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Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 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 Anne Arundel County, 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.


(Dollars in thousands)	2021		2020
Construction	$	239,353	$	106,760
Residential real estate		654,769		443,542
Commercial real estate		896,229		661,232
Commercial		203,377		211,256
Consumer		125,447		31,466
Total loans		2,119,175		1,454,256
Allowance for credit losses		(13,944)		(13,888)
Total loans, net	$	2,105,231	$	1,440,368

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, 2021 and 2020, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $18.7 million and $3.7 million, respectively. During 2021 and 2020, loan additions were approximately $16.5 million of which $15.4 million were due to the acquisition of Severn and loan repayments were approximately $1.5 million. Net loan origination costs, included in balances above, totaled $1.2 million and $622 thousand as of December 31, 2021 and 2020, respectively.

At December 31, 2021 and December 31, 2020 included in total loans were $39.9 million and $52.3 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition. These balances are presented net of the related discount which totaled $516 thousand at December 31, 2021 and $754 thousand at December 31, 2020. At December 31, 2021 included in total loans were $553.0 million in loans, acquired as part of the acquisition of Severn. These balances are presented net of the related discount which totaled $8.4 million at December 31, 2021.

The following table provides information about all loans acquired from Severn.


	December 31, 2021
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	36,943	$	524,474	$	561,417
Carrying amount
Construction	$	2,379	$	91,823	$	94,202
Residential real estate		17,326		167,580		184,906
Commercial real estate		13,594		202,819		216,413
Commercial		321		56,200		56,521
Consumer		30		921		951
Total loans	$	33,650	$	519,343	$	552,993

The following table presents a summary of the change in the accretable yield on PCI loans acquired from Severn.


	For the Year Ended
(Dollars in thousands)	December 31, 2021
Accretable yield, beginning of period	$	—
Additions		5,667
Accretion		(300)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—
Other changes, net		—
Accretable yield, end of period	$	5,367

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 December 31, 2021, the Company held PPP loans with a total outstanding balance of $27.6 million, of which $9.2 million was acquired from Severn, which is included in the commercial loan segment in the table above. As of December 31, 2020, the Company held PPP loans with a total outstanding balance of $122.8 million, which is included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received throughout 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.

At December 31, 2021, the Bank was servicing $301.4 million, in loans for the Federal National Mortgage Association and $69.8 million in loans for the Federal Home Loan Mortgage Corporation.

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 for the years ended December 31.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

December 31, 2021

Loans individually evaluated for impairment

321

3,717

3,833

226

—

8,097

Loans collectively evaluated for impairment

236,653

633,726

878,802

202,830

125,417

2,077,428

Acquired loans - PCI

2,379

17,326

13,594

321

33,650

Total loans

239,353

654,769

896,229

203,377

125,447

2,119,175

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

—

172

—

173

Loans collectively evaluated for impairment

2,454

2,686

4,597

2,070

1,964

13,771

Acquired loans - PCI

—

Total allowance

2,454

2,858

4,598

2,070

1,964

13,944


			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 allowance for loan losses was 0.66% of total loans and 0.67% when excluding PPP loans, at December 31, 2021 compared to 0.95% and 1.04% at December 31, 2020.

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. 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				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		recorded
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		investment
December 31, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	—
Residential real estate		882		803		—		—		1,095		—
Commercial real estate		994		606		—		—		2,122		—
Commercial		380		216		—		—		242		—
Consumer		—		—		—		—		9		—
Total	$	2,553	$	1,922	$	—	$	—	$	3,765	$	—

Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	30	$	3
Residential real estate		2,965		475		2,361		172		3,150		146
Commercial real estate		2,807		2,352		455		1		2,952		87
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	6,132	$	236

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		465		21
Commercial real estate		420		420		—		—		470		17
Commercial		10		10		—		—		13		—
Consumer		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	948	$	38

Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	327	$	3
Residential real estate		3,925		1,356		2,361		172		4,710		167
Commercial real estate		4,221		3,378		455		1		5,544		104
Commercial		390		226		—		—		255		—
Consumer		—		—		—		—		9		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	10,845	$	274



			Recorded		Recorded
	Unpaid		investment		investment				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2020
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	247	$	—
Residential real estate		1,665		1,585		—		—		2,648		—
Commercial real estate		4,288		3,220		67		67		5,669		—
Commercial		401		258		—		—		390		—
Consumer		28		28		—		—		9		—
Total	$	6,679	$	5,388	$	67	$	67	$	8,963	$	—

Impaired accruing TDRs:
Construction	$	34	$	34	$	—	$	—	$	37	$	3
Residential real estate		3,845		2,617		1,228		135		3,920		160
Commercial real estate		3,118		2,479		639		11		3,349		104
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	6,997	$	5,130	$	1,867	$	146	$	7,306	$	267

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	25	$	—
Residential real estate		292		292		—		—		362		2
Commercial real estate		512		512		—		—		774		5
Commercial		—		—		—		—		13		—
Consumer		—		—		—		—		9		—
Total	$	804	$	804	$	—	$	—	$	1,183	$	7

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	309	$	3
Residential real estate		5,802		4,494		1,228		135		6,930		162
Commercial real estate		7,918		6,211		706		78		9,792		109
Commercial		401		258		—		—		403		—
Consumer		28		28		—		—		18		—
Total	$	14,480	$	11,322	$	1,934	$	213	$	17,452	$	274

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


	1/1/2021												12/31/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For year ended
December 31, 2021
Accruing TDRs
Construction	$	34	$	—	$	(10)	$	—	$	—	$	—	$	24	$	—
Residential real estate		3,845		—		(109)		—		—		(900)		2,836		172
Commercial real estate		3,118		—		(311)		—		—		—		2,807		1
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(430)	$	—	$	—	$	(900)	$	5,667	$	173

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(42)		—		—		—		216		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(42)	$	—	$	—	$	—	$	216	$	—

Total	$	7,255	$	—	$	(472)	$	—	$	—	$	(900)	$	5,883	$	173


	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
For year ended
December 31, 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

The following tables provide information on loans that were modified and considered to be TDRs for the years ended December 31.


		Premodification		Postmodification
		outstanding		outstanding
	Number of	recorded		recorded		Related
(Dollars in thousands)	contracts	investment		investment		allowance
TDRs:
For year ended
December 31, 2021
Construction	—	$	—	$	—	$	—
Residential real estate	—		—		—		—
Commercial real estate	—		—		—		—
Commercial	—		—		—		—
Consumer	—		—		—		—
Total	—	$	—	$	—	$	—

For year ended
December 31, 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 December 31, 2021, the Company had executed principal and/or interest deferrals on outstanding loan balances of $221.1 million. As of December 31, 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 year ended December 31, 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 December 31, 2021, there were no nonaccrual loans classified as special mention or doubtful and $2.0 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 at December 31.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total

December 31, 2021

Construction

210,287

24,513

1,877

297

—

2,379

239,353

Residential real estate

596,694

38,309

1,539

901

—

17,326

654,769

Commercial real estate

724,561

151,209

4,535

2,330

—

13,594

896,229

Commercial

186,176

16,654

—

226

—

321

203,377

Consumer

125,200

215

—

125,447

Total

1,842,918

230,900

7,951

3,756

—

33,650

2,119,175


					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		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 at December 31.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

PCI

Total

December 31, 2021

Construction

235,757

920

—

920

297

2,379

239,353

Residential real estate

635,166

1,371

1,474

803

17,326

654,769

Commercial real estate

881,350

259

—

420

679

606

13,594

896,229

Commercial

202,503

183

255

298

321

203,377

Consumer

125,130

287

—

287

—

125,447

Total

2,079,906

3,020

508

3,615

2,004

33,650

2,119,175

Percent of total loans

98.2

0.1

—

0.1

1.6

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			PCI			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 years ended December 31. 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 year ended

December 31, 2021

Allowance for credit losses:

Beginning Balance

2,022

3,699

5,426

2,089

652

13,888

Charge-offs

—

(235)

(28)

(263)

Recoveries

278

114

193

677

Net (charge-offs) recoveries

278

114

(42)

(18)

414

Provision

154

(923)

(942)

1,330

(358)

Ending Balance

2,454

2,858

4,598

2,070

1,964

13,944


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

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $311 thousand and $0 as of December 31, 2021 and 2020. There were $203 thousand of residential real estate properties included in the balance of other real estate owned at December 31, 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 December 31, 2021 and 2020.