Loans and Allowance for Credit Losses | 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 — 2 — 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 past due 90 days past due Nonaccrual Total September 30, 2021 Construction $ 130,266 $ — $ 27 $ — $ 27 $ 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 — 12 — 12 226 145,217 Consumer 94,170 105 31 — 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 % 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 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 9 — 26 7 203 Net (charge-offs) recoveries 161 9 — (29) 6 147 Provision (114) 77 (73) 2 398 290 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 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 72 64 122 10 439 Net (charge-offs) recoveries 171 72 64 (40) 5 272 Provision 428 127 37 (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. |