 855,460 $ 463,890 $ 135,794 $ 141,149 $ 44,471 $ 3,860 $ 2,309,573 Allo wa nc e ba la nc e a llo c a te d to :

Lo a ns individua lly e va lua te d fo r im pa irm e nt $ - $ - $ 70,785 $ 24,604 $ 113 $ 3,885 $ - $ - $ 99,387 Lo a ns c o lle c tive ly e va lua te d fo r im pa irm e nt 61,375 603,574 784,675 439,286 135,681 137,264 44,471 3,860 2,210,186

61,375

$ $ 603,574 $ 855,460 $ 463,890 $ 135,794 $ 141,149 $ 44,471 $ 3,860 $ 2,309,573 Lo a n ba la nc e s :

Individua lly e va lua te d fo r im pa irm e nt $ 566,130 $ 7,409,605 $ 2,244,351 $ 45,008 $ 273,674 $ - $ - $ 10,538,768 C o lle c tive ly e va lua te d fo r im pa irm e nt $ 9,841,345 $ 106,007,276 $ 55,787,176 $ 13,454,643 $ 12,608,477 $ 5,799,445 $ 52,224 $ 203,550,586

De c e m be r 31, 2011 Allo wa nc e fo r Lo a n Lo s s e s B e ginning ba la nc e $ - $ 375,299 $ 1,287,577 $ 463,921 $ 273,676 $ 59,852 $ 12,929 $ 2,512 $ 2,475,766 C ha rge -o ffs - (975,778) (48,095) (156,808) (144,464) (131,771) (24,158) (7,053) (1,488,127) R e c o ve rie s - - - 6,000 16,000 2,664 968 1,442 27,074 P ro vis io n 34,606 1,328,884 (514,408) 133,122 (31,248) 215,904 55,298 7,842 1,230,000 Ending ba la nc e $ 34,606 $ 728,405 $ 725,074 $ 446,235 $ 113,964 $ 146,649 $ 45,037 $ 4,743 $ 2,244,713 Allo wa nc e ba la nc e a llo c a te d to :

Lo a ns individua lly e va lua te d fo r im pa irm e nt $ - $ 32,094 $ 66,549 $ 18,699 $ 65 $ 4,822 $ 4,468 $ - $ 126,697 Lo a ns c o lle c tive ly e va lua te d fo r im pa irm e nt 34,606 696,311 658,525 427,536 113,899 141,827 40,569 4,743 2,118,016

34,606

$ $ 728,405 $ 725,074 $ 446,235 $ 113,964 $ 146,649 $ 45,037 $ 4,743 $ 2,244,713 Lo a n ba la nc e s :

Individua lly e va lua te d fo r im pa irm e nt $ 1,125,449 $ 6,855,361 $ 2,455,380 $ 45,962 $ 324,451 $ 4,468 $ - $ 10,811,071 C o lle c tive ly e va lua te d fo r im pa irm e nt $ 11,647,711 $ 107,654,470 $ 54,019,605 $ 14,142,638 $ 12,841,502 $ 6,024,248 $ 59,359 $ 206,389,533

Harford Bank and Subsidiary

Notes to Consolidated Financial Statements

4. Loans - continued

The following table presents information about impaired loans segmented by those with and without a related allowance recorded at March 31, 2012 and December 31, 2011, and for the three- and twelve-month periods then ended.

Ave rage Inte re st Re corde d C urre nt Re late d Re corde d Income Inve stme nt Balance Allowance Inve stme nt Re cogniz e d March 31, 2012

W ith no re late d allowance re corde d

C onstruction, de ve lopme nt and othe r land $ 566,130 $ 566,130 $ - $ 560,069 $ -

C omme rcial re al e state and farmland 2,677,896 2,677,896 - 2,949,129 -

Re side ntial re al e state 141,526 141,526 - 141,526 -

C omme rcial and le ase financing - - - - -

Mobile home 118,580 118,580 - 118,580 -

O the r consume r - - - - -

W ith an allowance re corde d C onstruction, de ve lopme nt and othe r land - - - - -

C omme rcial re al e state and farmland 4,731,709 4,731,709 70,785 4,743,364 71,739 Re side ntial re al e state 2,102,825 2,102,825 24,604 2,105,690 34,531 C omme rcial and le ase financing 45,008 45,008 113 45,182 830

Mobile home 155,095 155,095 3,885 155,357 3,435 O the r consume r - - - - -

Total C onstruction, de ve lopme nt and othe r land 566,130 566,130 - 560,069 -

C omme rcial re al e state and farmland 7,409,605 7,409,605 70,785 7,692,493 71,739 Re side ntial re al e state 2,244,351 2,244,351 24,604 2,247,216 34,531 C omme rcial and le ase financing 45,008 45,008 113 45,182 830

Mobile home 273,675 273,675 3,885 273,937 3,435 O the r consume r - - - - -

10,538,769 $ $ 10,538,769 $ 99,387 $ 10,818,897 $ 110,535 December 31, 2011 With no related allowance recorded Construction, development and other land $ 581,040 $ 581,040 $ - $ 742,993 $ -

Commercial real estate and farmland 1,769,051 1,769,051 - 1,769,051 47,300 Residential real estate 345,957 345,957 - 162,755 -

Commercial and lease financing - - - - -

Mobile home 168,646 168,646 - 422,313 -

Other consumer - - - - -

With an allowance recorded Construction, development and other land 544,409 544,409 32,094 643,409 15,317 Commercial real estate and farmland 5,086,310 5,086,310 66,549 5,120,346 296,923 Residential real estate 2,109,423 2,109,423 18,699 2,139,960 111,722 Commercial and lease financing 45,962 45,962 65 47,673 2,362 Mobile home 155,805 155,805 4,822 156,300 5,025 Other consumer 4,468 4,468 4,468 4,468 47

T otal Construction, development and other land 1,125,449 1,125,449 32,094 1,386,402 15,317 Commercial real estate and farmland 6,855,361 6,855,361 66,549 6,889,397 344,223 Residential real estate 2,455,380 2,455,380 18,699 2,302,715 111,722 Commercial and lease financing 45,962 45,962 65 47,673 2,362 Mobile home 324,451 324,451 4,822 578,613 5,025 Other consumer 4,468 4,468 4,468 4,468 47

10,811,071

Harford Bank and Subsidiary

Notes to Consolidated Financial Statements

F-16

4. Loans - continued

Under a troubled debt restructured loan (TDR), the Bank has granted a concession that it would not otherwise make to a borrower who has experienced financial difficulty. At the time of the restructuring, the borrower is expected to pay the amounts due under the renegotiated terms.

The table below shows trouble debt restructured loans outstanding by classification included in impaired loans for the respective dates.

March 31, 2012 December 31, 2011

Number of Outstanding Number of Outstanding

Contracts Loan Balance Contracts Loan Balance

Construction, development and other land - $ - 1 $ 544,409 Commercial real estate and farmland 5 4,035,734 5 4,041,041 Residential real estate 2 350,748 2 351,805 Mobile home 1 21,995 1 21,995

8

$ 4,408,477 9 $ 4,959,250

The Bank granted a second restructuring to an existing TDR totaling $193,254 during the three months ended March 31, 2012. At the time of its restructure, the loan was in payment default, defined as being more than 30 days past due. The restructuring consisted of lowering the interest rate from 6.25% to 4.90% for a two year period. The restructured loan was current and performing to its restructured terms at March 31, 2012.

The Bank did not grant any troubled debt restructurings for the year ended December 31, 2011. The Bank granted one TDR totaling $44,299 in the 12 months prior to the beginning of the year ended December 31, 2011. The loan was in payment default at the time of restructure and continued to be in payment default at March 31, 2012. The Bank recorded a partial charge-off of $16,815 related to this loan in 2011.

The following table summarizes nonaccrual loans and other non-performing assets at March 31, 2012 and December 31, 2011, and the amount of gross interest income that would have been recorded during the three- and twelve-month periods ended March 31, 2012 and December 31, 2011 had these nonaccrual loans been current and performing according to terms.

At, and year to date through:

Non-performing Assets March 31, 2012 December 31, 2011

Non-accrual loans by class

Construction, development and other land $ 1,134,216 $ 1,699,597 Commercial real estate and farmland 2,664,793 2,614,388 Residential real estate 565,010 777,703 Mobile home 118,580 168,646 Total non-accrual loans 4,482,599 5,260,334 Foreclosed real estate 930,045 776,044 Repossessed assets 146,278 180,668 Total non-performing assets $ 5,558,922 $ 6,217,046

Harford Bank and Subsidiary

Notes to Consolidated Financial Statements