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 December 31.

(1)

Includes net origination costs totaling $1.4 million and $1.2 million as of December 31, 2022 and 2021, respectively.

In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons who are not related to the Company and are not considered to involve more than the normal risk of collectability. As of December 31, 2022 and 2021, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy-making officers, totaled approximately $24.1 million and $18.7 million, respectively. During 2022 and 2021, loan additions were approximately $7.6 million and $16.5 million of which $15.4 million were due to the acquisition of Severn and loan repayments were approximately $2.2 million and $1.5 million, respectively.

At December 31, 2022 and December 31, 2021 included in total loans were $22.9 million and $39.9 million in loans, respectively, acquired as part of the 2017 NWBI branch acquisition. These balances are presented net of the related discount which totaled $298 thousand at December 31, 2022 and $516 thousand at December 31, 2021. At December 31, 2022 and December 31, 2021 included in total loans were $372.2 million and $553.0 million in loans, acquired as part of the acquisition of Severn. These balances are presented net of the related discount which totaled $6.7 million at December 31, 2022 and $8.4 million at December 31, 2021.

The following table provides information about all loans acquired from Severn.


	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


	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 Year Ended
(Dollars in thousands)	December 31, 2022
Accretable yield, beginning of period	$	5,367
Accretion		(1,603)
Reclassification of nonaccretable difference due to improvement in expected cash flows		469
Other changes, net		506
Accretable yield, end of period	$	4,739

In April 2020, the Company began its participation in the Paycheck Protection Program (“PPP”) and continued participation in the Program through its expiration in 2021. As of December 31, 2022, the Company held PPP loans with a total outstanding balance of $187 thousand. 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. 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. The net fees associated with the PPP loans have been accreted to interest income over the remaining contractual lives of the loans, with any unrecognized fees recorded in interest income upon forgiveness and repayment by the SBA.

At December 31, 2022, the Bank was servicing $343.8 million in loans for the Federal National Mortgage Association and $74.1 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 for the years ended December 31.

Residential

Commercial

(Dollars in thousands)

Construction

real estate

Commercial

Consumer

Total

December 31, 2022

Loans individually evaluated for impairment

331

5,081

2,540

174

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

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.


			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 0.65% of total loans and 0.65% when excluding PPP loans, at December 31, 2022 compared to 0.66% and 0.67% at December 31, 2021.

The following tables provide information on impaired loans and any related allowance by loan class as of December 31. 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				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2022
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	309	$	—
Residential real estate		1,363		1,259		—		—		1,661		—
Commercial real estate		159		150		—		—		604		—
Commercial		359		174		—		—		227		—
Consumer		29		28		—		—		43		—
Total	$	2,207	$	1,908	$	—	$	—	$	2,844	$	—

Impaired accruing TDRs:
Construction	$	10	$	10	$	—	$	—	$	16	$	1
Residential real estate		2,849		1,176		1,539		127		2,979		108
Commercial real estate		1,680		1,680		—		—		2,095		56
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		5		—
Total	$	4,539	$	2,866	$	1,539	$	127	$	5,095	$	165

Other impaired accruing loans:
Construction	$	24	$	24	$	—	$	—	$	215	$	6
Residential real estate		1,107		1,107		—		—		474		3
Commercial real estate		710		710		—		—		553		30
Commercial		—		—		—		—		51		1
Consumer		—		—		—		—		15		—
Total	$	1,841	$	1,841	$	—	$	—	$	1,308	$	40

Total impaired loans:
Construction	$	331	$	331	$	—	$	—	$	540	$	7
Residential real estate		5,319		3,542		1,539		127		5,114		111
Commercial real estate		2,549		2,540		—		—		3,252		86
Commercial		359		174		—		—		278		1
Consumer		29		28		—		—		63		—
Total	$	8,587	$	6,615	$	1,539	$	127	$	9,247	$	205


			Recorded		Recorded
	Unpaid		investment		investment				Year-to-date		Interest
	principal		with no		with an		Related		average recorded		income
(Dollars in thousands)	balance		allowance		allowance		allowance		investment		recognized
December 31, 2021
Impaired nonaccrual loans:
Construction	$	297	$	297	$	—	$	—	$	297	$	—
Residential real estate		882		803		—		—		1,095		—
Commercial real estate		994		606		—		—		2,122		—
Commercial		380		216		—		—		242		—
Consumer		—		—		—		—		9		—
Total	$	2,553	$	1,922	$	—	$	—	$	3,765	$	—

Impaired accruing TDRs:
Construction	$	24	$	24	$	—	$	—	$	30	$	3
Residential real estate		2,965		475		2,361		172		3,150		146
Commercial real estate		2,807		2,352		455		1		2,952		87
Commercial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total	$	5,796	$	2,851	$	2,816	$	173	$	6,132	$	236

Other impaired accruing loans:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		78		78		—		—		465		21
Commercial real estate		420		420		—		—		470		17
Commercial		10		10		—		—		13		—
Consumer		—		—		—		—		—		—
Total	$	508	$	508	$	—	$	—	$	948	$	38

Total impaired loans:
Construction	$	321	$	321	$	—	$	—	$	327	$	3
Residential real estate		3,925		1,356		2,361		172		4,710		167
Commercial real estate		4,221		3,378		455		1		5,544		104
Commercial		390		226		—		—		255		—
Consumer		—		—		—		—		9		—
Total	$	8,857	$	5,281	$	2,816	$	173	$	10,845	$	274

The following tables provide a roll-forward for troubled debt restructurings as of and for the years ended December 31.


	1/1/2022												12/31/2022
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Year Ended
December 31, 2022
Accruing TDRs
Construction	$	24	$	—	$	(14)	$	—	$	—	$	—	$	10	$	—
Residential real estate		2,836		—		(100)		—		(20)		(1)		2,715		127
Commercial real estate		2,807		—		(180)		—		—		(947)		1,680		—
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	5,667	$	—	$	(294)	$	—	$	(20)	$	(948)	$	4,405	$	127

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		(6)		—		20		—		14		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		216		—		(46)		—		—		—		170		—
Consumer		—		—		—		—		—		—		—		—
Total	$	216	$	—	$	(52)	$	—	$	20	$	—	$	184	$	—

Total	$	5,883	$	—	$	(346)	$	—	$	—	$	(948)	$	4,589	$	127


	1/1/2021												12/31/2021
	TDR		New		Disbursements		Charge-		Reclassifications/				TDR		Related
(Dollars in thousands)	Balance		TDRs		(Payments)		offs		Transfer In/(Out)		Payoffs		Balance		Allowance
For the Year Ended
December 31, 2021
Accruing TDRs
Construction	$	34	$	—	$	(10)	$	—	$	—	$	—	$	24	$	—
Residential real estate		3,845		—		(109)		—		—		(900)		2,836		172
Commercial real estate		3,118		—		(311)		—		—		—		2,807		1
Commercial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Total	$	6,997	$	—	$	(430)	$	—	$	—	$	(900)	$	5,667	$	173

Nonaccrual TDRs
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential real estate		—		—		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—		—		—
Commercial		258		—		(42)		—		—		—		216		—
Consumer		—		—		—		—		—		—		—		—
Total	$	258	$	—	$	(42)	$	—	$	—	$	—	$	216	$	—

Total	$	7,255	$	—	$	(472)	$	—	$	—	$	(900)	$	5,883	$	173

There were no TDRs which subsequently defaulted within 12 months of modification for the years ended December 31, 2022 and 2021. Generally, a loan is considered in default when principal or interest is past due 90 days or more, the loan is placed on nonaccrual, the loan is charged off, or there is a transfer to 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 December 31, 2022, there were no nonaccrual loans classified as special mention or doubtful and $1.9 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 at December 31.

Special

(Dollars in thousands)

Pass/Performing (1)

Pass/Watch

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

—

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.


					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 at December 31.

Accruing

30‑59 days

60‑89 days

Greater than

Total

(Dollars in thousands)

Current (1)

past due

90 days

past due

Nonaccrual

PCI

Total

December 31, 2022

Construction

239,990

4,343

1,015

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

—

174

156

147,856

Consumer

285,750

223

—

234

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

0.6

0.1

1.0

100.0

(1)

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


	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 years ended December 31. 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 the year ended

December 31, 2022

Allowance for credit losses:

Beginning Balance

2,454

2,858

4,598

2,070

1,964

13,944

Charge-offs

—

(5)

(6)

(546)

(31)

(588)

Recoveries

142

951

227

1,362

Net (charge-offs) recoveries

137

945

(319)

(2)

774

Provision

506

(373)

(644)

(99)

2,535

1,925

Ending Balance

2,973

2,622

4,899

1,652

4,497

16,643


			Residential		Commercial
(Dollars in thousands)	Construction		real estate		real estate		Commercial		Consumer		Total
For the year ended
December 31, 2021
Allowance for credit losses:
Beginning Balance	$	2,022	$	3,699	$	5,426	$	2,089	$	652	$	13,888

Charge-offs		—		—		—		(235)		(28)		(263)
Recoveries		278		82		114		193		10		677
Net (charge-offs) recoveries		278		82		114		(42)		(18)		414

Provision		154		(923)		(942)		23		1,330		(358)
Ending Balance	$	2,454	$	2,858	$	4,598	$	2,070	$	1,964	$	13,944

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $263 thousand and $311 thousand as of December 31, 2022 and 2021, respectively. There were $18 thousand of residential real estate properties included in the balance of other real estate owned at December 31, 2022 and $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 December 31, 2022 and 2021.