Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 4. Loans and Allowance for Loan Losses

The Bank grants commercial loans to customers primarily in Anne Arundel County, Prince George’s County, Howard County and surrounding areas of central Maryland. The principal categories of the loan portfolio are as follows:

	December 31, 2011						December 31, 2010
				Percentage						Percentage
(In thousands)	Balance			of Loans			Balance			of Loans
Commercial and Industrial loans	$	43,051			23.3	%	$	44,582			24.1	%
SBA loans		8,049			4.4	%		7,742			4.2	%
Real estate loans:
Owner occupied		77,288			41.9	%		85,633			46.3	%
Non owner occupied		55,999			30.4	%		47,040			25.4	%
Total real estate loans		133,287			72.3	%		132,673			71.7	%
		184,387			100.0	%		184,997			100.0	%
Unearned loan fees, net		(89	)					(114	)
Allowance for loan losses		(3,033	)					(3,174	)
	$	181,265					$	181,709

Real estate loans are secured by residential and commercial properties as follows at December 31:

(In thousands)	2011		2010
Real estate loans secured by:
Residential real estate	$	26,520	$	24,307
Commercial real estate		106,767		108,366
Total real estate loans	$	133,287	$	132,673

Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers.

The loan portfolio is comprised of $47.0 million of loans with fixed interest rates and $137.0 million of loans with adjustable interest rates at December 31, 2011.

The activity in the allowance for loan losses for the years ended December 31 is shown in the following table.

(In thousands)	2011			2010			2009			2008			2007
Allowance for loan losses:
Beginning balance	$	3,174		$	2,380		$	1,860		$	1,665		$	1,614
Charge-offs — Commercial and Industrial loans		(1,043	)		(1,140	)		(500	)		(179	)		(72	)
Charge-offs — SBA loans		(284	)		(447	)		(463	)		(318	)		—
Real estate loans:
Charge-offs — Owner occupied		(765	)		—			(138	)		—			—
Charge-offs — Non owner occupied		(720	)		(386	)		—			—			—
Recoveries — Commercial and Industrial loans		101			26			—			45			78
Recoveries — SBA loans		35			25			5			—			—
Recoveries — Non owner occupied real estate loans		2			—			—			—			—
Net (charge-offs) recoveries		(2,674	)		(1,922	)		(1,096	)		(452	)		6
Provision for loan losses		2,533			2,716			1,616			647			45
Ending balance	$	3,033		$	3,174		$	2,380		$	1,860		$	1,665
Net (charge-offs) recoveries to average loans		(1.46	%)		(1.04	%)		(0.65	%)		(0.33	%)		0.00	%

The activity in the allowance for loan losses by category during 2011 is shown in the following table.

							Real Estate Loans
										Non
	Commercial			SBA			Owner			Owner			Not
In thousands	and Industrial			Loans			Occupied			Occupied			Allocated		Total
Balance at December 31, 2010	$	1,023		$	627		$	682		$	715		$	127	$	3,174
Less loan charge-offs		(1,043	)		(284	)		(765	)		(720	)		—		(2,812	)
Loss recoveries		101			35			—			2			—		138
Provision for loan losses		840			80			618			972			23		2,533
Balance at December 31, 2011	$	921		$	458		$	535		$	969		$	150	$	3,033
Allowance for loans individually
evaluated for impairment	$	326		$	103		$	206		$	780				$	1,415
Amount of loans individually evaluated for impairment	$	1,261		$	183		$	5,644		$	4,281				$	11,369
Balance of loans at December 31, 2011	$	43,051		$	8,049		$	77,288		$	55,999				$	184,387

The activity in the allowance for loan losses by category during 2010 is shown in the following table.

					Real Estate Loans
							Non
	Commercial		SBA		Owner		Owner		Not
In thousands	and Industrial		Loans		Occupied		Occupied		Allocated		Total
Balance at December 31, 2009	$	1,290	$	576	$	168	$	242	$	104	$	2,380
Loan charge-offs		1,140		447		—		386		—		1,973
Loss recoveries		26		25		—		—		—		51
Provision for loan losses		847		473		514		859		23		2,716
Balance at December 31, 2010	$	1,023	$	627	$	682	$	715	$	127	$	3,174
Allowance for loans individually evaluated for impairment	$	570	$	194	$	497	$	410			$	1,671
Amount of loans individually
evaluated for impairment	$	1,622	$	432	$	9,946	$	3,756			$	15,756
Balance of loans at December 31, 2010	$	44,645	$	7,742	$	85,570	$	47,040			$	184,997

Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At December 31, 2011 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Below is a summary of the Company’s impaired loans at December 31, 2011 and 2010.

	Recorded Investment				Related Allowance for Losses
	December 31,		December 31,		December 31,		December 31,
In thousands	2011		2010		2011		2010
LOANS WITH SPECIFIC RESERVES:
Non-accrual loans:
Commercial and Industrial loans	$	895	$	667	$	247	$	149
SBA loans		103		359		103		194
Real Estate — Owner Occupied		404		3,140		206		484
Real Estate — Non Owner Occupied		1,266		2,272		588		695
Total Non-accrual loans		2,668		6,438		1,144		1,522
TDR** loans:
Real Estate — Owner Occupied		—		2,051		—		13
Real Estate — Non Owner Occupied		1,560		1,603		191		11
Total TDR loans		1,560		3,654		191		24
Number of loans		6		7
Other Impaired loans:
Commercial and Industrial loans		80		250		80		125
Total Other Impaired loans		80		250		80		125
LOANS WITHOUT SPECIFIC RESERVES:
Non-accrual loans:
SBA loans		—		29		—		—
Real Estate — Owner Occupied		—		816		—		—
Total Non-accrual loans		—		845		—		—
TDR** loans:
Commercial and Industrial loans		45		154		—		—
Real Estate — Owner Occupied		1,494		—		—		—
Real Estate — Non Owner Occupied		173		177		—		—
Total TDR loans		1,712		331		—		—
Number of loans		3		2
Total Impaired Loans:
Commercial and Industrial loans		1,020	$	1,071	$	327	$	274
SBA loans		103		388		103		194
Real Estate — Owner Occupied		1,898		6,007		206		497
Real Estate — Non Owner Occupied		2,999		4,052		779		706
Total Impaired loans	$	6,020	$	11,518	$	1,415	$	1,671

** Troubled Debt Restructured

Below is a summary of the average recorded investment amount and recognized interest income related to the Company’s impaired loans during 2011:

	Average Recorded		Income Recorded
	Loan Amount		For Year
	2011		2011
LOANS WITH SPECIFIC RESERVES:
Non-accrual loans:
Commercial and Industrial loans	$	1,062	$	22
SBA loans		233		—
Real Estate — Owner Occupied		2,293		9
Real Estate — Non Owner Occupied		1,948		4
Total Non-accrual loans		5,536		35
TDR** loans:
Real Estate — Owner Occupied		789		47
Real Estate — Non Owner Occupied		1,583		50
Total TDR loans		2,372		97
Other Impaired loans:
Commercial and Industrial loans		125		6
Total Other Impaired loans		125		6
LOANS WITHOUT SPECIFIC RESERVES:
Non-accrual loans:
SBA loans		13		—
Real Estate — Owner Occupied		482		—
Total Non-accrual loans		495		—
TDR** loans:
Commercial and Industrial loans		81		4
Real Estate — Owner Occupied		920		40
Real Estate — Non Owner Occupied		174		11
Total TDR loans		1,175		55
Total Impaired Loans:
Commercial and Industrial loans	$	1,268	$	32
SBA loans		246		—
Real Estate — Owner Occupied		4,484		96
Real Estate — Non Owner Occupied		3,705		65
Total Impaired loans	$	9,703	$	193

Non-accrual loan activity is summarized as follows:

	Year Ended December 31,
In thousands	2011		2010		2009		2008		2007
Balance at the beginning of the period	$	7,283	$	2,734	$	5,819	$	1,125	$	628
New loans placed on non-accrual		2,693		7,846		2,427		5,046		569
Less:
Loan restored to interest earning status		—		—		1,266		—		—
Other real estate owned additions		2,529		945		2,462		—		—
Charge-offs		2,812		1,973		1,101		236		72
Other including payments received		1,967		379		683		116		—
Balance at the end of the period	$	2,668	$	7,283	$	2,734	$	5,819	$	1,125

Non-accrual loan activity by category during the year ended December 31, 2011 is summarized as follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Balance at the beginning of the period	$	7,283	$	667	$	388	$	3,956	$	2,272
New loans placed on non-accrual		2,693		1,460		128		581		524
Less:
Other real estate owned additions		2,529		—		—		2,271		258
Charge-offs		2,812		1,043		284		765		720
Other including payments received		1,967		189		129		1,097		552
Balance at the end of the period	$	2,668	$	895	$	103	$	404	$	1,266

Non-accrual loan activity by category during the year ended December 31, 2010 is summarized as follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Balance at the beginning of the period	$	2,734	$	2,280	$	454	$	—	$	—
New loans placed on non-accrual		7,846		630		548		3,956		2,712
Less:
Other real estate owned additions		945		945		—		—		—
Charge-offs		1,973		1,139		447		—		387
Other including payments received		379		159		167		—		53
Balance at the end of the period	$	7,283	$	667	$	388	$	3,956	$	2,272

Interest that would have been accrued under the terms of all non-accrual loans during the year totaled $391 thousand and $324 thousand for the years ended December 31, 2011 and 2010, respectively. The Bank has no commitments to loan additional funds to the borrowers of impaired or non-accrual loans.

At December 31, 2011, the Company had modified nine loans in amounts totaling $3.2 million which modifications qualify the loans as Troubled Debt Restructurings (TDR). The borrowers are in compliance with the modified loan terms. Changes made to the loans included the reduction of loan payments from principal and interest payments to interest only payments for specific time periods, the decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific reserves were established on the loans as appropriate. The majority of these loans were modified in the third and fourth quarters of 2010 as the adverse economic conditions hampered borrowers’ current cash flows. The non-accrual loans at December 31, 2010 include seven loans totaling $4 million that were previously TDR loans but the borrowers failed to meet the new terms under the restructuring.

TDRs included in non-accruing loans are summarized below. Generally the borrowers have not shown sustained compliance with the modified loan terms.

	Recorded Investment				Related Allowance for Losses
	December 31,		December 31,		December 31,		December 31,
In thousands	2011		2010		2011		2010
TDRs with specific reserves:
Commercial and Industrial loans	$	—	$	—	$	—	$	—
SBA loans		—		50		—		40
Real Estate — Owner Occupied:		103		3,140		103		483
Real Estate — Non Owner Occupied:		742		819		266		223
Total non-accruing loans	$	845	$	4,009	$	369	$	746
Number of loans		3		7

Accruing TDR loan activity for the year ended December 31, 2011 is shown in the following table.

						Real Estate Loans
	Commercial					Owner			Non Owner
In thousands	and Industrial			SBA Loans		Occupied			Occupied			Total
TDR loans at December 31, 2010	$	154		$	—	$	2,051		$	1,780		$	3,985
New TDR loans		45			—		1,494			—			1,539
Principal payments received		—			—		(2,051	)		(47	)		(2,098	)
Loans moved to non-accrual*		(154	)		—		—			—			(154	)
Balance at December 31, 2011	$	45		$	—	$	1,494		$	1,733		$	3,272

* Accrued income reversed upon move to non-accrual

At December 31, 2011, there were $3.9 million of performing loans considered potential problem loans, defined as loans which are not included in the 90 day past due, not reported as TDR or as non-accrual loans, but for which known information about possible credit problems causes the Company to be concerned as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in past due, non-accrual or restructured loans. The Company closely monitors the financial status of these borrowers.

Generally, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. During 2011, there were no amounts included in gross interest income attributable to loans in non-accrual status.

The following table shows the amounts of non-performing assets at December 31:

In thousands	2011			2010			2009			2008			2007
Non-accrual loans:
Commercial and Industrial	$	895		$	667		$	2,280		$	1,676		$	868
SBA		103			388			454			542			257
Real estate — owner occupied		404			3,956			—			3,601			—
Real estate — non owner occupied		1,266			2,272			—			—			—
Accrual loans —past due 90 days and over		—			—			—			—			—
Total non-performing loans		2,668			7,283			2,734			5,819			1,125
Other real estate owned		4,232			3,324			2,462			—			—
Total non-performing assets	$	6,900		$	10,607		$	5,196		$	5,819		$	1,125
Accruing Troubled Debt Restructured loans	$	3,272		$	3,985		$	1,263			—			—
Allowance for loan losses/total non-performing loans		113.7	%		43.6	%		87.1	%		32.0	%		148.0	%
Non-performing loans to total loans		1.45	%		3.94	%		1.47	%		3.80	%		0.89	%
Non-performing assets to total assets		3.33	%		5.22	%		2.59	%		3.49	%		0.76	%

The payment status of loans receivable at December 31, 2011 is as follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Current accrual loans	$	180,327	$	41,811	$	7,719	$	76,481	$	54,316
Past due loans:
30 to 89 days past due		1,392		345		227		403		417
90 days plus past due and accruing		—		—		—		—		—
Non-accrual loans, non-current		2,668		895		103		404		1,266
Total past due loans		4,060		1,082		330		807		1,683
Total loans at the end of the period	$	184,387	$	43,051	$	8,049	$	77,288	$	55,999

The Company applies risk ratings to the loans based upon rating criteria consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and the normal periodic reviews of the underlying credits indicate that a change in risk rating is appropriate. A summary of the risk rating of loans receivable at December 31, 2011 follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Risk rated — pass	$	175,225	$	41,835	$	7,866	$	73,139	$	52,385
Risk rated — special mention (loan weaknesses noted which could lead to loan loss)		4,920		241		80		2,251		2,348
Risk rated — substandard or doubtful (loans with significant weaknesses that could, or has, result in loan losses)		4,242		975		103		1,898		1,266
Total loans at the end of the period	$	184,387	$	43,051	$	8,049	$	77,288	$	55,999

Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs. The Company periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using current estimates of fair value when it has reason to believe that real estate values have declined for the particular type and location of the real estate owned. In the event of a subsequent decline, an allowance would be provided to reduce real estate acquired through foreclosure to fair value less estimated disposal cost.

Other Real Estate owned (ORE) activity for the year ended December 31, 2011 is summarized below:

				Commercial			Residential
In thousands	Total			Property			Property
Balance December 31, 2010	$	3,324		$	2,309		$	1,015
New ORE properties and improvements		2,672			1,563			1,109
Valuation reductions		(125	)		(85	)		(40	)
Sales		(1,639	)		(762	)		(877	)
Balance at December 31, 2011	$	4,232		$	3,025		$	1,207
Number of properties		5			3			2

At December 31, 2011 and 2010, the balance of commercial and real estate loans serviced by the Company for others under loan participation agreements was $34.6 million and $34.1 million, respectively. The related servicing rights are not material and are included in other assets.