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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2022

Loans and Allowance for Credit Losses [Abstract]

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 June 30, 2022 and December 31, 2021.


(Dollars in thousands)	June 30, 2022		December 31, 2021
Construction	$	263,069	$	239,353
Residential real estate		695,421		654,769
Commercial real estate		953,090		896,229
Commercial		158,345		203,377
Consumer		194,654		125,447
Total loans		2,264,579		2,119,175
Allowance for credit losses		(15,483)		(13,944)
Total loans, net	$	2,249,096	$	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 costs, net of fees, of $846 thousand and $1.2 million at June 30, 2022 and December 31, 2021. At June 30, 2022 and December 31, 2021, included in total loans were $31.3 million and $39.9 million in loans, respectively, net of discounts on acquired loans of $416 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At June 30, 2022 and December 31, 2021, included in total loans were $451.5 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 $7.6 million and $8.4 million at June 30, 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 June 30, 2022, the Company held PPP loans with a total outstanding balance of $1.7 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 June 30, 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.


	June 30, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	32,398	$	426,735	$	459,133
Carrying amount
Construction	$	681	$	53,864	$	54,545
Residential real estate		15,492		138,304		153,796
Commercial real estate		12,860		187,851		200,711
Commercial		239		41,451		41,690
Consumer		23		767		790
Total loans	$	29,295	$	422,237	$	451,532


	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 Six Months Ended
(Dollars in thousands)	June 30, 2022
Accretable yield, beginning of period	$	5,367
Accretion		(788)
Reclassification of nonaccretable difference due to improvement in expected cash flows		325
Other changes, net		237
Accretable yield, end of period	$	5,141

At June 30, 2022, the Bank was servicing $341.8 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 June 30, 2022 and December 31, 2021.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

June 30, 2022

Loans individually evaluated for impairment

472

5,801

3,782

204

103

10,362

Loans collectively evaluated for impairment

261,916

674,128

936,448

157,902

194,528

2,224,922

Acquired loans - PCI

681

15,492

12,860

239

29,295

Total loans

263,069

695,421

953,090

158,345

194,654

2,264,579

Allowance for credit losses allocated to:

Loans individually evaluated for impairment

—

158

—

161

Loans collectively evaluated for impairment

3,345

2,620

4,441

1,681

3,235

15,322

Acquired loans - PCI

—

Total allowance

3,345

2,778

4,441

1,681

3,238

15,483


			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 0.68% of total loans and 0.89% when excluding PPP loans and acquired loans, at June 30, 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 June 30, 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		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
June 30, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	314	$	322	$	—
Residential real estate		941		840		18		—		1,487		1,482		—
Commercial real estate		540		539		—		—		740		823		—
Commercial		379		204		—		—		208		265		—
Consumer		47		47		—		—		31		52		—
Total	$	2,204	$	1,927	$	18	$	—	$	2,780	$	2,944	$	—

Impaired accruing TDRs:
Construction	$	17	$	17	$	—	$	—	$	18	$	20	$	—
Residential real estate		5,196		2,660		2,199		158		2,773		3,221		56
Commercial real estate		2,509		2,123		386		—		2,147		2,431		38
Commercial		—		—		—		—		—		—		—
Consumer		56		—		56		3		—		9		—
Total	$	7,778	$	4,800	$	2,641	$	161	$	4,938	$	5,681	$	94

Other impaired accruing loans:
Construction	$	158	$	158	$	—	$	—	$	265	$	133	$	3
Residential real estate		84		84		—		—		5		17		4
Commercial real estate		734		734		—		—		524		471		4
Commercial		—		—		—		—		—		4		1
Consumer		—		—		—		—		—		19		—
Total	$	976	$	976	$	—	$	—	$	794	$	644	$	12

Total impaired loans:
Construction	$	472	$	472	$	—	$	—	$	597	$	475	$	3
Residential real estate		6,221		3,584		2,217		158		4,265		4,720		60
Commercial real estate		3,783		3,396		386		—		3,411		3,725		42
Commercial		379		204		—		—		208		269		1
Consumer		103		47		56		3		31		80		—
Total	$	10,958	$	7,703	$	2,659	$	161	$	8,512	$	9,269	$	106



			Recorded		Recorded				June 30, 2022
	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, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	297	$	—
Residential real estate		882		803		—		—		1,204		1,307		—
Commercial real estate		994		606		—		—		2,214		2,613		—
Commercial		380		216		—		—		241		246		—
Consumer		—		—		—		—		9		19		—
Total	$	2,553	$	1,922	$	—	$	—	$	3,965	$	4,482	$	—

Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	31	$	32	$	1
Residential real estate		2,965		475		2,361		172		3,354		3,442		89
Commercial real estate		2,807		2,352		455		1		3,005		3,035		46
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	6,390	$	6,509	$	136

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		359		606		7
Commercial real estate		420		420		—		—		479		495		2
Commercial		10		10		—		—		—		25		—
Consumer		—		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	838	$	1,126	$	9

Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	328	$	329	$	1
Residential real estate		3,925		1,356		2,361		172		4,917		5,355		96
Commercial real estate		4,221		3,378		455		1		5,698		6,143		48
Commercial		390		226		—		—		241		271		—
Consumer		—		—		—		—		9		19		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	11,193	$	12,117	$	145

The following tables provide a roll-forward for TDRs as of June 30, 2022 and June 30, 2021.


	1/1/2022												6/30/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Six Months Ended
June 30, 2022
Accruing TDRs
Construction	$	24	$	—	$	(7)	$	—	$	—	$	—	$	17	$	—
Residential real estate		2,836		—		(51)		—		(20)		—		2,765		158
Commercial real estate		2,807		—		(134)		—		—		(561)		2,112		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(192)	$	—	$	(20)	$	(561)	$	4,894	$	158

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		(3)		—		20		—		17		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(21)		—		—		—		195		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(24)	$	—	$	20	$	—	$	212	$	—

Total	$	5,883	$	—	$	(216)	$	—	$	—	$	(561)	$	5,106	$	158


	1/1/2021												6/30/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Six Months Ended
June 30, 2021
Accruing TDRs
Construction	$	34	$	—	$	(4)	$	—	$	—	$	—	$	30	$	—
Residential real estate		3,845		—		(57)		—		—		(459)		3,329		90
Commercial real estate		3,118		—		(139)		—		—		—		2,979		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(200)	$	—	$	—	$	(459)	$	6,338	$	90

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(21)		—		—		—		237		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(21)	$	—	$	—	$	—	$	237	$	—

Total	$	7,255	$	—	$	(221)	$	—	$	—	$	(459)	$	6,575	$	90

There were no loans modified and considered to be TDRs during the three and six months ended June 30, 2022 and June 30, 2021.

There were no TDRs which subsequently defaulted within 12 months of modification for the three and six months ended June 30, 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 June 30, 2022, there were no nonaccrual loans classified as special mention or doubtful and $2.7 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 June 30, 2022 and December 31, 2021.

Special

(Dollars in thousands)

Pass/Performing

Pass/Watch

Mention

Substandard

Doubtful

PCI

Total

June 30, 2022

Construction

237,742

22,473

1,824

349

—

681

263,069

Residential real estate

643,626

34,220

988

1,095

—

15,492

695,421

Commercial real estate

822,320

114,236

1,461

2,213

—

12,860

953,090

Commercial

140,086

17,319

497

204

—

239

158,345

Consumer

194,375

208

—

194,654

Total

2,038,149

188,456

4,770

3,909

—

29,295

2,264,579


					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 June 30, 2022 and December 31, 2021.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current

past due

90 days

past due

Nonaccrual

PCI

Total

June 30, 2022

Construction

261,432

450

—

209

659

297

681

263,069

Residential real estate

677,181

614

729

—

1,343

1,405

15,492

695,421

Commercial real estate

938,714

161

594

776

740

12,860

953,090

Commercial

157,862

—

204

239

158,345

Consumer

194,474

110

—

110

194,654

Total

2,229,663

1,335

790

803

2,928

2,693

29,295

2,264,579

Percent of total loans

98.5

0.1

—

0.1

1.3

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	%		—	%		—	%		0.1	%		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 and six months ended June 30, 2022 and June 30, 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

Commercial

Consumer

Total

For three months ended

June 30, 2022

Allowance for credit losses:

Beginning Balance

2,857

2,575

4,500

1,805

2,973

14,710

Charge-offs

—

(4)

(6)

(122)

(15)

(147)

Recoveries

555

720

Net (charge-offs) recoveries

549

(50)

573

Provision

484

134

(608)

(74)

264

200

Ending Balance

3,345

2,778

4,441

1,681

3,238

15,483


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
June 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,796	$	3,699	$	5,097	$	2,000	$	721	$	14,313

Charge-offs		—		—		—		(46)		—		(46)
Recoveries		5		57		64		44		1		171
Net (charge-offs) recoveries		5		57		64		(2)		1		125

Provision		(227)		56		439		(119)		501		650
Ending Balance	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

For six months ended

June 30, 2022

Allowance for credit losses:

Beginning Balance

2,454

2,858

4,598

2,070

1,964

13,944

Charge-offs

—

(4)

(6)

(214)

(31)

(255)

Recoveries

119

705

140

994

Net (charge-offs) recoveries

115

699

(74)

(8)

739

Provision

884

(195)

(856)

(315)

1,282

800

Ending Balance

3,345

2,778

4,441

1,681

3,238

15,483


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For six months ended
June 30, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

Charge-offs		—		—		—		(107)		(4)		(111)
Recoveries		10		63		64		96		3		236
Net (charge-offs) recoveries		10		63		64		(11)		(1)		125

Provision		542		50		110		(199)		572		1,075
Ending Balance	$	2,574	$	3,812	$	5,600	$	1,879	$	1,223	$	15,088

Foreclosure Proceedings

There were $81 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of June 30, 2022 and $311 thousand as of December 31, 2021, respectively. There was 1 residential real estate property included in the balance of other real estate owned totaling $18 thousand at June 30, 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 June 30, 2022 and December 31, 2021.