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 and Sussex County, Delaware and in Accomack County, Virginia. The following table provides information about the principal classes of the loan portfolio at September 30, 2022 and December 31, 2021. (Dollars in thousands) September 30, 2022 December 31, 2021 Construction $ 230,119 $ 239,353 Residential real estate 758,063 654,769 Commercial real estate 1,023,253 896,229 Commercial 160,430 203,377 Consumer 230,018 125,447 Total loans 2,401,883 2,119,175 Allowance for credit losses (16,277) (13,944) Total loans, net $ 2,385,606 $ 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 $967 thousand and $1.2 million at September 30, 2022 and December 31, 2021. At September 30, 2022 and December 31, 2021, included in total loans were $24.7 million and $39.9 million in loans, respectively, net of discounts on acquired loans of $332 thousand and $516 thousand, respectively, as part of the Northwest Bancshares, Inc. branch acquisition in 2017. At September 30, 2022 and December 31, 2021, included in total loans were $407.8 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 $7.3 million and $8.4 million at September 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 September 30, 2022, the Company held PPP loans with a total outstanding balance of $291 thousand, 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 September 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. September 30, 2022 Acquired Loans - Acquired Loans - Purchased Purchased Acquired Loans - (Dollars in thousands) Credit Impaired Performing Total Outstanding principal balance $ 31,334 $ 383,767 $ 415,101 Carrying amount Construction $ 665 $ 27,883 $ 28,548 Residential real estate 15,061 132,311 147,372 Commercial real estate 12,339 180,493 192,832 Commercial 197 38,140 38,337 Consumer 19 733 752 Total loans $ 28,281 $ 379,560 $ 407,841 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 Nine Months Ended (Dollars in thousands) September 30, 2022 Accretable yield, beginning of period $ 5,367 Accretion (1,195) Reclassification of nonaccretable difference due to improvement in expected cash flows 399 Other changes, net 287 Accretable yield, end of period $ 4,858 At September 30, 2022, the Bank was servicing $346.9 million in loans for the Federal National Mortgage Association and $74.5 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 September 30, 2022 and December 31, 2021. Residential Commercial (Dollars in thousands) Construction real estate real estate Commercial Consumer Total September 30, 2022 Loans individually evaluated for impairment $ 415 $ 4,146 $ 2,271 $ 193 $ 28 $ 7,053 Loans collectively evaluated for impairment 229,039 738,856 1,008,643 160,040 229,971 2,366,549 Acquired loans - PCI 665 15,061 12,339 197 19 28,281 Total loans $ 230,119 $ 758,063 $ 1,023,253 $ 160,430 $ 230,018 $ 2,401,883 Allowance for credit losses allocated to: Loans individually evaluated for impairment $ — $ 150 $ — $ — $ — $ 150 Loans collectively evaluated for impairment 3,032 2,858 5,009 1,907 3,321 16,127 Acquired loans - PCI — — — — — — Total allowance $ 3,032 $ 3,008 $ 5,009 $ 1,907 $ 3,321 $ 16,277 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 0.84% when excluding PPP loans and acquired loans, at September 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 September 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 September 30, 2022 Impaired nonaccrual loans: Construction $ 297 $ 297 $ — $ — $ 297 $ 314 $ — Residential real estate 1,374 1,268 15 — 1,639 1,534 — Commercial real estate 159 150 — — 466 704 — Commercial 374 193 — — 197 242 — Consumer 29 28 — — 40 48 — Total $ 2,233 $ 1,936 $ 15 $ — $ 2,639 $ 2,842 $ — Impaired accruing TDRs: Construction $ 14 $ 14 $ — $ — $ 14 $ 18 $ 1 Residential real estate 2,874 557 2,184 150 2,750 3,064 83 Commercial real estate 1,703 1,703 — — 1,830 2,231 48 Commercial — — — — — — — Consumer — — — — — 6 — Total $ 4,591 $ 2,274 $ 2,184 $ 150 $ 4,594 $ 5,319 $ 132 Other impaired accruing loans: Construction $ 104 $ 104 $ — $ — $ 304 $ 190 $ 6 Residential real estate 122 122 — — 745 259 3 Commercial real estate 418 418 — — 537 493 7 Commercial — — — — 13 7 1 Consumer — — — — — 13 — Total $ 644 $ 644 $ — $ — $ 1,599 $ 962 $ 17 Total impaired loans: Construction $ 415 $ 415 $ — $ — $ 615 $ 522 $ 7 Residential real estate 4,370 1,947 2,199 150 5,134 4,857 86 Commercial real estate 2,280 2,271 — — 2,833 3,428 55 Commercial 374 193 — — 210 249 1 Consumer 29 28 — — 40 67 — Total $ 7,468 $ 4,854 $ 2,199 $ 150 $ 8,832 $ 9,123 $ 149 Recorded Recorded September 30, 2021 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 — — 959 1,191 — Commercial real estate 994 606 — — 2,150 2,459 — Commercial 380 216 — — 230 241 — Consumer — — — — — 12 — Total $ 2,553 $ 1,922 $ — $ — $ 3,636 $ 4,200 $ — Impaired accruing TDRs: Construction $ 24 $ 24 $ — $ — $ 28 $ 31 $ 2 Residential real estate 2,965 475 2,361 172 2,871 3,252 118 Commercial real estate 2,807 2,352 455 1 2,913 2,994 67 Commercial — — — — — — — Consumer — — — — — — — Total $ 5,796 $ 2,851 $ 2,816 $ 173 $ 5,812 $ 6,277 $ 187 Other impaired accruing loans: Construction $ — $ — $ — $ — $ — $ — $ — Residential real estate 78 78 — — 328 513 7 Commercial real estate 420 420 — — 421 470 10 Commercial 10 10 — — — 17 — Consumer — — — — — — — Total $ 508 $ 508 $ — $ — $ 749 $ 1,000 $ 17 Total impaired loans: Construction $ 321 $ 321 $ — $ — $ 325 $ 328 $ 2 Residential real estate 3,925 1,356 2,361 172 4,158 4,956 125 Commercial real estate 4,221 3,378 455 1 5,484 5,923 77 Commercial 390 226 — — 230 258 — Consumer — — — — — 12 — Total $ 8,857 $ 5,281 $ 2,816 $ 173 $ 10,197 $ 11,477 $ 204 The following tables provide a roll-forward for TDRs as of September 30, 2022 and September 30, 2021. 1/1/2022 9/30/2022 TDR New Disbursements Charge- Reclassifications/ TDR Related (Dollars in thousands) Balance TDRs (Payments) offs Transfer In/(Out) Payoffs Balance Allowance For the Nine Months Ended September 30, 2022 Accruing TDRs Construction $ 24 $ — $ (10) $ — $ — $ — $ 14 $ — Residential real estate 2,836 — (75) — (20) — 2,741 150 Commercial real estate 2,807 — (157) — — (947) 1,703 — Commercial — — — — — — — — Consumer — — — — — — — — Total $ 5,667 $ — $ (242) $ — $ (20) $ (947) $ 4,458 $ 150 Nonaccrual TDRs Construction $ — $ — $ — $ — $ — $ — $ — $ — Residential real estate — — (4) — 20 — 16 — Commercial real estate — — — — — — — — Commercial 216 — (32) — — — 184 — Consumer — — — — — — — — Total $ 216 $ — $ (36) $ — $ 20 $ — $ 200 $ — Total $ 5,883 $ — $ (278) $ — $ — $ (947) $ 4,658 $ 150 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 the 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 There were no loans modified and considered to be TDRs during the three and nine months ended September 30, 2022 and September 30, 2021. There were no TDRs which subsequently defaulted within 12 months of modification for the three and nine months ended September 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 September 30, 2022, there were no nonaccrual nonaccrual The following tables provide information on loan risk ratings as of September 30, 2022 and December 31, 2021. Special (Dollars in thousands) Pass/Performing Pass/Watch Mention Substandard Doubtful PCI Total September 30, 2022 Construction $ 217,823 $ 9,553 $ 1,781 $ 297 $ — $ 665 $ 230,119 Residential real estate 708,215 32,488 969 1,330 — 15,061 758,063 Commercial real estate 882,561 125,246 2,538 569 — 12,339 1,023,253 Commercial 141,864 17,677 499 193 — 197 160,430 Consumer 229,776 193 2 28 — 19 230,018 Total $ 2,180,239 $ 185,157 $ 5,789 $ 2,417 $ — $ 28,281 $ 2,401,883 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 September 30, 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 September 30, 2022 Construction $ 229,053 $ — $ — $ 104 $ 104 $ 297 $ 665 $ 230,119 Residential real estate 738,911 2,032 657 121 2,810 1,281 15,061 758,063 Commercial real estate 1,009,749 596 — 419 1,015 150 12,339 1,023,253 Commercial 159,674 80 286 — 366 193 197 160,430 Consumer 229,218 742 11 — 753 28 19 230,018 Total $ 2,366,605 $ 3,450 $ 954 $ 644 $ 5,048 $ 1,949 $ 28,281 $ 2,401,883 Percent of total loans 98.6 % 0.1 % — % — % 0.1 % 0.1 % 1.2 % 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 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 nine months ended September 30, 2022 and September 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 real estate Commercial Consumer Total For three months ended September 30, 2022 Allowance for credit losses: Beginning Balance $ 3,345 $ 2,778 $ 4,441 $ 1,681 $ 3,238 $ 15,483 Charge-offs — — — (202) — (202) Recoveries 2 12 243 60 4 321 Net (charge-offs) recoveries 2 12 243 (142) 4 119 Provision (315) 218 325 368 79 675 Ending Balance $ 3,032 $ 3,008 $ 5,009 $ 1,907 $ 3,321 $ 16,277 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 nine months ended September 30, 2022 Allowance for credit losses: Beginning Balance $ 2,454 $ 2,858 $ 4,598 $ 2,070 $ 1,964 $ 13,944 Charge-offs — (4) (6) (416) (31) (457) Recoveries 9 131 948 200 27 1,315 Net (charge-offs) recoveries 9 127 942 (216) (4) 858 Provision 569 23 (531) 53 1,361 1,475 Ending Balance $ 3,032 $ 3,008 $ 5,009 $ 1,907 $ 3,321 $ 16,277 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 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 September 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 September 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 September 30, 2022 and December 31, 2021. |