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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2021

Loans and Allowance for Credit Losses [Abstract]

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, Dorchester County, Worcester County, Baltimore County and

Howard County in Maryland, Kent County, Delaware and Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at September 30, 2021 and December 31, 2020.


(Dollars in thousands)	September 30, 2021		December 31, 2020
Construction	$	130,590	$	106,760
Residential real estate		460,890		443,542
Commercial real estate		663,894		661,232
Commercial		145,217		211,256
Consumer		94,306		31,466
Total loans		1,494,897		1,454,256
Allowance for credit losses		(15,525)		(13,888)
Total loans, net	$	1,479,372	$	1,440,368

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Loans included deferred fees, net of costs, of $376 thousand and discounts on acquired loans of $577 thousand at September 30, 2021. Loans included deferred costs, net of deferred fees, of $622 thousand and discounts on acquired loans of $754 thousand at December 31, 2020. At September 30, 2021 and December 31, 2020, included in total loans were $40.5 million and $52.3 million in loans, respectively, acquired as part of the NWBI branch acquisition in 2017. 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 when due. 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. Loan payments received on nonaccrual impaired loans are generally applied to the outstanding principal balance. In certain circumstances, income may be recognized on a cash basis. 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.

A loan is considered a 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 Bank’s current underwriting guidelines 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.

In April 2020, the Company began its participation 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. In December 2020, the Consolidated Appropriations Act of 2021 (“CAA”) was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic. This extension of PPP lending expired on May 31, 2021. Under both the CARES and CAA, the Company funded 2,454 loans for a cumulative balance of $196.3 million. As of September 30, 2021, the Company held PPP loans with a total outstanding balance of $41.5 million, which is included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of September 30, 2021. 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.

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 September 30, 2021 and December 31, 2020.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
September 30, 2021
Loans individually evaluated for impairment	$	324	$	4,007	$	5,397	$	227	$	—	$	9,955
Loans collectively evaluated for impairment		130,266		456,883		658,497		144,990		94,306		1,484,942
Total loans	$	130,590	$	460,890	$	663,894	$	145,217	$	94,306	$	1,494,897

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	84	$	—	$	—	$	—	$	84
Loans collectively evaluated for impairment		2,621		3,814		5,527		1,852		1,627		15,441
Total allowance	$	2,621	$	3,898	$	5,527	$	1,852	$	1,627	$	15,525


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 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

The following tables provide information on impaired loans and any related allowance by loan class as of September 30, 2021 and December 31, 2020. 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
September 30, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—
Residential real estate		899		817		—		—		959		1,191		—
Commercial real estate		2,504		2,116		—		—		2,150		2,459		—
Commercial		385		227		—		—		230		241		—
Consumer		—		—		—		—		—		12		—
Total	$	4,085	$	3,457	$	—	$	—	$	3,636	$	4,200	$	—

Impaired accruing TDRs:
Construction	$	27	$	27	$	—	$	—	$	28	$	31	$	2
Residential real estate		2,863		1,754		1,109		84		2,871		3,252		118
Commercial real estate		2,860		2,860		—		—		2,913		2,994		67
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	5,750	$	4,641	$	1,109	$	84	$	5,812	$	6,277	$	187

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		327		327		—		—		328		513		7
Commercial real estate		421		421		—		—		421		470		10
Commercial		—		—		—		—		—		17		—
Consumer		—		—		—		—		—		—		—
Total	$	748	$	748	$	—	$	—	$	749	$	1,000	$	17

Total impaired loans:
Construction	$	324	$	324	$	—	$	—	$	325	$	328	$	2
Residential real estate		4,089		2,898		1,109		84		4,158		4,956		125
Commercial real estate		5,785		5,397		—		—		5,484		5,923		77
Commercial		385		227		—		—		230		258		—
Consumer		—		—		—		—		—		12		—
Total	$	10,583	$	8,846	$	1,109	$	84	$	10,197	$	11,477	$	204



			Recorded		Recorded				September 30, 2020
	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
December 31, 2020
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	231	$	—
Residential real estate		1,665		1,585		—		—		2,306		2,910		—
Commercial real estate		4,288		3,220		67		67		4,498		6,235		—
Commercial		401		258		—		—		355		429		—
Consumer		28		28		—		—		9		3		—
Total	$	6,679	$	5,388	$	67	$	67	$	7,465	$	9,808	$	—

Impaired accruing TDRs:
Construction	$	34	$	34	$	—	$	—	$	37	$	38	$	2
Residential real estate		3,845		2,617		1,228		135		3,886		3,940		120
Commercial real estate		3,118		2,479		639		11		3,357		3,379		70
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	6,997	$	5,130	$	1,867	$	146	$	7,280	$	7,357	$	192

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	33	$	—
Residential real estate		292		292		—		—		389		393		1
Commercial real estate		512		512		—		—		830		854		3
Commercial		—		—		—		—		42		18		—
Consumer		—		—		—		—		19		12		—
Total	$	804	$	804	$	—	$	—	$	1,280	$	1,310	$	4

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	334	$	302	$	2
Residential real estate		5,802		4,494		1,228		135		6,581		7,243		121
Commercial real estate		7,918		6,211		706		78		8,685		10,468		73
Commercial		401		258		—		—		397		447		—
Consumer		28		28		—		—		28		15		—
Total	$	14,480	$	11,322	$	1,934	$	213	$	16,025	$	18,475	$	196

The following tables provide a roll-forward for TDRs as of September 30, 2021 and September 30, 2020.


	1/1/2021												9/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For nine months ended
September 30, 2021
Accruing TDRs
Construction	$	34	$	—	$	(7)	$	—	$	—	$	—	$	27	$	—
Residential real estate		3,845		—		(82)		—		—		(900)		2,863		84
Commercial real estate		3,118		—		(258)		—		—		—		2,860		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(347)	$	—	$	—	$	(900)	$	5,750	$	84

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(31)		—		—		—		227		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(31)	$	—	$	—	$	—	$	227	$	—

Total	$	7,255	$	—	$	(378)	$	—	$	—	$	(900)	$	5,977	$	84


	1/1/2020												9/30/2020
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For nine months ended
September 30, 2020
Accruing TDRs
Construction	$	41	$	—	$	(5)	$	—	$	—	$	—	$	36	$	—
Residential real estate		4,041		—		(80)		—		—		(83)		3,878		142
Commercial real estate		3,419		—		(66)		—		—		—		3,353		14
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	7,501	$	—	$	(151)	$	—	$	—	$	(83)	$	7,267	$	156

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		1,393		—		(51)		—		—		(1,342)		—		—
Commercial real estate		—		1,506		(401)		—		—		—		1,105		—
Commercial		299		—		(30)		—		—		—		269		—
Consumer		—		—		—		—		—		—		—		—
Total	$	1,692	$	1,506	$	(482)	$	—	$	—	$	(1,342)	$	1,374	$	—

Total	$	9,193	$	1,506	$	(633)	$	—	$	—	$	(1,425)	$	8,641	$	156

There were no loans modified and considered to be TDRs during the three months ended September 30, 2021 and September 30, 2020. The following tables provide information on loans that were modified and considered to be TDRs during the nine months ended September 30, 2021 and September 30, 2020.


		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For nine months ended
September 30, 2021
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	—		—		—		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	—	$	—	$	—	$	—

For nine months ended
September 30, 2020
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	1		1,535		1,506		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	1	$	1,535	$	1,506	$	—

Since the beginning of the pandemic and through September 30, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million. As of September 30, 2021, the Company had no COVID related deferrals remaining. These deferrals were not considered TDRs based on the relief provisions of the CARES Act and CAA or recent interagency regulatory guidance.

There were no TDRs which subsequently defaulted within 12 months of modification for the three and nine months ended September 30, 2021 and 2020. 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 September 30, 2021, there were no nonaccrual loans classified as special mention or doubtful and $3.5 million of nonaccrual loans were classified as substandard. Similarly, 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.

The following tables provide information on loan risk ratings as of September 30, 2021 and December 31, 2020.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

Total

September 30, 2021

Construction

101,708

26,670

1,915

297

—

130,590

Residential real estate

423,355

34,664

1,767

1,104

—

460,890

Commercial real estate

514,583

137,759

4,985

6,567

—

663,894

Commercial

127,807

16,885

286

239

—

145,217

Consumer

94,143

161

—

94,306

Total

1,261,596

216,139

8,953

8,209

—

1,494,897


					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		Total
December 31, 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

The following tables provide information on the aging of the loan portfolio as of September 30, 2021 and December 31, 2020.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

Total

September 30, 2021

Construction

130,266

—

297

130,590

Residential real estate

458,790

530

425

327

1,282

818

460,890

Commercial real estate

661,208

149

—

421

570

2,116

663,894

Commercial

144,979

—

226

145,217

Consumer

94,170

105

—

136

—

94,306

Total

1,489,413

784

495

748

2,027

3,457

1,494,897

Percent of total loans

99.6

0.1

—

0.1

0.2

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
December 31, 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	%

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2021 and September 30, 2020. 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

Commercial

Consumer

Total

For three months ended

September 30, 2021

Allowance for credit losses:

Beginning Balance

2,574

3,812

5,600

1,879

1,223

15,088

Charge-offs

—

(55)

(1)

(56)

Recoveries

161

—

203

Net (charge-offs) recoveries

161

—

(29)

147

Provision

(114)

(73)

398

290

Ending Balance

2,621

3,898

5,527

1,852

1,627

15,525


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
September 30, 2020
Allowance for credit losses:
Beginning Balance	$	1,497	$	2,639	$	4,097	$	2,355	$	502	$	11,090

Charge-offs		—		(10)		(1)		(89)		(1)		(101)
Recoveries		5		199		1		81		2		288
Net (charge-offs) recoveries		5		189		—		(8)		1		187

Provision		56		456		1,002		(126)		112		1,500
Ending Balance	$	1,558	$	3,284	$	5,099	$	2,221	$	615	$	12,777

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For nine months ended

September 30, 2021

Allowance for credit losses:

Beginning Balance

2,022

3,699

5,426

2,089

652

13,888

Charge-offs

—

(162)

(5)

(167)

Recoveries

171

122

439

Net (charge-offs) recoveries

171

(40)

272

Provision

428

127

(197)

970

1,365

Ending Balance

2,621

3,898

5,527

1,852

1,627

15,525


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For nine months ended
September 30, 2020
Allowance for credit losses:
Beginning Balance	$	1,576	$	2,501	$	4,032	$	1,929	$	469	$	10,507

Charge-offs		—		(201)		(601)		(208)		(8)		(1,018)
Recoveries		13		206		—		205		14		438
Net (charge-offs) recoveries		13		5		(601)		(3)		6		(580)

Provision		(31)		778		1,668		295		140		2,850
Ending Balance	$	1,558	$	3,284	$	5,099	$	2,221	$	615	$	12,777

Foreclosure Proceedings

There were no consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of September 30, 2021 and December 31, 2020, respectively. There was 1 residential real estate property included in the balance of other real estate owned totaling $203 thousand at September 30, 2021 and $0 at December 31, 2020.

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 September 30, 2021 and December 31, 2020.