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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2023

Note 5 – Loans and Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the most significant accounting policies that the Company follows see Note 2 – Adoption of Accounting Standards and Note 1 of the 2022 Annual Report. All loan information presented as of June 30, 2023 is in accordance with ASC 326. All loan information presented as of December 31, 2022, or a prior date is presented in accordance with previously applicable GAAP.

The Company makes residential mortgage, commercial and consumer loans to customers primarily in Anne Arundel County, Baltimore County, Howard County, Kent County, Queen Anne’s County, Caroline County, Talbot County, Dorchester County and Worcester County in Maryland, Kent and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at June 30, 2023 and December 31, 2022.


(Dollars in thousands)	June 30, 2023		December 31, 2022
Construction	$	220,228	$	246,319
Residential real estate		938,151		810,497
Commercial real estate		1,130,346		1,065,409
Commercial		138,459		147,856
Consumer		326,039		286,026
Total loans		2,753,223		2,556,107
Allowance for credit losses		(29,014)		(16,643)
Total loans, net	$	2,724,209	$	2,539,464

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 $2.0 million and $1.4 million at June 30, 2023 and December 31, 2022. At June 30, 2023 and December 31, 2022, included in total loans were $332.4 million and $372.2 million in loans, acquired as part of the acquisition of Severn Bancorp, Inc. (“Severn”), effective October 31, 2021. These balances were presented net of the related discount which totaled $5.7 million and $6.7 million at June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Bank was servicing $352.3 million in loans for the Federal National Mortgage Association and $78.0 million in loans for Freddie Mac.

The following table provides information on nonaccrual loans by loan class as of June 30, 2023.


	Nonaccrual		Nonaccrual		Loans past due
	with no		with an		90 days or more
	allowance for		allowance for		and still
(Dollars in thousands)	credit loss		credit loss		accruing
June 30, 2023
Nonaccrual loans:
Construction	$	173	$	—	$	79
Residential real estate		2,602		131		250
Commercial real estate		368		—		721
Commercial		156		—		—
Consumer		27		24		—
Total	$	3,326	$	155	$	1,050

Interest income	$	—	$	—	$	2

The overall quality of the Bank’s loan portfolio is primarily assessed using the Bank’s risk-grading scale. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators are adjusted based on management’s judgment during the quarterly review process. Loans are graded on a scale of one to ten.

Ratings 1 thru 6 – Pass - Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 7 – Special Mention - These credits have potential weaknesses due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. Special mention loan relationships are reviewed at least quarterly.

Rating 8 – Substandard - Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the credit loss allowance analysis and/or place the loan on nonaccrual. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

Rating 9 – Doubtful - Doubtful assets have many of the same characteristics of substandard with the exception that the Bank has determined that loss is not only possible but is probable. The amount of loss is not discernible due to factors such as merger, acquisition, or liquidation; a capital injection; a pledge of additional collateral; the sale of assets; or alternative refinancing plans. Credits receiving a doubtful classification are required to be on nonaccrual. These relationships will be reviewed at least quarterly.

Rating 10 – Loss – Loss assets are uncollectible or of little value.

The following table provides information on loan risk ratings as of June 30, 2023 and gross write-offs during the six months ended June 30, 2023.


															Revolving
	Term Loans by Origination Year												Revolving		converted to
(Dollars in thousands)	Prior		2019		2020		2021		2022		2023		loans		term loans		Total
June 30, 2023
Construction
Pass	$	15,492	$	7,228	$	16,242	$	42,062	$	103,722	$	34,080	$	1,205	$	—	$	220,031
Substandard		185		—		—		12		—		—		—		—		197
Total	$	15,677	$	7,228	$	16,242	$	42,074	$	103,722	$	34,080	$	1,205	$	—	$	220,228
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential real estate
Pass	$	217,796	$	35,596	$	68,945	$	177,830	$	232,814	$	127,464	$	73,990	$	321	$	934,756
Special Mention		41		—				—		—		—		193		—		234
Substandard		2,973		—		—		—		—		—		188		—		3,161
Total	$	220,810	$	35,596	$	68,945	$	177,830	$	232,814	$	127,464	$	74,371	$	321	$	938,151
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial real estate
Pass	$	374,795	$	105,944	$	153,693	$	195,339	$	208,386	$	71,276	$	9,083	$	1,223	$	1,119,739
Special Mention		8,421		142		—		1,395		—		—		—		—		9,958
Substandard		649		—		—		—		—		—		—		—		649
Total	$	383,865	$	106,086	$	153,693	$	196,734	$	208,386	$	71,276	$	9,083	$	1,223	$	1,130,346
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial
Pass	$	16,181	$	3,927	$	10,511	$	33,807	$	16,906	$	5,100	$	49,134	$	1,541	$	137,107
Special Mention		—		—		—		457		—		—		440		251		1,148
Substandard		156		—		—		—		—		—		—		48		204
Total	$	16,337	$	3,927	$	10,511	$	34,264	$	16,906	$	5,100	$	49,574	$	1,840	$	138,459
Gross Charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer
Pass	$	894	$	1,517	$	17,458	$	88,451	$	157,030	$	59,935	$	702	$	—	$	325,987
Special Mention		—		—		—		—		—		—		2		—		2
Substandard		—		26		—		—		23		—		1		—		50
Total	$	894	$	1,543	$	17,458	$	88,451	$	157,053	$	59,935	$	705	$	—	$	326,039
Gross Charge-offs	$	—	$	—	$	—	$	(4)	$	—	$	(279)	$	—	$	(1)	$	(284)

Total
Pass		625,158		154,212		266,849		537,489		718,858		297,855		134,114		3,085		2,737,620
Special Mention		8,462		142		—		1,852		—		—		635		251		11,342
Substandard		3,963		26		—		12		23		—		189		48		4,261
Total loans by risk category	$	637,583	$	154,380	$	266,849	$	539,353	$	718,881	$	297,855	$	134,938	$	3,384	$	2,753,223

Total gross charge-offs	$	—	$	—	$	—	$	(4)	$	—	$	(279)	$	—	$	(1)	$	(284)

The following tables provide information on the aging of the loan portfolio as of June 30, 2023 and December 31, 2022.

Accruing

30‑59 days

60‑89 days

90 days or more

Total

(Dollars in thousands)

Current (1)

past due

Nonaccrual

Total

June 30, 2023

Construction

218,784

683

509

1,271

173

220,228

Residential real estate

932,852

574

1,742

250

2,566

2,733

938,151

Commercial real estate

1,128,529

685

721

1,449

368

1,130,346

Commercial

138,303

—

156

138,459

Consumer

324,312

1,509

167

—

1,676

326,039

Total

2,742,780

3,451

2,461

1,050

6,962

3,481

2,753,223

Percent of total loans

99.7

0.1

—

0.2

0.1

100.0

(1)

Includes loans measured at fair value of $9.7 million at June 30, 2023.


	Accruing
				30‑59 days			60‑89 days			90 days or more			Total
(Dollars in thousands)	Current (1)			past due			past due			past due			past due			Nonaccrual			PCI			Total
December 31, 2022
Construction	$	239,990		$	4,343		$	1,015		$	24		$	5,382		$	297		$	650		$	246,319
Residential real estate		787,070			6,214			891			1,107			8,212			1,259			13,956			810,497
Commercial real estate		1,052,314			369			—			710			1,079			150			11,866			1,065,409
Commercial		147,511			15			—			—			15			174			156			147,856
Consumer		285,750			223			11			—			234			28			14			286,026
Total	$	2,512,635		$	11,164		$	1,917		$	1,841		$	14,922		$	1,908		$	26,642		$	2,556,107
Percent of total loans		98.3	%		0.4	%		0.1	%		0.1	%		0.6	%		0.1	%		1.0	%		100.0	%

(1)

Includes loans measured at fair value of $8.4 million at December 31, 2022.

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, 2023 and June 30, 2022. 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 (1)

Total

For three months ended

June 30, 2023

Allowance for credit losses:

Beginning Balance

2,689

8,747

9,858

1,921

5,249

28,464

Charge-offs

—

(177)

Recoveries

—

119

127

Net (charge-offs) recoveries

—

(58)

(50)

Provision

(307)

401

409

600

Ending Balance

2,386

9,151

10,267

1,956

5,254

29,014

(1)

Gross charge-offs of consumer loans for the three months ended June 30, 2023 included $172 of demand deposit overdrafts.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For three months ended
June 30, 2022
Allowance for credit losses:
Beginning Balance	$	2,857	$	2,575	$	4,500	$	1,835	$	2,932	$	14,699

Charge-offs		—		(4)		(6)		(26)		(111)		(147)
Recoveries		4		73		555		20		79		731
Net (charge-offs) recoveries		4		69		549		(6)		(32)		584

Provision		484		134		(608)		(148)		338		200
Ending Balance	$	3,345	$	2,778	$	4,441	$	1,681	$	3,238	$	15,483

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer (1)

Total

For the six months ended

June 30, 2023

Allowance for credit losses:

Beginning Balance

2,973

2,622

4,899

1,652

4,497

16,643

Impact of ASC326 Adoption

1,222

4,974

3,742

401

452

10,791

Charge-offs

—

(284)

Recoveries

—

165

214

Net (charge-offs) recoveries

—

(119)

(70)

Provision

(1,816)

1,521

1,626

(105)

424

1,650

Ending Balance

2,386

9,151

10,267

1,956

5,254

29,014

(1)

Gross charge-offs of consumer loans for the six months ended June 30, 2023 included $279 of demand deposit overdrafts.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For the 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)		(25)		(220)		(255)
Recoveries		7		119		705		25		138		994
Net (charge-offs) recoveries		7		115		699		—		(82)		739

Provision		884		(195)		(856)		(389)		1,356		800
Ending Balance	$	3,345	$	2,778	$	4,441	$	1,681	$	3,238	$	15,483

There were no modifications to loans for borrowers experiencing financial difficulty (“BEFD”) during the three and six months ending June 30, 2023.

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment.


	June 30, 2023
(Dollars in thousands)	Real Estate Collateral		Other Collateral		Total
Construction	$	252	$	—	$	252
Residential real estate		3,219		—		3,219
Commercial real estate		1,239		—		1,239
Commercial		—		156		156
Consumer		—		51		51
Total	$	4,710	$	207	$	4,917

The Company did not identify any significant changes in the extent to which collateral secures its collateral dependent loans, whether in the form of general deterioration or from other factors during the period ended June 30, 2023.

Foreclosure Proceedings

There were $39 thousand of consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure as of June 30, 2023 and $263 thousand as of December 31, 2022, respectively. There were no residential real estate properties included in the balance of other real estate owned at June 30, 2023 and 1 residential real estate property totaling $18 thousand at December 31, 2022.

Prior to the adoption of ASC 326

The following table provides information about all loans acquired from Severn as of December 31, 2022.


	December 31, 2022
	Acquired Loans -		Acquired Loans -
	Purchased		Purchased		Acquired Loans -
(Dollars in thousands)	Credit Impaired		Performing		Total
Outstanding principal balance	$	29,620	$	349,262	$	378,882
Carrying amount
Construction	$	650	$	18,761	$	19,411
Residential real estate		13,956		116,118		130,074
Commercial real estate		11,866		174,278		186,144
Commercial		156		35,687		35,843
Consumer		14		697		711
Total loans	$	26,642	$	345,541	$	372,183

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

The following tables include impairment information relating to loans and the allowance for credit losses as of December 31, 2022.


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
December 31, 2022
Loans individually evaluated for impairment	$	331	$	5,081	$	2,540	$	174	$	28	$	8,154
Loans collectively evaluated for impairment		236,901		791,460		1,051,003		147,526		285,984		2,512,874
Acquired loans - PCI		650		13,956		11,866		156		14		26,642
Total loans (1)	$	237,882	$	810,497	$	1,065,409	$	147,856	$	286,026	$	2,547,670

Allowance for credit losses allocated to:
Loans individually evaluated for impairment	$	—	$	127	$	—	$	—	$	—	$	127
Loans collectively evaluated for impairment		2,973		2,495		4,899		1,652		4,497		16,516
Total allowance	$	2,973	$	2,622	$	4,899	$	1,652	$	4,497	$	16,643

(1)

Excludes loans measured at fair value of $8.4 million at December 31, 2022.

The following tables provide information on impaired loans and any related allowance by loan class as of December 31, 2022. 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				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, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	314	$	322	$	—
Residential real estate		1,363		1,259		—		—		1,487		1,482		—
Commercial real estate		159		150		—		—		740		823		—
Commercial		359		174		—		—		208		265		—
Consumer		29		28		—		—		31		52		—
Total	$	2,207	$	1,908	$	—	$	—	$	2,780	$	2,944	$	—

Impaired accruing TDRs:
Construction	$	10	$	10	$	—	$	—	$	18	$	20	$	—
Residential real estate		2,849		1,176		1,539		127		2,773		3,221		56
Commercial real estate		1,680		1,680		—		—		2,147		2,431		38
Commercial		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		9		—
Total	$	4,539	$	2,866	$	1,539	$	127	$	4,938	$	5,681	$	94

Other impaired accruing loans:
Construction	$	24	$	24	$	—	$	—	$	265	$	133	$	3
Residential real estate		1,107		1,107		—		—		5		17		4
Commercial real estate		710		710		—		—		524		471		4
Commercial		—		—		—		—		—		4		1
Consumer		—		—		—		—		—		19		—
Total	$	1,841	$	1,841	$	—	$	—	$	794	$	644	$	12

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	597	$	475	$	3
Residential real estate		5,319		3,542		1,539		127		4,265		4,720		60
Commercial real estate		2,549		2,540		—		—		3,411		3,725		42
Commercial		359		174		—		—		208		269		1
Consumer		29		28		—		—		31		80		—
Total	$	8,587	$	6,615	$	1,539	$	127	$	8,512	$	9,269	$	106

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

There were no TDRs which subsequently defaulted within 12 months of modification for the three and six months ended June 30, 2022. 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.

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


					Special
(Dollars in thousands)	Pass/Performing (1)		Pass		Mention		Substandard		Doubtful		PCI		Total
December 31, 2022
Construction	$	231,160	$	14,212	$	—	$	297	$	—	$	650	$	246,319
Residential real estate		761,405		32,467		1,239		1,430		—		13,956		810,497
Commercial real estate		929,501		121,711		1,814		517		—		11,866		1,065,409
Commercial		131,084		15,958		484		174		—		156		147,856
Consumer		285,786		196		2		28		—		14		286,026
Total	$	2,338,936	$	184,544	$	3,539	$	2,446	$	—	$	26,642	$	2,556,107

(1) Includes loans measured at fair value of $8.4 million at December 31, 2022.