Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2022

Loans and Allowance for Credit Losses [Abstract]

Loans and Allowance for Credit Losses

Note 5 – 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 March 31, 2022 and December 31, 2021.

(Dollars in thousands)	March 31, 2022		December 31, 2021
Construction	$	258,176	$	239,353
Residential real estate		653,800		654,769
Commercial real estate		928,116		896,229
Commercial		177,037		203,377
Consumer		163,977		125,447
Total loans		2,181,106		2,119,175
Allowance for credit losses		(14,710)		(13,944)
Total loans, net	$	2,166,396	$	2,105,231

Loans are stated at their principal amount outstanding net of any purchase premiums/discounts, deferred fees and costs. Included in loans were deferred fees, net of costs, of $795 thousand and $1.2 million at March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, included in total loans were $36.5 million and $39.9 million in loans, respectively, net of discounts on acquired loans of $480 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At March 31, 2022 and December 31, 2021, included in total loans were $506.5 million and $553.0 million in loans, acquired as part of the acquisition of Severn. These balances were presented net of the related discount which totaled $8.0 million and $8.4 million at March 31, 2022 and December 31, 2021, respectively. 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.

During 2021 and 2020, the Company participated in the Small Business Administration’s Paycheck Protection Program (PPP). As of March 31, 2022, the Company held PPP loans with a total outstanding balance of $14.9 million, inclusive of loans issued pre-merger and those acquired from Severn, which are included in the commercial loan segment in the table above. 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 are included in the commercial loan segment in the table above. The decrease is due to repayment and forgiveness received as of March 31, 2022. 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 following tables provide information about all loans acquired from Severn.

	March 31, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	35,603	$	478,949	$	514,552
Carrying amount
Construction	$	2,356	$	76,560	$	78,916
Residential real estate		16,603		152,793		169,396
Commercial real estate		13,207		197,264		210,471
Commercial		294		46,250		46,544
Consumer		27		1,184		1,211
Total loans	$	32,487	$	474,051	$	506,538

	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 Three Months Ended
(Dollars in thousands)	March 31, 2022
Accretable yield, beginning of period	$	5,367
Additions		—
Accretion		(394)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—
Other changes, net		—
Accretable yield, end of period	$	4,973

At March 31, 2022, the Bank was servicing $336.5 million in loans for the Federal National Mortgage Association and $75.9 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 as of March 31, 2022 and December 31, 2021.

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
March 31, 2022
Loans individually evaluated for impairment	$	345	$	4,345	$	3,365	$	241	$	15	$	8,311
Loans collectively evaluated for impairment		255,475		632,852		911,544		176,502		163,935		2,140,308
Acquired loans - PCI		2,356		16,603		13,207		294		27		32,487
Total loans	$	258,176	$	653,800	$	928,116	$	177,037	$	163,977	$	2,181,106
Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	166	$	3	$	—	$	—	$	169
Loans collectively evaluated for impairment		2,857		2,409		4,497		1,805		2,973		14,541
Acquired loans - PCI		—		—		—		—		—		—
Total allowance	$	2,857	$	2,575	$	4,500	$	1,805	$	2,973	$	14,710

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		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		30		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	$	1	$	—	$	—	$	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

The allowance for loan losses was 0.67% of total loans and 0.92% when excluding PPP loans and acquired loans, at March 31, 2022 compared to 0.66% and 0.93% at December 31, 2021.

The following tables provide information on impaired loans and any related allowance by loan class as of March 31, 2022 and December 31, 2021. 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		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
March 31, 2022
Impaired nonaccrual loans:
Construction	$	336	$	325	$	—	$	—	$	331	$	—
Residential real estate		1,797		1,526		20		—		1,476		—
Commercial real estate		753		747		—		—		906		—
Commercial		385		215		—		—		321		—
Consumer		15		15		—		—		74		—
Total	$	3,286	$	2,828	$	20	$	—	$	3,108	$	—
Impaired accruing TDRs:
Construction	$	20	$	20	$	—	$	—	$	22	$	—
Residential real estate		2,915		571		2,213		166		2,809		25
Commercial real estate		2,200		1,769		431		3		2,581		23
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	5,135	$	2,360	$	2,644	$	169	$	5,412	$	48
Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		15		15		—		—		29		3
Commercial real estate		418		418		—		—		417		1
Commercial		26		26		—		—		9		—
Consumer		—		—		—		—		38		—
Total	$	459	$	459	$	—	$	—	$	493	$	4
Total impaired loans:
Construction	$	356	$	345	$	—	$	—	$	353	$	—
Residential real estate		4,727		2,112		2,233		166		4,314		28
Commercial real estate		3,371		2,934		431		3		3,904		24
Commercial		411		241		—		—		330		—
Consumer		15		15		—		—		112		—
Total	$	8,880	$	5,647	$	2,664	$	169	$	9,013	$	52

			Recorded		Recorded				March 31, 2021
	Unpaid		investment		investment				Quarter-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	—
Residential real estate		882		803		—		—		1,411		—
Commercial real estate		994		606		—		—		3,012		—
Commercial		380		216		—		—		251		—
Consumer		—		—		—		—		28		—
Total	$	2,553	$	1,922	$	—	$	—	$	4,999	$	—
Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	33	$	—
Residential real estate		2,965		475		2,361		172		3,530		40
Commercial real estate		2,807		2,352		455		1		3,065		23
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	6,628	$	63
Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		853		5
Commercial real estate		420		420		—		—		510		1
Commercial		10		10		—		—		50		—
Consumer		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	1,413	$	6
Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	330	$	—
Residential real estate		3,925		1,356		2,361		172		5,794		45
Commercial real estate		4,221		3,378		455		1		6,587		24
Commercial		390		226		—		—		301		—
Consumer		—		—		—		—		28		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	13,040	$	69

The following tables provide a roll-forward for TDRs as of March 31, 2022 and March 31, 2021.

	1/1/2022												3/31/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For three months ended
March 31, 2022
Accruing TDRs
Construction	$	24	$	—	$	(4)	$	—	$	—	$	—	$	20	$	—
Residential real estate		2,836		—		(32)		—		(20)		—		2,784		166
Commercial real estate		2,807		—		(46)		—		—		(561)		2,200		3
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(82)	$	—	$	(20)	$	(561)	$	5,004	$	169
Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		20		—		20		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(11)		—		—		—		205		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(11)	$	—	$	20	$	—	$	225	$	—
Total	$	5,883	$	—	$	(93)	$	—	$	—	$	(561)	$	5,229	$	169

	1/1/2021												3/31/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For three months ended
March 31, 2021
Accruing TDRs
Construction	$	34	$	—	$	(2)	$	—	$	—	$	—	$	32	$	—
Residential real estate		3,845		—		(29)		—		—		(435)		3,381		95
Commercial real estate		3,118		—		(75)		—		—		—		3,043		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(106)	$	—	$	—	$	(435)	$	6,456	$	95
Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(10)		—		—		—		248		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(10)	$	—	$	—	$	—	$	248	$	—
Total	$	7,255	$	—	$	(116)	$	—	$	—	$	(435)	$	6,704	$	95

There were no loans modified and considered to be TDRs during the three months ended March 31, 2022 and March 31, 2021.

There were no TDRs which subsequently defaulted within 12 months of modification for the three months ended March 31, 2022 and 2021. 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 other real estate owned (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 March 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $2.8 million of nonaccrual loans were classified as substandard. Similarly, 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.

The following tables provide information on loan risk ratings as of March 31, 2022 and December 31, 2021.

					Special
(Dollars in thousands)	Pass/Performing		Pass/Watch		Mention		Substandard		Doubtful		PCI		Total
March 31, 2022
Construction	$	232,417	$	21,175	$	1,866	$	362	$	—	$	2,356	$	258,176
Residential real estate		598,246		36,529		985		1,437		—		16,603		653,800
Commercial real estate		763,772		147,357		1,485		2,295		—		13,207		928,116
Commercial		160,951		15,577		—		215		—		294		177,037
Consumer		163,722		211		—		17		—		27		163,977
Total	$	1,919,108	$	220,849	$	4,336	$	4,326	$	—	$	32,487	$	2,181,106

					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		—		2		—		30		125,447
Total	$	1,842,918	$	230,900	$	7,951	$	3,756	$	—	$	33,650	$	2,119,175

The following tables provide information on the aging of the loan portfolio as of March 31, 2022 and December 31, 2021.

	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
March 31, 2022
Construction	$	254,773		$	722		$	—		$	—		$	722		$	325		$	2,356		$	258,176
Residential real estate		632,387			3,201			48			15			3,264			1,546			16,603			653,800
Commercial real estate		913,723			21			—			418			439			747			13,207			928,116
Commercial		176,498			4			—			26			30			215			294			177,037
Consumer		163,736			199			—			—			199			15			27			163,977
Total	$	2,141,117		$	4,147		$	48		$	459		$	4,654		$	2,848		$	32,487		$	2,181,106
Percent of total loans		98.2	%		0.2	%		—	%		—	%		0.2	%		0.1	%		1.5	%		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, 2021
Construction	$	235,757		$	920		$	—		$	—		$	920		$	297		$	2,379		$	239,353
Residential real estate		635,166			1,371			25			78			1,474			803			17,326			654,769
Commercial real estate		881,350			259			—			420			679			606			13,594			896,229
Commercial		202,503			183			62			10			255			298			321			203,377
Consumer		125,130			287			—			—			287			—			30			125,447
Total	$	2,079,906		$	3,020		$	87		$	508		$	3,615		$	2,004		$	33,650		$	2,119,175
Percent of total loans		98.2	%		0.1	%		0.0	%		0.0	%		0.1	%		0.1	%		1.6	%		100.0	%

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three months ended March 31, 2022 and March 31, 2021. 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
For three months ended
March 31, 2022
Allowance for credit losses:
Beginning Balance	$	2,454	$	2,858	$	4,598	$	2,070	$	1,964	$	13,944
Charge-offs		—		—		—		(92)		(16)		(108)
Recoveries		3		46		150		68		7		274
Net (charge-offs) recoveries		3		46		150		(24)		(9)		166
Provision		400		(329)		(248)		(241)		1,018		600
Ending Balance	$	2,857	$	2,575	$	4,500	$	1,805	$	2,973	$	14,710

			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
March 31, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888
Charge-offs		—		—		—		(61)		(4)		(65)
Recoveries		5		6		—		52		2		65
Net (charge-offs) recoveries		5		6		—		(9)		(2)		—
Provision		769		(6)		(329)		(80)		71		425
Ending Balance	$	2,796	$	3,699	$	5,097	$	2,000	$	721	$	14,313

Foreclosure Proceedings

There were $297 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of March 31, 2022 and $311 thousand as of  December 31, 2021, respectively. There were 2 residential real estate properties included in the balance of other real estate owned totaling $198 thousand at March 31, 2022 and 1 residential real estate property totaling $203 thousand at December 31, 2021.

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 March 31, 2022 and December 31, 2021.