Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2020

Loans and Allowance for Credit Losses [Abstract]

LOANS AND ALLOWANCE FOR CREDIT LOSSES

NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Baltimore City, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at December 31, 2020 and 2019.

(Dollars in thousands)	2020		2019
Construction	$	106,760	$	99,829
Residential real estate		443,542		442,506
Commercial real estate		661,232		586,562
Commercial		211,256		102,020
Consumer		31,466		17,737
Total loans		1,454,256		1,248,654
Allowance for credit losses		(13,888)		(10,507)
Total loans, net	$	1,440,368	$	1,238,147

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 collectability. As of December 31, 2020 and 2019, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $3.7 million and $18.8 million, respectively. During 2020 and 2019, loan additions were approximately $701 thousand and $15.7 million, respectively, and loan repayments were approximately $776 thousand and $8.6 million, respectively. Due to changes in the composition of related parties, $15.0 million of loans included in the total for the prior year end were no longer reported as related party loans at December 31, 2020. Net loan origination costs, included in balances above, totaled $622 thousand and $1.8 million as of December 31, 2020 and 2019, respectively. At December 31, 2020 and December 31, 2019 included in total loans were

$52.3 million and $79.2 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition. These balances are presented net of the related discount which totaled $754 thousand at December 31, 2020 and $1.1 million at December 31, 2019.

In 2020, the Company participated in the Paycheck Protection Program (PPP). The PPP commenced subsequent to the passage of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in March 2020, and was later expanded by the Paycheck Protection Program and Health Care Enhancement Act of April 2020. The PPP was designed to provide U.S. small businesses with cash-flow assistance during the COVID-19 pandemic through loans that are fully guaranteed by the Small Business Administration (SBA) which may be forgiven upon satisfaction of certain criteria. As of December 31, 2020, the Company held PPP loans with a total outstanding balance of $122.9 million, which is included in the commercial loan segment in the table above. As compensation for originating the loans, the Company received lender processing fees from the SBA, which were deferred, along with the related loan origination costs. These net fees are being accreted to interest income over the remaining contractual lives of the loans. Upon forgiveness of a PPP loan and repayment by the SBA, which may be prior to the loan’s maturity, the remainder of any unrecognized net fees are recognized as interest income. The Company has continued to participate in the newest round of the PPP during the first quarter of 2021.

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

Construction loans – Construction loans are offered primarily to builders and individuals to finance the construction of 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 properties 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, 2020 and 2019.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
2020
Loans individually evaluated for impairment	$	331	$	5,722	$	6,917	$	258	$	28	$	13,256
Loans collectively evaluated for impairment		106,429		437,820		654,315		210,998		31,438		1,441,000
Total loans	$	106,760	$	443,542	$	661,232	$	211,256	$	31,466	$	1,454,256
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	135	$	78	$	—	$	—	$	213
Loans collectively evaluated for impairment		2,022		3,564		5,348		2,089		652		13,675
Total allowance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
2019
Loans individually evaluated for impairment	$	41	$	7,072	$	12,006	$	298	$	—	$	19,417
Loans collectively evaluated for impairment		99,788		435,434		574,556		101,722		17,737		1,229,237
Total loans	$	99,829	$	442,506	$	586,562	$	102,020	$	17,737	$	1,248,654
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	395	$	580	$	—	$	—	$	975
Loans collectively evaluated for impairment		1,576		2,106		3,452		1,929		469		9,532
Total allowance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

The allowance for loan losses was 0.95% of total loans and 1.04% when excluding PPP loans, at December 31, 2020 compared to 0.84% at December 31, 2019.

In the first quarter of 2020, the Company transitioned from its in-house allowance model to an external vendor's allowance model software for the calculation of the allowance for loan losses.  Prior to the adoption of the new model, the Company ran both models parallel for multiple periods to confirm the reasonableness of the new model's output as compared to the old.  The primary motivation for the change was to increase efficiencies in the calculation of the allowance estimate under the current incurred loss standard and also allow for a more seamless transition for the Company's eventual adoption of the Current Expected Credit Loss standard in 2023.  The Company's processes for loan segmentation, assessing qualitative factors, and determining specific reserves for impaired loans remained substantially unchanged when comparing the models.  As part of the new model, more precise averages are utilized in the calculation of the net charge-off ratios used in the historical loss analysis and the historical loss rates are applied to all pools of loans accounted for under ASC 450.  Additionally, the historical look-back periods for retail loan pools were adjusted to four years in the new model as compared to two years under the prior in-house model.  While there were some variances between loan pools when comparing the two models, the Company's ending recorded allowance and provision for loan losses during 2020 were not materially impacted as a result of the transition.

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2020 and 2019. The difference between the unpaid principal balance and the recorded investment is the amount of partial charge-offs that have been taken and interest paid on nonaccrual loans that has been applied to principal.

			Recorded		Recorded
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		investment
2020
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	247	$	—
Residential real estate		1,665		1,585		—		—		1,861		2,648		—
Commercial real estate		4,288		3,220		67		67		3,971		5,669		—
Commercial		401		258		—		—		272		390		—
Consumer		28		28		—		—		28		9		—
Total	$	6,679	$	5,388	$	67	$	67	$	6,429	$	8,963	$	—
Impaired accruing TDRs:
Construction	$	34	$	34	$	—	$	—	$	34	$	37	$	3
Residential real estate		3,845		2,617		1,228		135		3,857		3,920		160
Commercial real estate		3,118		2,479		639		11		3,261		3,349		104
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	6,997	$	5,130	$	1,867	$	146	$	7,152	$	7,306	$	267
Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	25	$	—
Residential real estate		292		292		—		—		269		362		2
Commercial real estate		512		512		—		—		532		774		5
Commercial		—		—		—		—		—		13		—
Consumer		—		—		—		—		—		9		—
Total	$	804	$	804	$	—	$	—	$	801	$	1,183	$	7
Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	331	$	309	$	3
Residential real estate		5,802		4,494		1,228		135		5,987		6,930		162
Commercial real estate		7,918		6,211		706		78		7,764		9,792		109
Commercial		401		258		—		—		272		403		—
Consumer		28		28		—		—		28		18		—
Total	$	14,480	$	11,322	$	1,934	$	213	$	14,382	$	17,452	$	274

			Recorded		Recorded
	Unpaid		investment		investment				Quarter-to-date		Year-to-date		Interest
	principal		with no		with an		Related		average recorded		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment		recognized
2019
Impaired nonaccrual loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	1,076	$	—
Residential real estate		2,660		678		1,797		215		2,052		2,691		—
Commercial real estate		8,242		5,680		2,137		561		8,533		9,421		—
Commercial		421		298		—		—		301		313		—
Consumer		—		—		—		—		—		—		—
Total	$	11,323	$	6,656	$	3,934	$	776	$	10,886	$	13,501	$	—
Impaired accruing TDRs:
Construction	$	41	$	41	$	—	$	—	$	41	$	46	$	10
Residential real estate		4,041		2,583		1,458		180		4,052		4,157		171
Commercial real estate		3,419		2,748		671		19		3,438		3,496		125
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	7,501	$	5,372	$	2,129	$	199	$	7,531	$	7,699	$	306
Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	18	$	—
Residential real estate		556		556		—		—		786		337		5
Commercial real estate		770		770		—		—		297		336		4
Commercial		—		—		—		—		89		38		1
Consumer		—		—		—		—		—		3		—
Total	$	1,326	$	1,326	$	—	$	—	$	1,172	$	732	$	10
Total impaired loans:
Construction	$	41	$	41	$	—	$	—	$	41	$	1,140	$	10
Residential real estate		7,257		3,817		3,255		395		6,890		7,185		176
Commercial real estate		12,431		9,198		2,808		580		12,268		13,253		129
Commercial		421		298		—		—		390		351		1
Consumer		—		—		—		—		—		3		—
Total	$	20,150	$	13,354	$	6,063	$	975	$	19,589	$	21,932	$	316

The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31, 2020 and December 31, 2019.

	1/1/2020												12/31/2020
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
2020
Accruing TDRs
Construction	$	41	$	—	$	(7)	$	—	$	—	$	—	$	34	$	—
Residential real estate		4,041		—		(113)		—		—		(83)		3,845		135
Commercial real estate		3,419		—		(97)		—		—		(204)		3,118		11
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	7,501	$	—	$	(217)	$	—	$	—	$	(287)	$	6,997	$	146
Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		1,393		—		(51)		—		—		(1,342)		—		—
Commercial real estate		—		1,506		(401)		—		—		(1,105)		—		—
Commercial		299		—		(41)		—		—		—		258		—
Consumer		—		—		—		—		—		—		—		—
Total	$	1,692	$	1,506	$	(493)	$	—	$	—	$	(2,447)	$	258	$	—
Total	$	9,193	$	1,506	$	(710)	$	—	$	—	$	(2,734)	$	7,255	$	146

	1/1/2019												12/31/2019
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
2019
Accruing TDRs
Construction	$	51	$	—	$	(10)	$	—	$	—	$	—	$	41	$	—
Residential real estate		4,454		41		(101)		—		—		(353)		4,041		180
Commercial real estate		4,158		—		(739)		—		—		—		3,419		19
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	8,663	$	41	$	(850)	$	—	$	—	$	(353)	$	7,501	$	199
Nonaccrual TDRs
Construction	$	2,798	$	—	$	(1,402)	$	(3)	$	(1,393)	$	—	$	—	$	—
Residential real estate		—		—		—		—		1,393		—		1,393		113
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		320		—		(21)		—		—		—		299		—
Consumer		—		—		—		—		—		—		—		—
Total	$	3,118	$	—	$	(1,423)	$	(3)	$	—	$	—	$	1,692	$	113
Total	$	11,781	$	41	$	(2,273)	$	(3)	$	—	$	(353)	$	9,193	$	312

The following table provides information on loans that were modified and considered TDRs during 2020 and 2019.

		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
2020
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	1		1,535		1,506		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	1	$	1,535	$	1,506	$	—
2019
Construction	—	$	—	$	—	$	—
Residential real estate	3		2,310		2,119		—
Commercial real estate	1		2,152		1,531		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	4	$	4,462	$	3,650	$	—

During the year ended December 31, 2020 there was one new TDR that was modified to extend the term of the loan.

For the year ended December 31, 2020, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million, of which only $34.9 million remained on deferral as of December 31, 2020. These deferrals were no more than six months in duration and were for loans not more than 30 days past due as of December 31, 2019.  As such, they were not considered TDRs based on the relief provisions of the CARES Act and recent interagency regulatory guidance. 

There were no TDRs which subsequently defaulted within 12 months of modification for the year ended December 31, 2020 and 2019. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to OREO or repossessed assets.

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. These loans and the pass/watch loans are assigned higher qualitative factors than favorably rated loans in the calculation of the formula portion of the allowance for credit losses. At December 31, 2020, there were no nonaccrual loans classified as special mention or doubtful and $5.5 million of nonaccrual loans were classified as substandard. Similarly, at December 31, 2019, there were no nonaccrual loans classified as special mention or doubtful and $10.6 million of nonaccrual loans were classified as substandard.

The following tables provide information on loan risk ratings as of December 31, 2020 and 2019.

					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
2020
Construction	$	81,926	$	22,547	$	1,990	$	297	$	—	$	106,760
Residential real estate		401,494		36,759		2,946		2,343		—		443,542
Commercial real estate		514,524		133,892		3,504		9,312		—		661,232
Commercial		182,166		25,870		2,948		272		—		211,256
Consumer		31,221		215		—		30		—		31,466
Total	$	1,211,331	$	219,283	$	11,388	$	12,254	$	—	$	1,454,256

					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
2019
Construction	$	84,357	$	13,068	$	2,404	$	—	$	—	$	99,829
Residential real estate		404,500		29,223		5,549		3,234		—		442,506
Commercial real estate		455,388		115,190		4,822		11,162		—		586,562
Commercial		80,816		20,130		746		328		—		102,020
Consumer		17,347		383		2		5		—		17,737
Total	$	1,042,408	$	177,994	$	13,523	$	14,729	$	—	$	1,248,654

The following tables provide information on the aging of the loan portfolio as of December 31, 2020 and 2019.

	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
2020
Construction	$	106,463		$	—		$	—		$	—		$	—		$	297		$	106,760
Residential real estate		440,210			517			938			292			1,747			1,585			443,542
Commercial real estate		657,066			367			—			512			879			3,287			661,232
Commercial		210,704			226			68			—			294			258			211,256
Consumer		31,318			119			1			—			120			28			31,466
Total	$	1,445,761		$	1,229		$	1,007		$	804		$	3,040		$	5,455		$	1,454,256
Percent of total loans		99.3	%		0.1	%		0.1	%		0.1	%		0.3	%		0.4	%		100.0	%

	Accruing
				30‑59 days			60‑89 days			Greater than			Total
(Dollars in thousands)	Current			past due			past due			90 days			past due			Nonaccrual			Total
2019
Construction	$	99,234		$	595		$	—		$	—		$	595		$	—		$	99,829
Residential real estate		435,671			3,021			783			556			4,360			2,475			442,506
Commercial real estate		577,015			743			217			770			1,730			7,817			586,562
Commercial		101,476			246			—			—			246			298			102,020
Consumer		17,680			57			—			—			57			—			17,737
Total	$	1,231,076		$	4,662		$	1,000		$	1,326		$	6,988		$	10,590		$	1,248,654
Percent of total loans		98.6	%		0.4	%		0.1	%		0.1	%		0.6	%		0.8	%		100.0	%

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for 2020 and 2019. 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		Total
2020
Allowance for credit losses:
Beginning Balance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507
Charge-offs		—		(201)		(601)		(286)		(9)		(1,097)
Recoveries		17		211		1		322		27		578
Net (charge-offs) recoveries		17		10		(600)		36		18		(519)
Provision		429		1,188		1,994		124		165		3,900
Ending Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
2019
Allowance for credit losses:
Beginning Balance	$	2,662	$	2,353	$	3,077	$	1,949	$	302	$	10,343
Charge-offs		(3)		(646)		—		(411)		(37)		(1,097)
Recoveries		18		27		206		306		4		561
Net (charge-offs) recoveries		15		(619)		206		(105)		(33)		(536)
Provision		(1,101)		767		749		85		200		700
Ending Balance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $0 and $23 thousand as of December 31, 2020 and 2019. There were no residential real estate properties included in the balance of other real estate owned at December 31, 2020 and December 31, 2019.

All accruing TDRs were in compliance with their modified terms. Both performing and non-performing TDRs had no further commitments associated with them as of December 31, 2020 and December 31, 2019.