UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, ~~2021~~2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-36094

THE COMMUNITY FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Maryland						52-1652138
(State of Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification No.)

3035 Leonardtown Road, Waldorf, MD, 20601

(Address of Principal Executive Offices) (Zip Code)

(301) 645-5601

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCFC

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☐

Non-accelerated Filer

☒

Smaller Reporting Company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April ~~30, 2021,~~29, 2022, the registrant had ~~5,898,996~~5,654,971 shares of common stock outstanding.

~~Table of Contents~~

TABLE OF CONTENTS


Table of Contents						Page

Forward-Looking Statements

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements (Unaudited)						1
Consolidated Balance Sheets						1
Consolidated Statements of Income						2
Consolidated Statements of Comprehensive Income /Loss						3
Consolidated Statements of Changes in Stockholders’ Equity						4
Consolidated Statements of Cash Flows						5
Notes to Consolidated Financial Statements						7

Item 2 – Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations						41
Item 3 – Quantitative and Qualitative Disclosures about Market Risk						6566
Item 4 – Controls and Procedures						6667

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings						6768
Item 1A – Risk Factors						6768
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds						6768
Item 3 – Defaults Upon Senior Securities						68
Item 4 – Mine Safety Disclosures						68
Item 5 – Other Information						68
Item 6 – Exhibits						69

SIGNATURES						70

Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “is optimistic”, “believe,” “expect,” “anticipate,” ~~“estimate”~~“estimate,” "assume" and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Statements in this report that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements include, without ~~limitation,~~limitation: (i) those relating to the Company’s and Community Bank of the Chesapeake’s future growth and management’s outlook or expectations for revenue, assets, asset quality, profitability, business prospects, net interest margin, non-interest revenue, allowance for loan losses, the level of credit losses from lending, liquidity levels, capital levels, or other future financial or business performance strategies or expectations, ~~and~~(ii) any statements of the plans and objectives of management for future operations products or services, including the expected benefits from, and/or the execution of integration plans relating to any acquisition ~~that~~ we have undertaken or that we undertake in the future; (iii) plans and cost savings regarding branch closings or consolidation; ~~any statement of expectation or belief;~~(iv) projections related to certain financial metrics; (v) expected benefits of programs we introduce, including residential mortgage programs and retail and commercial credit card programs; and (vi) any statement of expectation or belief, and any assumptions underlying the foregoing. These forward-looking statements express management’s current expectations or forecasts of future events, results and conditions, and by their nature are subject to and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein.

Factors that might cause actual results to differ materially from those made in such statements include, but are not limited to: (i) risks, uncertainties and other factors relating to the COVID-19 pandemic (including the length of time that the pandemic continues, the ability of states and local governments to successfully implement the lifting of restrictions on movement and the potential imposition of further restrictions on movement and travel in the ~~future;~~future, the effect of the pandemic on the general economy and on the businesses of our borrowers and their ability to make payments on their obligations; (ii) the remedial actions and stimulus measures adopted by federal, state and local ~~governments;~~governments, and the inability of employees to work due to illness, quarantine, or government mandates); (iii) the impacts related to or resulting from Russia’s military action in Ukraine, including the broader impacts to financial markets and the global macroeconomic and geopolitical environments; (iv) assumptions that interest-earning assets will reprice faster than interest-bearing liabilities and the Bank’s ability to maintain its current favorable funding mix; (v)the synergies and other expected financial benefits from any acquisition that we have undertaken or may undertake in the future may or may not be realized within the expected time frames; (vi) changes in ~~The Community Financial Corporation~~the Company's or ~~Community Bank of~~ the ~~Chesapeake’s strategy;~~Bank's strategy, costs or difficulties related to integration matters might be greater than expected; (vii) availability of and costs associated with obtaining adequate and timely sources of liquidity; (viii) the ability to maintain credit quality; (ix) general economic ~~trends;~~trends and conditions, including inflation and its impacts; (xii) changes in interest rates; loss of deposits and loan demand to other financial institutions; (xiii) substantial changes in financial markets; (xiv) changes in real estate value and the real estate market; (xv) regulatory changes; (xvi) the impact of government shutdowns or sequestration; (xvii) the possibility of unforeseen events affecting the industry generally; (xviii) the uncertainties associated with newly developed or acquired operations; (xix) the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future; (xx) market disruptions and other effects of terrorist activities; and (xxi) the matters described in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the Year Ended December 31, ~~2020,~~2021, and in its other Reports filed with the Securities and Exchange Commission (the “SEC”).

The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this Report or in its filings with the SEC, accessible on the SEC’s Web site at www.sec.gov. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required under the rules and regulations of the SEC.

You are cautioned not to place undue reliance on the forward-looking statements contained in this document in that actual results could differ materially from those indicated in such forward-looking statements, due to a variety of factors. Any forward-looking statement speaks only as of the date of this Report, and the Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.

Table of Contents

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(Unaudited)
(dollars in thousands, except per share amounts) March 31, 2021 December 31, 2020
Assets
Cash and due from banks $ 126,834 $ 56,887
Federal funds sold 43,614 0
Interest-bearing deposits with banks 17,390 20,178
Securities available for sale ("AFS"), at fair value 253,348 246,105
Equity securities carried at fair value through income 4,787 4,855
Non-marketable equity securities held in other financial institutions 207 207
Federal Home Loan Bank ("FHLB") stock - at cost 2,036 2,777
Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans 112,485 107,960
Portfolio Loans Receivable net of allowance for loan losses of $18,256 and $19,424 1,489,806 1,486,115
Net loans 1,602,291 1,594,075
Goodwill 10,835 10,835
Premises and equipment, net 20,540 20,271
Premises and equipment held for sale 430 430
Other real estate owned ("OREO") 2,329 3,109
Accrued interest receivable 7,337 8,717
Investment in bank owned life insurance 38,275 38,061
Core deposit intangible 1,394 1,527
Net deferred tax assets 8,671 7,909
Right of use assets - operating leases 6,391 7,831
Other assets 2,822 2,665
Total Assets $ 2,149,531 $ 2,026,439
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing deposits $ 406,319 $ 362,079
Interest-bearing deposits 1,461,577 1,383,523
Total deposits 1,867,896 1,745,602
Long-term debt 27,285 27,302
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") 12,000 12,000
Subordinated notes net of debt issuance costs - 4.75% 19,468 19,526
Lease liabilities - operating leases 6,614 8,088
Accrued expenses and other liabilities 15,509 15,908
Total Liabilities 1,948,772 1,828,426
Stockholders’ Equity
Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,897,685 and 5,903,613 shares, respectively 59 59
Additional paid in capital 96,181 95,965
Retained earnings 103,294 97,944
Accumulated other comprehensive income 1,684 4,504
Unearned ESOP shares (459) (459)
Total Stockholders’ Equity 200,759 198,013
Total Liabilities and Stockholders’ Equity $ 2,149,531 $ 2,026,439


	(Unaudited)
(dollars in thousands, except per share amounts)	March 31, 2022		December 31, 2021
Assets
Cash and due from banks	$	80,702	$	108,990

Interest-bearing deposits with banks	32,460		30,664
Securities available for sale ("AFS"), at fair value	507,527		497,839

Equity securities carried at fair value through income	4,562		4,772
Non-marketable equity securities held in other financial institutions	207		207
Federal Home Loan Bank ("FHLB") stock - at cost	1,685		1,472
Loans held for sale	373		—
Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans	15,279		26,398
Portfolio Loans Receivable net of allowance for credit losses of $21,382 and $18,417	1,608,156		1,560,393
Net loans	1,623,435		1,586,791
Goodwill	10,835		10,835
Premises and equipment, net	21,304		21,427


Accrued interest receivable	5,389		5,588
Investment in bank owned life insurance	39,145		38,932
Core deposit intangible	924		1,032
Net deferred tax assets	15,523		9,033
Right of use assets - operating leases	6,033		6,124
Other assets	1,819		3,600
Total Assets	$	2,351,923	$	2,327,306
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing deposits	$	644,385	$	445,778
Interest-bearing deposits	1,450,698		1,610,386
Total deposits	2,095,083		2,056,164

Long-term debt	12,213		12,231

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		12,000
Subordinated notes net of debt issuance costs - 4.75%	19,524		19,510
Lease liabilities - operating leases	6,266		6,343
Accrued expenses and other liabilities	13,697		12,925
Total Liabilities	2,158,783		2,119,173

Stockholders’ Equity
Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,686,799 and 5,718,528 shares, respectively	57		57
Additional paid in capital	97,189		96,896
Retained earnings	115,179		113,448
Accumulated other comprehensive losses	(18,969)		(1,952)
Unearned ESOP shares	(316)		(316)
Total Stockholders’ Equity	193,140		208,133
Total Liabilities and Stockholders’ Equity	$	2,351,923	$	2,327,306

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended March 31,
(dollars in thousands, except per share amounts) 2021 2020
Interest and Dividend Income
Loans, including fees $ 16,592 $ 16,502
Interest and dividends on investment securities 1,064 1,469
Interest on deposits with banks 22 68
Total Interest and Dividend Income 17,678 18,039
Interest Expense
Deposits 802 3,044
Short-term borrowings 0 69
Long-term debt 367 573
Total Interest Expense 1,169 3,686
Net Interest Income 16,509 14,353
Provision for loan losses 295 4,100
Net Interest Income After Provision For Loan Losses 16,214 10,253
Noninterest Income
Loan appraisal, credit, and miscellaneous charges 198 14
Net gains on sale of investment securities 586 329
Unrealized (loss) gain on equity securities (85) 75
Income from bank owned life insurance 214 219
Service charges 1,187 982
Referral fee income 451 502
Loss on sale of loans (191) 0
Total Noninterest Income 2,360 2,121
Noninterest Expense
Compensation and benefits 4,788 5,188
Occupancy expense 761 734
Advertising 79 121
Data processing expense 936 928
Professional fees 640 626
Depreciation of premises and equipment 147 158
FDIC Insurance 252 170
OREO valuation allowance and expenses 181 782
Core deposit intangible amortization 133 157
Other expenses 2,231 819
Total Noninterest Expense 10,148 9,683
Income before income taxes 8,426 2,691
Income tax expense (benefit) 2,127 (57)
Net Income $ 6,299 $ 2,748
Earnings Per Common Share
Basic $ 1.07 $ 0.47
Diluted $ 1.07 $ 0.47


	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2022		2021
Interest and Dividend Income
Loans, including fees	$	15,610	$	16,592
Interest and dividends on investment securities	1,666		1,064
Interest on deposits with banks	60		22
Total Interest and Dividend Income	17,336		17,678
Interest Expense
Deposits	513		802

Long-term debt	354		367
Total Interest Expense	867		1,169
Net Interest Income	16,469		16,509
Provision for credit losses	450		295
Provision (recovery) for unfunded commitments	(31)		—
Net Interest Income After Provision For Credit Losses	16,050		16,214
Noninterest Income
Loan appraisal, credit, and miscellaneous charges	176		198

Net gains on sale of investment securities	—		586
Unrealized losses on equity securities	(222)		(85)
Income from bank owned life insurance	214		214
Service charges	926		1,187
Referral fee income	361		451
Net losses on sale of loans originated for sale	(4)		—
Loss on sale of loans	—		(191)
Total Noninterest Income	1,451		2,360
Noninterest Expense
Compensation and benefits	5,055		4,788
Occupancy expense	732		761
Advertising	64		79
Data processing expense	1,007		936
Professional fees	731		640

Depreciation of premises and equipment	149		147


FDIC Insurance	179		252
OREO valuation allowance and expenses	6		181
Core deposit intangible amortization	109		133
Fraud losses	40		1,329
Other expenses	1,008		902
Total Noninterest Expense	9,080		10,148
Income before income taxes	8,421		8,426
Income tax expense	2,133		2,127
Net Income	$	6,288	$	6,299
Earnings Per Common Share
Basic	$	1.11	$	1.07
Diluted	$	1.10	$	1.07
Cash dividends paid per common share	$	0.175	$	0.125

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~INCOME/LOSS

(Unaudited)

Three Months Ended March 31,
(dollars in thousands) 2021 2020
Net Income $ 6,299 $ 2,748
Net unrealized holding (loss) gains arising during period, net of tax (benefit) expense of $(1,147) and $457, respectively. (3,253) 1,412
Reclassification adjustment for gains included in net income, net of tax expense of $153 and $86, respectively. 433 243
Comprehensive Income $ 3,479 $ 4,403


	Three Months Ended March 31,
(dollars in thousands)	2022		2021
Net Income	$	6,288	$	6,299
Net unrealized holding loss arising during period, net of tax benefit of $(5,998) and $(1,147), respectively.	(17,017)		(3,253)
Reclassification adjustment for gains included in net income, net of tax expense of $0 and $153, respectively.	—		433
Comprehensive (Losses) Income	$	(10,729)	$	3,479

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021


(dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Unearned ESOP Shares		Total

Balance at January 1, 2022	$	57	$	96,896	$	113,448	$	(1,952)	$	(316)	$	208,133
Cumulative effect adjustment due to the adoption of ASC 326, net of tax	—		—		(2,006)		—		—		(2,006)
Net Income	—		—		6,288		—		—		6,288
Unrealized holding loss on investment securities, net of tax $(5,998)	—		—		—		(17,017)		—		(17,017)
Cash dividend at $0.175 per common share	—		—		(949)		—		—		(949)
Dividend reinvestment	—		52		(52)		—		—		—
Net change in fair market value below cost of leveraged ESOP shares released	—		6		—		—		—		6

Repurchase of common stock	—		—		(1,550)		—		—		(1,550)
Stock based compensation	—		235		—		—		—		235
Balance at March 31, 2022	$	57	$	97,189	$	115,179	$	(18,969)	$	(316)	$	193,140

(dollars in thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Unearned ESOP Shares Total
Balance at January 1, 2021 $ 59 $ 95,965 $ 97,944 $ 4,504 $ (459) $ 198,013
Net Income — — 6,299 — — 6,299
Unrealized holding loss on investment securities net of tax $(994) — — — (2,820) — (2,820)
Cash dividend at $0.125 per common share — — (704) — — (704)
Dividend reinvestment — 35 (35) — — 0
Net change in fair market value below cost of leveraged ESOP shares released — (5) — — — (5)
Repurchase of common stock — — (210) — — (210)
Stock based compensation — 186 — — — 186
Balance at March 31, 2021 $ 59 $ 96,181 $ 103,294 $ 1,684 $ (459) $ 200,759


(dollars in thousands)	(dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Unearned ESOP Shares		Total		(dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Unearned ESOP Shares		Total

Balance at January 1, 2020		$	59	$	95,474	$	85,059	$	1,504	$	(602)	$	181,494
Balance at January 1, 2021														Balance at January 1, 2021	$	59	$	95,965	$	97,944	$	4,504	$	(459)	$	198,013
Net Income	Net Income	—		—		2,748		—		—		2,748		Net Income	—		—		6,299		—		—		6,299
Unrealized holding gain on investment securities net of tax $543		—		—		—		1,655		—		1,655
Unrealized holding gain on investment securities, net of tax $(994)														Unrealized holding gain on investment securities, net of tax $(994)	—		—		—		(2,820)		—		(2,820)

Cash dividend at $0.125 per common share	Cash dividend at $0.125 per common share	—				(702)		—		—		(702)		Cash dividend at $0.125 per common share	—		—		(704)		—		—		(704)
Dividend reinvestment	Dividend reinvestment	—		35		(35)		—		—		0		Dividend reinvestment	—		35		(35)		—		—		—
Net change in fair market value below cost of leveraged ESOP shares released	Net change in fair market value below cost of leveraged ESOP shares released	—		(4)		—		—		—		(4)		Net change in fair market value below cost of leveraged ESOP shares released	—		(5)		—		—		—		(5)

Repurchase of common stock														Repurchase of common stock	—		—		(210)		—		—		(210)
Stock based compensation	Stock based compensation	—		76				—		—		76		Stock based compensation	—		186		—		—		—		186
Balance at March 31, 2020		$	59	$	95,581	$	87,070	$	3,159	$	(602)	$	185,267
Balance at March 31, 2021														Balance at March 31, 2021	$	59	$	96,181	$	103,294	$	1,684	$	(459)	$	200,759

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021

Cash Flows from Operating Activities	Cash Flows from Operating Activities					Cash Flows from Operating Activities
Net income	Net income	$	6,299	$	2,748	Net income	$	6,288	$	6,299
Adjustments to reconcile net income to net cash provided by operating activities	Adjustments to reconcile net income to net cash provided by operating activities					Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		295		4,100
Provision for credit losses						Provision for credit losses	450		295
Provision (recovery) for unfunded commitments						Provision (recovery) for unfunded commitments	(31)		—
Depreciation and amortization	Depreciation and amortization	399		403		Depreciation and amortization	373		399

Loans originated for resale						Loans originated for resale	(1,606)		—
Proceeds from sale of loans originated for sale						Proceeds from sale of loans originated for sale	1,255		—
Net loss on sale of loans held for sale						Net loss on sale of loans held for sale	4		—
Loss on sale of loans	Loss on sale of loans	191		0		Loss on sale of loans	—		191
Net (gain) loss on the sale of OREO		(22)		3
Net gain on the sale of OREO						Net gain on the sale of OREO	—		(22)
Gains on sales of investment securities	Gains on sales of investment securities	(586)		(329)		Gains on sales of investment securities	—		(586)
Unrealized loss (gain) on equity securities		85		(75)
Unrealized loss on equity securities						Unrealized loss on equity securities	222		85

Net amortization of premium/discount on investment securities	Net amortization of premium/discount on investment securities	108		(29)		Net amortization of premium/discount on investment securities	582		108
Net accretion of merger accounting adjustments	Net accretion of merger accounting adjustments	(90)		(222)		Net accretion of merger accounting adjustments	(62)		(90)
Net amortization of debt issuance costs	Net amortization of debt issuance costs	(58)		0		Net amortization of debt issuance costs	14		(58)
Amortization of core deposit intangible	Amortization of core deposit intangible	133		157		Amortization of core deposit intangible	109		133
Amortization of right of use asset	Amortization of right of use asset	128		0		Amortization of right of use asset	91		128
Net change in right of use assets and lease liabilities	Net change in right of use assets and lease liabilities	(161)		27		Net change in right of use assets and lease liabilities	(77)		(161)
Increase in OREO valuation allowance	Increase in OREO valuation allowance	180		732		Increase in OREO valuation allowance	—		180
Increase in cash surrender value of bank owned life insurance	Increase in cash surrender value of bank owned life insurance	(214)		(219)		Increase in cash surrender value of bank owned life insurance	(213)		(214)
Increase in deferred income tax benefit	Increase in deferred income tax benefit	232		(796)		Increase in deferred income tax benefit	206		232
Decrease (increase) in accrued interest receivable		1,380		(58)
Decrease in accrued interest receivable						Decrease in accrued interest receivable	199		1,380
Stock based compensation	Stock based compensation	186		76		Stock based compensation	235		186
Net change due to deficit of fair market value over cost of leveraged ESOP shares released		(5)		(4)
Decrease (increase) in net deferred loan costs		1,240		(181)
Decrease in accrued expenses and other liabilities		(399)		(1,325)
(Increase) decrease in other assets		(158)		2,977
Net change in fair market value above (below) cost of leveraged ESOP shares released						Net change in fair market value above (below) cost of leveraged ESOP shares released	6		(5)
Decrease in net deferred loan costs						Decrease in net deferred loan costs	283		1,240
Increase (decrease) in accrued expenses and other liabilities						Increase (decrease) in accrued expenses and other liabilities	586		(399)
Decrease (increase) in other assets						Decrease (increase) in other assets	1,781		(158)
Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities	9,163		7,985		Net Cash Provided by Operating Activities	10,695		9,163

Cash Flows from Investing Activities	Cash Flows from Investing Activities					Cash Flows from Investing Activities
Purchase of AFS investment securities	Purchase of AFS investment securities	(35,557)		(53,919)		Purchase of AFS investment securities	(46,404)		(35,557)
Proceeds from redemption or principal payments of AFS investment securities	Proceeds from redemption or principal payments of AFS investment securities	12,420		8,572		Proceeds from redemption or principal payments of AFS investment securities	13,107		12,420

Proceeds from sale of AFS investment securities	Proceeds from sale of AFS investment securities	12,540		41,902		Proceeds from sale of AFS investment securities	—		12,540
Net decrease (increase) of FHLB stock	Net decrease (increase) of FHLB stock	742		(2,179)		Net decrease (increase) of FHLB stock	(214)		742

Net change in loans	Net change in loans	(18,710)		(35,675)		Net change in loans	(39,828)		(18,710)
Purchase of premises and equipment	Purchase of premises and equipment	(668)		(46)		Purchase of premises and equipment	(250)		(668)
Proceeds from sale of OREO	Proceeds from sale of OREO	622		700		Proceeds from sale of OREO	—		622

Proceeds from sale of loans	Proceeds from sale of loans	8,858		0		Proceeds from sale of loans	—		8,858

Net Cash Used in Investing Activities	Net Cash Used in Investing Activities	(19,753)		(40,645)		Net Cash Used in Investing Activities	(73,589)		(19,753)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

~~(continued)~~

(Continued)


		Three Months Ended March 31,					Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021
Cash Flows from Financing Activities						Cash Flows from Financing Activities
Net increase in deposits	Net increase in deposits	$	122,294	$	752	Net increase in deposits	$	38,919	$	122,294
Proceeds from long-term debt		0		27,000

Payments of long-term debt	Payments of long-term debt	(17)		(17)		Payments of long-term debt	(18)		(17)
Net increase in short term borrowings		0		22,000

Payments of subordinated notes - 6.25%		0		(23,000)

Dividends paid	Dividends paid	(704)		(702)		Dividends paid	(949)		(704)

Repurchase of common stock	Repurchase of common stock	(210)		0		Repurchase of common stock	(1,550)		(210)
Net Cash Provided by Financing Activities	Net Cash Provided by Financing Activities	121,363		26,033		Net Cash Provided by Financing Activities	36,402		121,363
Increase (decrease) in Cash and Cash Equivalents		110,773		(6,627)
(Decrease) increase in Cash and Cash Equivalents						(Decrease) increase in Cash and Cash Equivalents	(26,492)		110,773

Cash and Cash Equivalents - January 1	Cash and Cash Equivalents - January 1	77,065		32,469		Cash and Cash Equivalents - January 1	139,654		77,065
Cash and Cash Equivalents - March 31	Cash and Cash Equivalents - March 31	$	187,838	$	25,842	Cash and Cash Equivalents - March 31	$	113,162	$	187,838

Supplemental Disclosures of Cash Flow Information	Supplemental Disclosures of Cash Flow Information					Supplemental Disclosures of Cash Flow Information
Cash paid during the period for	Cash paid during the period for					Cash paid during the period for
Interest	Interest	$	1,105	$	4,331	Interest	$	637	$	1,105
Income taxes	Income taxes	$	0	$	0	Income taxes	$	—	$	—

Supplemental Schedule of Non-Cash Operating Activities	Supplemental Schedule of Non-Cash Operating Activities					Supplemental Schedule of Non-Cash Operating Activities
Issuance of common stock for payment of compensation	Issuance of common stock for payment of compensation	$	0	$	303	Issuance of common stock for payment of compensation	$	130	$	—

Supplemental Schedule of Non-Cash Investing and Financing Activities						Supplemental Schedule of Non-Cash Investing and Financing Activities
Cumulative effect adjustment for adoption of ASU 2016-13						Cumulative effect adjustment for adoption of ASU 2016-13	$	2,006	$	—

See notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND NATURE OF OPERATIONS

Basis of Presentation

The Consolidated Financial Statements include the accounts of The Community Financial Corporation ~~(the “Company”)~~ and its wholly-owned subsidiary, Community Bank of the Chesapeake (the “Bank”), ~~and~~(collectively, the ~~Bank’s wholly-owned subsidiary, Community Mortgage Corporation of Tri-County,~~“Company”), included herein are unaudited.

The Consolidated Financial Statements reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. Management believes that the included disclosures are adequate to make the information presented not misleading. The balances as of December 31, ~~2020~~2021 have been derived from audited Consolidated Financial Statements. ~~Additions to the~~The Company’s accounting policies are disclosed in the ~~2020~~2021 Annual Report included in Note 1, as well as the adoption of the new Current Expected Credit Loss ("CECL") accounting ~~standards included in Note 1.~~standard that is described below. The results of operations for the three months March 31, ~~2021~~2022 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period.

These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes included in the Company’s ~~2020~~2021 Annual Report on Form 10-K.

Reclassification

Certain items in prior Consolidated Financial Statements have been reclassified to conform to the current presentation.

Nature of Operations

The Company provides financial services to individuals and businesses through its offices in Southern Maryland, and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.

Use of Estimates

The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for ~~loan~~credit losses ("~~ALLL"~~ACL"), real estate acquired in the settlement of loans ("OREO"), fair value of financial instruments, fair value of assets acquired and liabilities assumed in a business combination, evaluating other-than-temporary-impairment ("OTTI") of investment securities and valuation of deferred tax assets.

~~COVID-19~~

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued. On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a global pandemic. The COVID-19 pandemic adversely impacted many of the Company's customers and impaired their abilities to fulfill their financial obligations to the Company. In response to the likely effects on the economy of the pandemic, the Federal Open Market Committee reduced the federal funds rate from a target range of 1.50% to 1.75% to a target range of 0% to 0.25%. These reductions in interest rates along with the other effects of the COVID-19 outbreak may adversely affect the Company's financial condition and results of operations. Please refer to Management's Discussion and Analysis for further discussion.

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New Accounting Policy

~~COVID-19 Deferrals~~Allowance for Credit Losses

On ~~March 22, 2020, federal banking regulatory agencies, including~~January 1, 2022, the ~~Board~~Company adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of ~~Governors~~Credit Losses on Financial Instruments, which replaced the incurred loss methodology for determining the provision for credit losses and ACL with the CECL methodology. The measurement of expected credit losses under the CECL methodology applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. In addition, ASU 2016-13 made changes to the accounting for available-for-sale ("AFS") debt securities. Credit-related impairments of AFS debt securities are now recognized through an allowance for credit loss rather than a write-down of the ~~Federal Reserve System~~securities amortized cost basis when management does not intend to sell or believes that it is not likely that they will be required to sell the securities prior to recovery of the securities amortized cost basis.

We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2022 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. At adoption, the Company did not hold Held to Maturity ("HTM") investment debt securities.

The following table shows the impact of the Company's adoption of ASC 326:


	January 1, 2022
(dollars in thousands)	As Reported Under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
Portfolio Loans:
Commercial real estate	$	1,113,793	$	1,115,485	(1,692)
Residential first mortgages	92,710		91,120		1,590
Residential rentals	194,911		195,035		(124)
Construction and land development	35,502		35,590		(88)
Home equity and second mortgages	25,661		25,638		23
Commercial loans	50,512		50,574		(62)
Consumer loans	3,015		3,002		13
Commercial equipment	62,706		62,499		207
Gross Portfolio Loans	1,578,810		1,578,943		(133)
Adjustments:
Net deferred costs	—		(133)		133
Allowance for credit losses	(20,913)		(18,417)		(2,496)
Net Portfolio Loans	1,557,897		1,560,393		(2,496)

U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	26,398		27,276		(878)
Net deferred fees	—		(878)		878
Net U.S. SBA PPP Loans	26,398		26,398		—
Total Net Loans	$	1,584,295	$	1,586,791	$	(2,496)

Liabilities: Reserve for Unfunded Commitments	$	268	$	51	$	217

Loans that the Company has the intent and ability to hold for the ~~Federal Deposit Insurance Corporation, ("~~foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for the ~~agencies"~~allowance for credit losses and any deferred fees or premiums. Interest income is accrued on the unpaid principal balance. Loan origination fees and premiums, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered credit deteriorated. Evidence of credit quality deterioration as of the purchase date may include statistics such as internal risk grade, past due and nonaccrual status, recent borrower credit scores and recent loan-to-value (“LTV”) ~~issued~~percentages. At December 31, 2021, the Bank had purchased credit-deteriorated (“PCD”) loans from the County First acquisition PCD loans with an ~~interagency statement~~unpaid principal balances of $1.4 million and a carrying values of $1.1 million. At the adoption of ASC 326, management evaluated the remaining unamortized discount on the PCD loans and determined that approximately $8,000 of the discount was credit

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related and reclassified into the ACL. The non-credit component of the discount will be recognized in interest income over the remaining life of the loan.

The Company considers a loan ~~modifications and reporting for financial institutions working with customers affected~~to be past due or delinquent when the terms of the contractual obligation are not met by the ~~Coronavirus.~~borrower. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The ~~interagency statement impacted accounting~~accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Non-accrual loans include certain loans that are current with all loan payments and are placed on non-accrual status due to customer operating results and cash flows. Non-accrual loans are evaluated for impairment on a loan-by-loan basis in accordance with the Company’s impairment methodology.

Consumer loans, excluding credit card loans, are typically charged-off no later than 90 days past due. Credit card loans are typically charged-off no later than 180 days past due. Mortgage and commercial loans are fully or partially charged-off when in management’s judgment all reasonable efforts to return a loan ~~modifications. Under Accounting Standards Codification 310-40, "Receivables - Troubled Debt Restructurings by Creditors," ("ASC 310-40"),~~to performing status have occurred. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

TDRs are loans that have been modified to provide for a ~~restructuring~~reduction or a delay in the payment of ~~debt constitutes~~either interest or principal because of deterioration in the financial condition of the borrower. A loan extended or renewed at a ~~troubled debt restructure ("TDR") if the creditor, for economic or legal reasons related~~stated interest rate equal to the ~~debtor's financial difficulties, grants~~current interest rate for new debt with similar risk is not considered a ~~concession to the debtor that~~TDR. Once an obligation has been classified as a TDR it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers, who were current prior to any relief, are notcontinues to be considered ~~TDRs. This~~a TDR until paid in full or until the debt is refinanced and considered unimpaired. All TDRs are assessed on a loan-by-loan basis. The Company does not participate in any specific government or Company-sponsored loan modification programs. All restructured loan agreements are individual contracts negotiated with a borrower.

Allowance for Credit Losses - Loans

The ACL is an estimate of the expected credit losses for loans held for investment and off-balance sheet exposures. ASU 2016-13 replaced the incurred loss model that recognized losses when it became probable that a credit losses had occurred, with a model that immediately recognizes a credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Loan losses are charged against the ACL when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL in accordance with U.S. GAAP and in compliance with appropriate regulatory guidelines.

The ACL includes ~~modifications~~quantitative estimates of losses for collectively and individually evaluated loans. As more fully described below, the model-based quantitative estimate for collectively evaluated loans is determined using the probability of default (PD) and loss given default (LGD) at the segment level and applied at the loan level against the expected exposure at default (EAD). Qualitative adjustments to the quantitative estimate may be made using information not considered in the quantitative model.

The Bank uses a range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as ~~payment deferrals, fee waivers, extensions~~the impact of ~~repayment terms,~~changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic conditions and factors that may affect the borrower’s ability to repay, or reduce the estimated value of underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The ACL is measured on a collective basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by loan type code or product type codes and assigned to a corresponding portfolio segment. Portfolio segments may be further subdivided into similar risk profile groupings based on interest rate structure, types of collateral or other ~~delays~~terms and characteristics.

The probability of default (“PD”) calculation analyzes the historical loan portfolio over the given look back period to identify, by segment, loans that have defaulted. A default is defined as a loan that has moved to past due 90 days and greater, nonaccrual status, or experienced a charge-off during the period. The model observes loans over a 12-month window, detecting any events previously defined. This information is then used by the model to calculate annual iterative count-based PD rates for each segment. This process is then repeated for all dates within the historical data range. These averaged PD’s are used for a 12-month straight-line reversion to the historical mean. The historical data used to calculate this input dates was captured from mid-2006 through the most recent quarter end.

The Company utilizes reasonable and supportable forecasts of future economic conditions when estimating the ACL on loans. The model’s calculation also includes a 12-month forecasted PD based on a regression model that compared the Company’s historical loan data to

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various national economic metrics during the same periods. The results showed the Company’s past losses having a high rate of correlation to national unemployment rates for fixed rate loans and the 10-Year U.S. Treasury for adjustable rate loans. The model uses this information, along with the most recently published Wall Street Journal survey of sixty economists’ forecasts predicting unemployment rates out over the next four quarters to estimate the PD for the forward-looking 12-month period. These data are also used to predict loan losses at different levels of stress, including a baseline, low, high and adverse economic conditions. After the forecast period, PD rates revert to the historical mean straight line over a 12-month period for the entire data set.

The loss given default (“LGD”) calculation is based on actual losses (charge-offs, net recoveries) at a loan level experienced over the entire look-back period aggregated for each loan segment. The aggregate loss is divided by the exposure at default to determine an LGD rate. Defaults occurring during the look-back period are included in the denominator, whether a loss occurred or not and exposure at default is determined by the loan balance immediately preceding the default event. When the Company's data are insufficient. an industry index is used.

The exposure at default (“EAD”) calculation projects future expected balances to apply PD and LGD assumptions through the creation of monthly cash flow schedules. These are derived based on current contractual terms (balance, interest rate, payment structure), adjusted for expected voluntary prepayments. The contractual terms exclude expected extensions, renewals and modifications unless either of the following applies: management has the reasonable expectation that a loan will be restructured, or the extension or renewal option are included in the borrower contract.

On a quarterly basis, the Company uses internal portfolio credit data, such as levels of non-accrual loans, classified assets and concentrations of credit along with other external information not used in the quantitative calculation to determine qualitative adjustments.

Loans that do not share the same common risk characteristics with other loans are individually assessed. Such loans include non-accrual loans, TDRs, loans classified as substandard or worse, loans that are ~~insignificant. Borrowers considered current~~greater than 89 days delinquent and any other loan identified by management determines for individual assessment. Reserves on individually assessed loans are ~~those that~~measured on a loan-by loan basis. Generally, consumer loans, including credit cards, are ~~less~~not individually assessed as the Bank's policy is to charge-off credit card loans when they become 180 days delinquent and other consumer loans when they are more than 3090 days ~~past due on their contractual payments~~delinquent.

The methodology used in the estimation of the ACL, which is performed at ~~the time a modification program~~least quarterly, is ~~implemented. Under the March 22, 2020 interagency statement loan modifications were required~~designed to be ~~executed between March 1, 2020,~~responsive to changes in portfolio credit quality and forecasted economic conditions. Changes are reflected in the pool-based allowance and in reserves assigned on an individual basis as collectibility is updated with new information. Our portfolio loss ratios have been closely monitored. The review of the appropriateness of the ACL is performed by executive management and is presented to the Credit Risk Committee and the ~~earlier~~Audit Committee. The committees report to the Board as part of ~~(A) 60 days after the date~~Board's quarterly review of ~~termination~~our regulatory reporting and consolidated financial statements.

The calculation of the National Emergency or (B) December 31, 2020. The Consolidated Appropriations Act that was signed into law on December 27, 2020 extended the loan modification date to the earlier of (A) January 1, 2022 or (B) 60 days after the date on which the national COVID-19 emergency terminates. This interagency guidance is expected to haveACL excludes accrued interest receivable balances because these balances are reversed in a ~~material impact on the Company's Consolidated Financial Statements.~~

Under the Coronavirus Aid, Relief and Economic Security ("CARES") Act, borrowers who were making payments as required and were not considered past due prior to becoming affected by COVID-19 and then receive payment accommodations as a result of the effects of COVID-19 generally would not be reported as past due or nonaccrual for regulatory and financial reporting during the accommodation period. Consistent with regulatory guidance, if new information during the deferral period indicates that there is evidence of default, the Bank may change the classification rating (e.g., change from passing credit to substandard) and accrual status (e.g., change from accrual to non-accrual status) as deemed appropriate.

In keeping with regulatory guidance to work with borrowers as outlined in the CARES Act, the Company offered payment deferral programs for its business and individual customers who were adversely affected by the pandemic. Generally, depending on the demonstrated need of the client, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days. Whiletimely manner against previously recognized interest ~~and fees will still accrue to~~ income ~~should eventual credit losses on these deferred payments emerge or if~~when a loan is placed on ~~nonaccrual status, interest income~~non-accrual status.

Allowance for Credit Losses - AFS Debt securities

As described above, the Company does not presently hold any HTM debt securities and ~~fees accrued would be reversed. Given~~therefore is not presently required to apply a CECL methodology for an HTM investment portfolio.

The impairment model for AFS debt securities differs from the ~~ongoing uncertainty regarding~~CECL approach utilized by HTM debt securities because AFS debt securities are measured at fair value rather than amortized cost. Although ASU No. 2016-13 replaced the legacy other-than-temporary impairment (“OTTI”) model with a credit loss model, it retained the fundamental nature of the legacy OTTI model for AFS securities. One notable change from the legacy OTTI model is when evaluating whether credit loss exists, an entity may no longer consider the length ~~and economic impact~~of time fair value has been less than amortized cost. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the ~~COVID-19 crisis~~security by a rating agency, and adverse conditions specifically related to the ~~effects~~security, among other factors. If this assessment indicates that a credit loss exists, the present value of ~~various government stimulus programs,~~cash flows expected to be collected from the ~~estimated number~~security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and ~~dollar impact~~a corresponding allowance for credit losses is recorded. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of ~~loan deferrals~~an AFS security is confirmed or when either of the ~~Company could execute~~criteria regarding intent or requirement to sell is ~~subject to change.~~met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a noncredit-related impairment. As of March 31, ~~2021~~2022, the Company determined that the

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unrealized loss positions in AFS securities were not the result of credit losses, and therefore, an allowance for credit losses was not recorded. See Note 2 Investment Securities for more information.

Management has made a policy election to exclude accrued interest from the amortized cost basis of AFS debt securities and report accrued interest separately in accrued interest and other assets in the consolidated balance sheets. AFS debt securities are placed on non- accrual status when management no longer expects to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status. Accordingly, the Company does not recognize an allowance for credit loss against accrued interest receivable. The majority of AFS debt securities as of March 31, 2022 and December 31, ~~2020,~~2021 were issued by Government Sponsored Enterprises (“GSEs”) and U.S. agencies. As such, an allowance for credit losses is not considered necessary.

Collateral Dependent Financial Assets

Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company ~~had $23.1 million~~has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and ~~$35.4 million~~the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. Subsequent changes to the fair value of collateral, for which an ACL was previously recognized, will be reported as a provision (recovery) for credit losses.

The Bank uses the practical expedient and uses the fair value of the collateral, net of estimated selling costs, to determine the expected credit loss for most individually assessed collateral dependent loans .

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposure

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan ~~deferrals, respectively, which~~commitments is represented ~~1.53% and 2.35%~~by the contractual amount of ~~gross~~those instruments. Such financial instruments are recorded when they are funded.

The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s consolidated statements of operations. The RUC on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, ~~respectively.~~taking into consideration the likelihood that funding will occur, and is included in Other Liabilities on the Company’s consolidated balance sheets.

See Note 1 – Summary of Significant Accounting Policies included in the Company’s ~~2020~~2021 Annual Report on Form 10-K for a list of policies in effect as of December 31, ~~2020.~~2021.

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)

Adopted New Accounting Standard

ASU 2016-13 -– Financial Instruments -– Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. ASU ~~No.~~ 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard ~~will replace~~replaced the ~~current~~existing “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, ~~will apply to:~~applies to (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, ~~held-to-maturity~~HTM securities, loan commitments, and financial guarantees. Credit losses relating to AFS debt securities will be recorded through an allowance for credit losses. The ASU also simplifies the accounting model for ~~purchase credit impaired~~Purchase Credit Impaired (“PCI”) debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the ~~ALLL.~~allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).

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The Company has formed a CECL committee with representatives from various departments. The committee has selected a third-party vendor solution to assist in the application of the ASU 2016-13. The committee continues to make progress in accordance with the Company's plan for adoption. The Company has developed new expected credit loss estimation models, depending on the nature of each identified pool of financial assets with similar risk characteristics, and is currently reviewing and analyzing the different methodologies to estimate expected credit losses. The Company is also working on documenting new processes and controls, challenging estimated credit loss model assumptions and outputs, refining the qualitative framework as well as drafting policies and disclosures. Additionally, parallel runs will be enhanced throughout 2021 as the processes, controls, and policies are finalized. The adoption of the ASU 2016-13 could result in an increase or decrease in the allowance for loan losses as a result of changing from an “incurred loss” model to an “expected loss” model. Furthermore, ASU 2016-13 will necessitate the establishment of an allowance for expected credit losses for certain debt securities and other financial assets.

In December 2019, the FASB issued ASU ~~No.~~No 2019-10, Financial ~~Instruments-Credit~~Instruments - Credit Losses (Topic 326). This update amends the effective date of ASU ~~No.~~ 2016-13 for certain entities, including smaller reporting companies until fiscal years beginning after December 15, 2022, including interim periods within those fiscal periods. Early adoption iswas permitted. The ~~one-time determination date for identifying as a smaller reporting company was November 15, 2019.~~FASB has issued other ASUs that clarify items related to ASU 2016-13. The Company ~~met~~adopted this guidance effective January 1, 2022.

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The Company's estimates are derived using one-year reasonable and supportable economic forecasts with subsequent one-year reversion to the ~~definition~~historical mean loss rates. For loans that share similar risk characteristics and are collectively assessed, the Company uses a probability of ~~a smaller reporting company~~default/loss given default cash flow method to determine the expected losses at the loan level. Loans that do not share similar risk characteristics are evaluated on an individual basis. Based on forecasted economic conditions and portfolio balances as of ~~this date and plans~~January 1, 2022, we recognized an increase to ~~adopt~~ the standard with the amended effective date. The Company continues to work through implementation and continues collecting and retaining loan and credit data and evaluating various loss estimation models. Management expects to recognize a one-time cumulative effect adjustment to theopening allowance for credit losses of $2.5 million. The increase is primarily related to the change in methodology from estimating losses incurred as of the ~~beginning of~~balance sheet date to estimating lifetime credit losses required by the ~~first reporting period in which the standard is effective. While the Company currently cannot reasonably estimate the~~CECL standard.

The impact of ~~adopting this standard,~~adoption was not significant to the ~~Company expects~~Bank's regulatory capital. The Bank did not elect to phase-in, over a three-year period, the standard's initial impact ~~will be influenced~~on regulatory capital as permitted by the ~~composition, characteristics and quality of its loan and securities portfolios, as well as the general economic conditions and forecasts as of the adoption date.~~

~~ASU 2019-04~~ - In April 2019, the FASB issued ASU No. 2019-4 which codifies improvements to Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), Financial Instruments (Topic 825). With respect to Topic 326, ASU 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to Topic 825, ASU 2019-04 clarifies the scope of the guidance for recognizing and measuring financial instruments, the requirement for remeasurement under ASC 820 when using the measurement alternative, which equity securities have to be remeasured at historical exchange rates, and certain disclosure requirements. The amendments to Topic 326 have the same effective dates as ASU 2016-13. The Company is currently evaluating the potential impact of Topic 326 amendments on the Company's Consolidated Financial Statements. The amendments to Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2022 and are not expected to have a material impact on the Company's Consolidated Financial Statements.

regulatory transition rules.

ASU 2019-05- Financial Instruments-Credit Losses (Topic 326). In May 2019, the FASB issued ASU No. 2019-05. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option for financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to ~~held-to-maturity~~HTM debt securities. Entities are required to make this election on an instrument-by-instrument basis. The Company ~~plans to adopt~~adopted ASU 2019-05 concurrently upon adoption of ASU ~~2016-13 unless an earlier~~2016-13. The adoption ~~is permitted in an accounting update. The Company is evaluating the impact~~ of ~~electing the fair value option of ASU 2019-05 on the Company's Consolidated Financial Statements.~~

~~ASU 2020-02 -~~ Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842). In February 2020, the FASB issued guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. The amendments were effective upon issuance. The Company doesCECL did not ~~expect these amendments to~~ have a material effect on ~~its Consolidated Financial Statements.~~available-for-sale securities, which are predominantly composed of mortgage-backed securities issued by government sponsored entities and U.S. agencies and U.S. government obligations.

Pending adoption

ASU 2020-04 - Reference Rate Reform (Topic ~~848)~~848). In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.

ASU Update 2022-02Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU Update 2022-02 eliminates the TDR recognition and measurement guidance and, instead required that an entity evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. In addition, ASU Update 2022-02 requires that an entity disclosure current-period gross write-offs by year of origination for financing receivables and net investment in leases. Entities have the option to apply a modified retrospective transition method for TDRs. The disclosure amendments in the Update 2022-02 will be applied prospectively. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its Consolidated Financial Statements.

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NOTE 2 – INVESTMENT SECURITIES

Amortized cost and fair values of investment securities at March 31, 2022 and December 31, 2021 are summarized as follows:


		March 31, 2021									March 31, 2022
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
AFS Securities	AFS Securities									AFS Securities
Asset-backed securities issued by GSEs and U.S. Agencies	Asset-backed securities issued by GSEs and U.S. Agencies									Asset-backed securities issued by GSEs and U.S. Agencies
Residential Mortgage Backed Securities ("MBS")	Residential Mortgage Backed Securities ("MBS")	$	37,204	$	1,367	$	191	$	38,380	Residential Mortgage Backed Securities ("MBS")	$	127,828	$	172	$	6,480	$	121,520
Residential Collateralized Mortgage Obligations ("CMOs")	Residential Collateralized Mortgage Obligations ("CMOs")	132,294		1,575		1,221		132,648		Residential Collateralized Mortgage Obligations ("CMOs")	197,548		85		7,834		189,799

U.S. Agency										U.S. Agency	14,488		—		1,078		13,410
Asset-backed securities ("ABSs") issued by Others:	Asset-backed securities ("ABSs") issued by Others:									Asset-backed securities ("ABSs") issued by Others:
Residential CMOs	Residential CMOs	271		10		6		275		Residential CMOs	199		3		3		199
Student Loan Trust ABSs	Student Loan Trust ABSs	39,925		625		70		40,480		Student Loan Trust ABSs	54,425		147		1,103		53,469

Municipal bonds	Municipal bonds	36,914		521		314		37,121		Municipal bonds	98,889		16		8,078		90,827

Corporate bonds										Corporate bonds	3,000		—		40		2,960
U.S. government obligations	U.S. government obligations	4,463		0		19		4,444		U.S. government obligations	36,805		—		1,462		35,343
Total AFS Securities	Total AFS Securities	$	251,071	$	4,098	$	1,821	$	253,348	Total AFS Securities	$	533,182	$	423	$	26,078	$	507,527

Equity securities carried at fair value through income	Equity securities carried at fair value through income									Equity securities carried at fair value through income
CRA investment fund	CRA investment fund	$	4,787	$	—	$	—	$	4,787	CRA investment fund	$	4,562	$	—	$	—	$	4,562

Non-marketable equity securities	Non-marketable equity securities									Non-marketable equity securities
Other equity securities	Other equity securities	$	207	$	—	$	—	$	207	Other equity securities	$	207	$	—	$	—	$	207

Total Investment Securities	Total Investment Securities	$	256,065	$	4,098	$	1,821	$	258,342	Total Investment Securities	$	537,951	$	423	$	26,078	$	512,296

~~Amortized cost and fair values of investment securities at December 31, 2020 are summarized as follows:~~


		December 31, 2020									December 31, 2021
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
AFS Securities	AFS Securities									AFS Securities
Asset-backed securities issued by GSEs and U.S. Agencies	Asset-backed securities issued by GSEs and U.S. Agencies									Asset-backed securities issued by GSEs and U.S. Agencies
Residential Mortgage Backed Securities ("MBS")		$	33,248	$	1,735	$	30	$	34,953
Residential Collateralized Mortgage Obligations ("CMOs")		125,564		2,180		297		127,447

Asset-backed securities ("ABSs") issued by Others:
Residential MBS										Residential MBS	$	121,125	$	1,057	$	2,266	$	119,916
Residential CMOs										Residential CMOs	198,780		710		2,367		197,123
U.S. Agency										U.S. Agency	14,433		11		140		14,304
Asset-backed securities issued by Others:										Asset-backed securities issued by Others:
Residential CMOs	Residential CMOs	292		5		9		288		Residential CMOs	220		5		4		221
Student Loan Trust ABSs	Student Loan Trust ABSs	37,141		386		88		37,439		Student Loan Trust ABSs	56,422		438		286		56,574

Municipal bonds	Municipal bonds	42,268		2,210		0		44,478		Municipal bonds	92,556		1,169		884		92,841

U.S. government obligations	U.S. government obligations	1,500		0		0		1,500		U.S. government obligations	16,942		—		82		16,860
Total AFS Securities	Total AFS Securities	$	240,013	$	6,516	$	424	$	246,105	Total AFS Securities	$	500,478	$	3,390	$	6,029	$	497,839

Equity securities carried at fair value through income	Equity securities carried at fair value through income									Equity securities carried at fair value through income
CRA investment fund	CRA investment fund	$	4,855	$	—	$	—	$	4,855	CRA investment fund	$	4,772	$	—	$	—	$	4,772

Non-marketable equity securities	Non-marketable equity securities									Non-marketable equity securities
Other equity securities	Other equity securities	$	207	$	—	$	—	$	207	Other equity securities	$	207	$	—	$	—	$	207

Total Investment Securities	Total Investment Securities	$	245,075	$	6,516	$	424	$	251,167	Total Investment Securities	$	505,457	$	3,390	$	6,029	$	502,818

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The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. AFS debt securities, AIR totaled $1.2 million and $1.1 million as of March 31, 2022, and December 31, 2021, respectively. AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

At March 31, ~~2021~~2022 and December 31, ~~2020~~2021 securities with an amortized cost of ~~$46.7~~$55.0 million and ~~$48.2~~$50.9 million were pledged to secure certain customer deposits. ~~At March 31, 2021, and December 31, 2020, 0 securities were pledged as collateral for advances from the FHLB of Atlanta.~~

During the quarter ended March 31, 2022, the Company did not sell any securities. During the year ended December 31, 2021, the Company recognized net gains of $0.6 million on the sale of 10 AFS securities with aggregate carrying values of $11.9 million. ~~During the year ended December 31, 2020, the Company recognized net gains of $1.4 million on the sale of 42 AFS securities with aggregate carrying values of $62.5 million.~~

The ~~Company’s investment portfolio includes~~Company does not believe that the AFS debt securities that ~~are~~were in an unrealized loss position as of March 31, 2022, which were comprised of 295 individual securities, represent a credit loss impairment. As of March 31, 2022, and December 31, 2021, the ~~details~~gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government sponsored enterprises. These securities carry the explicit and/or implicit guarantee of ~~which~~the U.S. government, are ~~included~~widely recognized as “risk free,” and have a long history of zero credit loss. The Company also performed credit review on municipal bonds issued by States and Political Subdivisions and asset backed securities issued by Student Loan Trust. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the ~~following table. Although these~~investment securities ~~if sold at March 31, 2021 would result in a pretax loss~~were purchased, and not due to the credit quality of ~~$1.8 million,~~ the investment securities. The Company ~~has no intent~~does not intend to sell the ~~applicable~~investment securities ~~at such fair values,~~that were in an unrealized loss position, and ~~maintains the ability to hold these securities until all principal has been recovered. It~~it is not more likely than not that the Company will ~~not~~be required to sell ~~any~~the investment securities before recovery of their amortized cost basis, which may be at ~~a loss for liquidity purposes. Declines~~maturity. Management believes that the securities will either recover in ~~the fair values of these securities are due to general~~ market ~~conditions which reflect prospects for the economy~~value or be paid off as a whole. When determining OTTI, the Company considers such factors as adverse conditions specifically related to a certain security or to specific conditions in an industry or geographic area, the time frame securities have been in an unrealized loss position, the Company’s ability to hold the security for a period of time sufficient to allow for anticipated recovery in value, whether or not the security has been downgraded by a rating agency, and whether or not the financial condition of the security issuer has severely deteriorated. As of March 31, 2021, the Company considers all securities with unrealized loss positions to be temporarily impaired, and consequently, does not believe it will sustain any material realized losses as a result of the current temporary decline in fair value. NaN charges related to OTTI were made during the three months ended March 31, 2021 and the year ended December 31, 2020.agreed.

AFS Securities

Gross unrealized losses and estimated fair value by length of time that individual AFS securities have been in a continuous unrealized loss position at March 31, ~~2021,~~2022, and December 31, ~~2020~~2021 were as follows:


March 31, 2021		Less Than 12 Months				More Than 12 Months				Total
March 31, 2022														March 31, 2022	Less Than 12 Months				More Than 12 Months				Total
(dollars in thousands)	(dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Losses		(dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies	Asset-backed securities issued by GSEs and U.S. Agencies	$	42,247	$	1,406	$	1,202	$	6	$	43,449	$	1,412	Asset-backed securities issued by GSEs and U.S. Agencies	$	190,094	$	10,820	$	106,161	$	4,572	$	296,255	$	15,392

Asset-backed securities issued by Others	Asset-backed securities issued by Others	0		0		78		6		78		6		Asset-backed securities issued by Others	—		—		44		3		44		3
Student Loan Trust ABSs	Student Loan Trust ABSs	2,852		24		5,055		46		7,907		70		Student Loan Trust ABSs	17,882		716		24,890		387		42,772		1,103
Municipal bonds	Municipal bonds	9,511		199		8,391		115		17,902		314		Municipal bonds	56,379		5,774		33,041		2,304		89,420		8,078
Corporate bonds														Corporate bonds	2,960		40		—		—		2,960		40
U.S. government obligations	U.S. government obligations	2,945		19		0		0		2,945		19		U.S. government obligations	25,896		959		9,447		503		35,343		1,462
		$	57,555	$	1,648	$	14,726	$	173	$	72,281	$	1,821		$	293,211	$	18,309	$	173,583	$	7,769	$	466,794	$	26,078

December 31, 2020 Less Than 12 Months More Than 12 Months Total
(dollars in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies $ 32,281 $ 320 $ 670 $ 7 $ 32,951 $ 327
Asset-backed securities issued by Others 0 0 87 9 87 9
Student Loan Trust ABSs 12,511 88 — 0 12,511 88
$ 44,792 $ 408 $ 757 $ 16 $ 45,549 $ 424


December 31, 2021	Less Than 12 Months				More Than 12 Months				Total
(dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Losses
Asset-backed securities issued by GSEs and U.S. Agencies	$	205,891	$	3,997	$	41,327	$	776	$	247,218	$	4,773


Asset-backed securities issued by Others	—		—		57		4		57		4
Student Loan Trust ABSs	21,640		281		2,226		5		23,866		286
Municipal bonds	47,314		776		6,696		108		54,010		884

U.S. government obligations	14,860		82		1,999		—		16,859		82
	$	289,705	$	5,136	$	52,305	$	893	$	342,010	$	6,029

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AFS asset-backed securities issued by GSEs are guaranteed by the issuer and U.S. government agency securities and bonds are guaranteed by the full faith and credit of the U.S. government. At March 31, 2021 and December 31, 2020, total unrealized losses were $1.8 million and $0.4 million of the portfolio amortized cost of $251.1 million and $240.0 million, respectively.

At March 31, 2021 and December 31, 2020, AFS asset-backed securities issued by GSEs and U.S. Agencies with unrealized losses had amortized cost of $44.9 million and $33.3 million, respectively, with the unrealized losses of $1.4 million and $0.3 million, respectively. At March 31, 2021 and December 31, 2020, AFS asset-backed securities issued by student loan trust and others with unrealized losses had amortized cost of $8.0 million and $12.6 million, respectively, with unrealized losses of $70,000 and $88,000, respectively. The Company's amortized cost investment of $39.9 million in student loan trusts are 97% U.S. government guaranteed. At March 31, 2021, AFS municipal bonds issued by states, political subdivisions, or agencies with unrealized losses had amortized cost of $18.2 million, with unrealized losses of $0.3 million. At December 31, 2020, AFS municipal bonds issued by states, political subdivisions, or agencies had 0 unrealized losses. Management believes that the securities will either recover in market value or be paid off as agreed.

Maturities

The amortized cost and estimated fair value of debt securities at March 31, ~~2021,~~2022, and December 31, ~~2020~~2021 by contractual maturity, are shown below. The Company has allocated the AFS securities into the four maturity groups listed below using the expected average life of the individual securities based on statistics provided by industry sources. ExpectedActual maturities will differ from contractual maturities because ~~the issuers of the securities~~borrowers may have the right to call or prepay obligations with or without call premiums or prepayment penalties.

March 31, 2021 December 31, 2020
(dollars in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value
Within one year $ 24,334 $ 24,554 $ 36,165 $ 37,084
Over one year through five years 59,975 60,519 60,669 62,209
Over five years through ten years 94,889 95,750 67,158 68,862
After ten years 71,873 72,525 76,021 77,950
Total AFS securities $ 251,071 $ 253,348 $ 240,013 $ 246,105


	March 31, 2022				December 31, 2021
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	36,359	$	34,610	$	36,859	$	36,665
Over one year through five years	146,286		139,247		121,308		120,668
Over five years through ten years	196,631		187,170		191,166		190,158
After ten years	153,906		146,500		151,145		150,348
Total AFS securities	$	533,182	$	507,527	$	500,478	$	497,839

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NOTE 3 – LOANS

~~Loans consist~~Portfolio loans, net of ~~the following:~~deferred costs and fees, are summarized by type as follows at March 31, 2022:


		March 31, 2021				December 31, 2020					March 31, 2022
(dollars in thousands)	(dollars in thousands)	Total		% of Gross Loans		Total		% of Gross Loans		(dollars in thousands)	Total		% of Total Loans
Portfolio Loans:	Portfolio Loans:									Portfolio Loans:
Commercial real estate	Commercial real estate	$	1,081,111	71.74	%	$	1,049,147	69.75	%	Commercial real estate	$	1,177,761	72.28	%
Residential first mortgages	Residential first mortgages	115,803		7.68	%	133,779		8.89	%	Residential first mortgages	86,416		5.30	%
Residential rentals	Residential rentals	137,522		9.12	%	139,059		9.24	%	Residential rentals	191,065		11.73	%
Construction and land development	Construction and land development	38,446		2.55	%	37,520		2.49	%	Construction and land development	30,649		1.88	%
Home equity and second mortgages	Home equity and second mortgages	29,363		1.95	%	29,129		1.94	%	Home equity and second mortgages	26,445		1.62	%
Commercial loans	Commercial loans	42,689		2.83	%	52,921		3.52	%	Commercial loans	48,948		3.00	%
Consumer loans	Consumer loans	1,415		0.09	%	1,027		0.07	%	Consumer loans	3,592		0.22	%
Commercial equipment	Commercial equipment	60,834		4.04	%	61,693		4.10	%	Commercial equipment	64,662		3.97	%
Gross portfolio loans		1,507,183		100.00	%	1,504,275		100.00	%
Less:

Total portfolio loans (1)										Total portfolio loans (1)	1,629,538		100.00	%
Less: Allowance for Credit Losses										Less: Allowance for Credit Losses	(21,382)		(1.31)	%
Total net portfolio loans										Total net portfolio loans	1,608,156
U.S. SBA PPP loans (1)										U.S. SBA PPP loans (1)	15,279
Total net loans										Total net loans	$	1,623,435

Portfolio loans are summarized by type as follows at December 31, 2021:										Portfolio loans are summarized by type as follows at December 31, 2021:
Portfolio Loans:										Portfolio Loans:	December 31, 2021
Commercial real estate										Commercial real estate	$	1,115,485	70.66	%
Residential first mortgages										Residential first mortgages	91,120		5.77	%
Residential rentals										Residential rentals	195,035		12.35	%
Construction and land development										Construction and land development	35,590		2.25	%
Home equity and second mortgages										Home equity and second mortgages	25,638		1.62	%
Commercial loans										Commercial loans	50,574		3.20	%
Consumer loans										Consumer loans	3,002		0.19	%
Commercial equipment										Commercial equipment	62,499		3.96	%
Gross portfolio loans (1)										Gross portfolio loans (1)	1,578,943		100.00	%
Adjustments:										Adjustments:
Net deferred costs	Net deferred costs	879		0.06	%	1,264		0.08	%	Net deferred costs	(133)		(0.01)	%
Allowance for loan losses	Allowance for loan losses	(18,256)		(1.21)	%	(19,424)		(1.29)	%	Allowance for loan losses	(18,417)		(1.17)	%
		(17,377)				(18,160)					(18,550)
Net portfolio loans	Net portfolio loans	$	1,489,806			$	1,486,115			Net portfolio loans	1,560,393

U.S. SBA PPP loans		$	115,700			$	110,320
Gross U.S. SBA PPP loans (1)										Gross U.S. SBA PPP loans (1)	27,276
Net deferred fees	Net deferred fees	(3,215)				(2,360)				Net deferred fees	(878)
Net U.S. SBA PPP Loans	Net U.S. SBA PPP Loans	$	112,485			$	107,960			Net U.S. SBA PPP Loans	26,398

Total net loans	Total net loans	$	1,602,291			$	1,594,075			Total net loans	$	1,586,791

Gross Loans		$	1,622,883			$	1,614,595
Total gross loans										Total gross loans	$	1,606,219

(1)Excludes accrued interest receivable of $4.2 million and $4.5 million, at March 31, 2022 and December 31, 2021, respectively.

The Company has segregated its loans into ~~2 categories;~~ portfolio loans and U.S. SBA PPP ~~loans.~~loans at December 31, 2021.

~~During the quarter ended March 31, 2021, the Bank sold non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost~~

Table of ~~$9.1 million for proceeds of $8.9 million and recognized a loss of $0.2 million.~~Contents

Deferred Costs/Fees

Portfolio net deferred costs of ~~$0.9~~$0.2 million at March 31, ~~2021~~2022 included deferred fees paid by customers of ~~$3.5~~$4.2 million offset by deferred costs of ~~$4.4~~$4.0 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs in accordance with ASC 310-20. Net deferred loan costs of ~~$1.3~~$0.1 million at December 31, ~~2020~~2021 included deferred fees paid by customers of ~~$3.4~~$4.1 million offset by deferred costs of ~~$4.7~~$4.0 million.

U.S. SBA PPP loan net deferred fees of ~~$3.2~~$0.5 million at March 31, ~~2021~~2022 included deferred fees paid by the U.S. SBA of ~~$3.7~~$0.5 million partially offset by deferred costs of ~~$0.4 million.~~$41,000. U.S. SBA PPP net deferred loan fees of ~~$2.4~~$0.9 million at December 31, ~~2020~~2021 included deferred fees paid by the SBA of ~~$2.9~~$1.0 million offset by deferred costs of ~~$0.5~~$0.1 million. The net deferred fees are being amortized as a component of interest income through the contractual maturity date of each ~~individual~~ U.S. SBA PPP loan. Net deferred fees include fees (deferred fees) paid to participant banks for each U.S. SBA PPP loan underwritten and funded net of costs incurred to underwrite the loans (deferred costs). Net deferred fees will be recognized in income when the U.S. SBA PPP loan is forgiven or paid.

~~Table of Contents~~

Risk Characteristics of Portfolio Segments

Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has business loans secured by real estate and real estate development loans. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had no loans outstanding with foreign entities.

The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:

Commercial Real Estate (“CRE”)

Commercial and other real estate projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were ~~5.5%~~6.7% and ~~6.9%~~6.5% of the CRE portfolio at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.

~~Loans secured by commercial real estate are larger and involve greater risks than 1-4 family residential mortgage loans.~~ Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.

At March 31, 2021 and December 31, 2020, the largest outstanding commercial real estate loans were $20.7 million and $20.7 million, respectively, which were secured by commercial real estate and performing according to their terms.

Residential First Mortgages

Residential first mortgage loans are generally long-term ~~loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from 10~~(10 to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty.years) amortizing loans. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages. The Bank did not purchase any residential first mortgages during the three months ended March 31, 2021. During the year ended December 31, 2020, the Bank purchased residential first mortgages of $22.0 million.

The annual and lifetime limitations on interest rate adjustments may constrain interest rate increases on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was ~~$27.9~~$15.1 million or ~~1.9%~~0.9% of total portfolio loans of $1.6 billion at March 31, 2022 compared to $18.9 million or 1.2% of total gross portfolio loans of ~~$1.5 billion at March 31, 2021 compared to $33.6 million or 2.2% of total gross portfolio loans of $1.5~~$1.6 billion at December 31, ~~2020.~~2021.

The Bank generally retains the right to service loans sold for a payment based upon a percentage (generally 0.25% of the outstanding loan balance). As of March 31, ~~2021,~~2022 and December 31, ~~2020,~~2021, the Bank serviced ~~$21.5~~$21.4 million and ~~$23.9~~$20.9 million, respectively, in residential mortgage loans for others.

Residential Rentals

Residential rental mortgage loans are amortizing with principal and interest due each month. The loans are secured by income-producing 1-4 family units and apartments. As of March 31, 2021, and December 31, 2020, $104.9 million and $105.9 million, respectively, were 1-4 family units and $32.6 million and $33.2 million, respectively, were apartment buildings or multi-family units.long-term loans. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years. ~~The primary security on a residential rental loan is the property and the leases that produce income.~~ During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential rental portfolio was $118.3 million or 7.8% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $118.5 million or 7.9% of total gross portfolio loans of $1.5 billion at December 31, 2020.

~~Table of Contents~~

Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Payments on loans secured by residential rental properties are dependent on the successful operation of the properties; and repayment of these loans may be subject to ~~more volatile~~adverse conditions in the rental real estate market or the economy than similar owner-occupied properties.

At March 31, 2021 and December 31, 2020, the largest outstanding residential rental mortgage loan was $9.5 million which was secured by over 120 single family homes located in the Bank’s market area. The loan was performing according to its terms.

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Construction and Land Development

The Bank offers loans for the construction of ~~1-4 family~~residential dwellings. ~~Generally, these~~These loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop ~~land, as well as~~land. Construction and Land Development loans are dependent on ~~undeveloped, subdivided lots for home building. The Bank’s construction and land development portfolio was $38.4 million~~the successful completion of the underlying project, or ~~2.6% of total gross portfolio loans at March 31, 2021 compared to $37.5 million or 2.5% of total gross portfolio loans at December 31, 2020.~~

~~A decline in demand for new housing might adversely affect~~ the ~~ability of~~ borrowers guarantee to repay ~~these loans. Construction and land development loans~~the loan. As such, they are ~~inherently riskier than financing owner-occupied real estate. The Bank’s risk of loss is affected by~~subject to the ~~accuracy~~risks of the ~~initial estimate~~project including changing prices and interest rates. The repayment of the market value of the completed project as well as the accuracy of the cost estimates to complete the project. In addition, volatility in the real estate market can make it difficult to ensure that the valuation of land associated with these loans is ~~accurate. During~~also dependent on the borrower’s ability to successfully manage the construction ~~phase, a number of factors could result in delays~~ and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to complete development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of principal, accrued interest, and related foreclosure and holding costs.development activities.

Home Equity and Second Mortgage Loans

The Bank maintains a portfolio of home equity and second mortgage loans. The Bank’s home equity and second mortgage portfolio was $29.4 million or 1.9% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $29.1 million or 1.9% of total gross portfolio loans of $1.5 billion at December 31, 2020. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage.

Commercial Loans

~~The Bank offers its customers commercial loan products~~Commercial loans including ~~term loans, demand loans and~~ lines of ~~credit. Such~~credit are short-term loans ~~are generally made for terms of five~~(5 years or ~~less. The Bank offers both fixed-rate and adjustable-rate loans. The portfolio consists primarily of demand loans and lines of credit. When making commercial business loans,~~less) that are secured by the ~~Bank considers~~equipment financed, the ~~financial condition~~guarantees of the borrower, ~~the borrower’s payment history of both corporate~~ and personal debt, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, and the borrower’s ability to service the debt from income.other collateral. These loans are primarily secured by equipment, real property, accounts receivable or other security as determined by the Bank. Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantiallydependent on the success of the underlying business ~~itself. In~~or the ~~case~~strength of ~~business failure, collateral would need to be liquidated to provide repayment for~~ the ~~loan. In many cases, the highly specialized nature of collateral would make fullrecovery from its sale unlikely.~~

The Bank’s commercial loan portfolio was $42.7 million or 2.8% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $52.9 million or 3.5% of total gross portfolio loans of $1.5 billion at December 31, 2020.guarantor.

Consumer Loans

Consumer loans consist of loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of ~~credit. Consumer~~credit and credit card loans. The repayment of these loans ~~entail greater risk than other loan types due to being secured by rapidly depreciating assets or the reliance~~is dependent on the ~~borrower’s continuing~~continued financial ~~stability.~~

~~Table~~stability of ~~Contents~~

the customer.

Commercial Equipment Loans

These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment or secured by real property, accounts receivable, or other security as determined by the Bank. ~~When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan.~~ Commercial loans are of higher risk and ~~typically~~these loans are ~~made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, repayment of commercial loans may depend substantially~~dependent on the success of the underlying business ~~itself. In~~or the ~~case~~strength of ~~business failure, collateral would need to be liquidated to repay~~ the ~~loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.~~

The Bank’s commercial equipment portfolio was $60.8 million or 4.0% of total gross portfolio loans of $1.5 billion at March 31, 2021 compared to $61.7 million or 4.1% of total gross portfolio loans of $1.5 billion at December 31, 2020.guarantor.

U.S. SBA PPP Loans

~~The U.S. SBA PPP loan was created to address economic hardships resulting from the COVID-19 pandemic. As of March 31, 2021, the Company had originated 865~~ U.S. SBA PPP loans with balances of $115.7 million. The program is designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses. U.S. SBA PPP loans carry a two or five-year term at a 1% annual interest rate until the loan is either forgiven or paid. At March 31, 2021, 52.61% or $60.9 million of these loans have a two-year term.

~~No credit issues are anticipated with U.S. SBA PPP loans as they~~ are fully guaranteed by the Small Business Administration and the Bank's ~~ALLL~~ACL does not include an allowance for U.S. SBA PPP loans. Management believes all U.S. SBA PPP loans were underwritten in accordance with the program's guidelines. The U.S. SBA PPP guidelines indicate that lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guidelines further specify that lenders will be held harmless for a borrower's failure to comply with program criteria.

~~Non-accrual and Aging Analysis of Current and Past Due Loans~~

~~Non-accrual loans as of March 31, 2021 and December 31, 2020 were as follows:~~

March 31, 2021
(dollars in thousands) Non-accrual Delinquent Loans Number of Loans Non-accrual Current Loans Number of Loans Total Non-accrual Loans Total Number of Loans
Commercial real estate $ 5,200 2 $ 6,686 11 $ 11,886 13
Residential first mortgages 50 1 274 1 324 2
Residential rentals — — 736 5 736 5
Home equity and second mortgages 202 2 390 2 592 4
Commercial loans — — — — — —
Commercial equipment — — 85 3 85 3
$ 5,452 5 $ 8,171 22 $ 13,623 27

December 31, 2020
(dollars in thousands) Non-accrual Delinquent Loans Number of Loans Non-accrual Current Loans Number of Loans Total Non-accrual Loans Total Number of Loans
Commercial real estate $ 11,428 9 $ 5,184 9 $ 16,612 18
Residential first mortgages 335 2 459 2 794 4
Residential rentals — — 275 2 275 2
Home equity and second mortgages 202 2 293 1 495 3
Commercial loans — — — — — —
Commercial equipment — — 46 3 46 3
$ 11,965 13 $ 6,257 17 $ 18,222 30

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Loans

Non-accrual loans as of March 31, 2022 and December 31, 2021 were as follows:


	March 31, 2022
(dollars in thousands)	Nonaccrual with No Allowance for Credit Losses		Nonaccrual with Allowance for Credit Losses		Total Nonaccrual Loans
Commercial real estate	$	4,899	$	89	$	4,988
Residential first mortgages	736		—		736
Residential rentals	672		—		672

Home equity and second mortgages	377		—		377
Commercial loans	—		25		25

Commercial equipment	500		166		666

U.S. SBA PPP	1		—		1
Total	$	7,185	$	280	$	7,465

Interest Income on Nonaccrual Loans	$	40	$	—	$	40


	December 31, 2021
(dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans		Total Non-accrual Loans
Commercial real estate	$	—	$	4,890	$	4,890
Residential first mortgages	450		—		450
Residential rentals	252		690		942

Home equity and second mortgages	202		399		601


Commercial equipment	—		691		691
U.S. SBA PPP loans	57		—		57
	$	961	$	6,670	$	7,631

Non-accrual loans decreased ~~$4.6~~$0.2 million from ~~$18.2~~$7.6 million or ~~1.13%~~0.48% of total loans at December 31, ~~2020~~2021 to ~~$13.6~~$7.5 million or ~~0.84%~~0.45% of total loans at March 31, ~~2021.~~2022. Loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, such interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.

Non-accrual loans of $8.2 million (60%) were current with all payments of principal and interest with no impairment at March 31, 2021. Delinquent non-accrual loans were $5.5 million (40%) with specific reserves of $0.7 million at March 31, 2021. During the quarter ended March 31, 2021 , non-accrual loans decreased $4.6 million primarily as a result of the loan sale mentioned previously. At December 31, ~~2020,~~2021, there were ~~$6.3~~$6.7 million ~~(34%~~(87%) of non-accrual loans were current with all payments of principal and interest with no0 impairment and ~~$12.0~~$1.0 million ~~(66%~~(13%) of non-accrual loans were delinquent with specific valuation reserves of ~~$1.3~~$0.3 million.

Loan delinquency (total past due) increased $0.2 million from $1.4 million, or 0.09% of loans, at December 31, 2021 to $1.6 million, or 0.10% of loans, at March 31, 2022.

Non-accrual loans at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 included 1 and 3 TDRs totaling $2,000 and $1.52 million, respectively. These loans were classified as non-accrual solely for the calculation of financial ratios. Loan delinquency (total past due) decreased $5.3 million from $12.1 million, or 0.81% of loans, at December 31, 2020 to $6.8 million, or 0.45% of loans, at March 31, 2021.

no delinquent TDRs. Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to ~~$7.3~~$7.2 million and ~~$12.4~~$7.4 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Interest due but not recognized on these balances at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$56,000~~$0.1 million and ~~$0.4~~$0.1 million, respectively. Non-accrual loans with a specific allowance for impairment amounted to ~~$6.3~~$0.3 million and ~~$5.8~~$0.3 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Interest due but not recognized on these balances at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$0.4 million~~$2,000 and ~~$0.4 million,~~$1,000, respectively.

The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of days past due ("DPD") loans as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:

March 31, 2021
(dollars in thousands) 31-60 Days 61-89 Days 90 or Greater Days Total Past Due PCI Loans Current Total Loan Receivables
Commercial real estate $ 955 $ 0 $ 5,201 $ 6,156 $ 1,550 $ 1,073,405 $ 1,081,111
Residential first mortgages 133 0 50 183 0 115,620 115,803
Residential rentals 265 0 0 265 0 137,257 137,522
Construction and land dev. 0 0 0 0 0 38,446 38,446
Home equity and second mtg. 20 0 202 222 403 28,738 29,363
Commercial loans 0 0 0 0 0 42,689 42,689
Consumer loans 0 0 0 0 0 1,415 1,415
Commercial equipment 0 0 0 0 0 60,834 60,834
Total portfolio loans $ 1,373 $ 0 $ 5,453 $ 6,826 $ 1,953 $ 1,498,404 $ 1,507,183
U.S. SBA PPP loans $ 0 $ 0 $ 0 $ 0 $ 0 $ 115,700 $ 115,700

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		December 31, 2020															March 31, 2022
(dollars in thousands)	(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables		(dollars in thousands)	31-60 DPD		61-89 DPD		90 DPD and Still Accruing		Current		Non-Accrual		Total Loans		Current Non-Accrual
Commercial real estate	Commercial real estate	$	0	$	0	$	11,428	$	11,428	$	1,572	$	1,036,147	$	1,049,147	Commercial real estate	$	—	$	—	$	—	$	1,172,773	$	4,988	$	1,177,761	$	4,516
Residential first mortgages	Residential first mortgages	0		0		335		335		0		133,444		133,779		Residential first mortgages	—		—		—		85,680		736		86,416		276
Residential rentals	Residential rentals	0		0		0		0		0		139,059		139,059		Residential rentals	281		—		—		190,112		672		191,065		672
Construction and land dev.		0		0		0		0		0		37,520		37,520
Home equity and second mtg.		167		0		202		369		406		28,354		29,129
Construction and land development																Construction and land development	51		—		—		30,598		—		30,649		—
Home equity and second mortgages																Home equity and second mortgages	—		—		—		26,068		377		26,445		95
Commercial loans	Commercial loans	0		0		0		0		0		52,921		52,921		Commercial loans	30		—		—		48,893		25		48,948		25
Consumer loans	Consumer loans	8		0		0		8		0		1,019		1,027		Consumer loans	1		15		20		3,556		—		3,592		—
Commercial equipment	Commercial equipment	0		4		0		4		0		61,689		61,693		Commercial equipment	—		—		—		63,996		666		64,662		666
Total portfolio loans		$	175	$	4	$	11,965	$	12,144	$	1,978	$	1,490,153	$	1,504,275

U.S. SBA PPP loans		$	0	$	0	$	0	$	0	$	0	$	110,320	$	110,320
U.S. SBA PPP																U.S. SBA PPP	—		8		—		15,270		1		15,279		—
Total Loans																Total Loans	$	363	$	23	$	20	$	1,636,946	$	7,465	$	1,644,817	$	6,250


	December 31, 2021
(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables
Commercial real estate	$	—	$	—	$	—	$	—	$	1,116	$	1,114,369	$	1,115,485
Residential first mortgages	—		277		450		727		—		90,393		91,120
Residential rentals	—		42		252		294		—		194,741		195,035
Construction and land development	—		—		—		—		—		35,590		35,590
Home equity and second mortgages	200		—		202		402		—		25,236		25,638
Commercial loans	—		—		—		—		—		50,574		50,574
Consumer loans	—		—		—		—		—		3,002		3,002
Commercial equipment	—		—		—		—		—		62,499		62,499
Total portfolio loans	$	200	$	319	$	904	$	1,423	$	1,116	$	1,576,404	$	1,578,943

U.S. SBA PPP loans	$	9	$	40	$	57	$	106	$	—	$	27,170	$	27,276

There were no0 loans that were past due 90 days or greater accruing interest at ~~March 31, 2021 and~~ December 31, ~~2020.~~

~~Impaired Loans and Troubled Debt Restructures (“TDRs”)~~

~~Impaired loans, including TDRs, at March 31, 2021 and 2020 and at December 31, 2020 were as follows:~~

March 31, 2021
(dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance Quarter Average Recorded Investment Quarter Interest Income Recognized YTD Average Recorded Investment YTD Interest Income Recognized
Commercial real estate $ 12,029 $ 5,641 $ 6,290 $ 11,931 $ 854 $ 11,937 $ 110 $ 11,937 $ 110
Residential first mortgages 794 751 0 751 0 756 11 756 11
Residential rentals 741 736 0 736 0 744 10 744 10
Home equity and second mtg. 666 651 0 651 0 657 4 657 4
Commercial loans 0 0 0 0 0 0 0 0 0
Commercial equipment 559 507 37 544 37 565 12 565 12
Total $ 14,789 $ 8,286 $ 6,327 $ 14,613 $ 891 $ 14,659 $ 147 $ 14,659 $ 147

March 31, 2020
(dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance Quarter Average Recorded Investment Quarter Interest Income Recognized YTD Average Recorded Investment YTD Interest Income Recognized
Commercial real estate $ 22,527 $ 18,250 $ 4,064 $ 22,314 $ 367 $ 22,347 $ 140 $ 22,347 $ 140
Residential first mortgages 1,738 1,738 0 1,738 0 1,744 16 1,744 16
Residential rentals 656 656 0 656 0 658 6 658 6
Home equity and second mtg. 530 519 0 519 0 519 5 519 5
Commercial loans 2,906 1,807 1,099 2,906 932 2,951 0 2,951 0
Commercial equipment 949 576 350 926 350 939 15 939 15
Total $ 29,306 $ 23,546 $ 5,513 $ 29,059 $ 1,649 $ 29,158 $ 182 $ 29,158 $ 182

~~Table of Contents~~

December 31, 2020
(dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance YTD Average Recorded Investment YTD Interest Income Recognized
Commercial real estate $ 17,952 $ 11,915 $ 5,799 $ 17,714 $ 1,316 $ 17,729 $ 361
Residential first mortgages 2,001 1,989 0 1,989 0 2,043 70
Residential rentals 626 625 0 625 0 643 32
Home equity and second mtg. 568 555 0 555 0 559 15
Commercial loans 0 0 0 0 0 0 0
Commercial equipment 527 472 40 512 40 531 30
Total $ 21,674 $ 15,556 $ 5,839 $ 21,395 $ 1,356 $ 21,505 $ 508

~~TDRs included in the impaired loan schedules above, as of March 31, 2021 and December 31, 2020 were as follows:~~

March 31, 2021 December 31, 2020
(dollars in thousands) Dollars Number of Loans Dollars Number of Loans
Commercial real estate $ 45 1 $ 1,376 2
Residential first mortgages 0 0 247 2
Commercial equipment 461 2 471 2
Total TDRs $ 506 3 $ 2,094 6
Less: TDRs included in non-accrual loans (2) (1) (1,522) (3)
Total accrual TDR loans $ 504 2 $ 572 3

~~TDRs decreased $1.59 million during the three months ended March 31, 2021 due to the previously discussed sale of 3 TDRs in the amount of $1.58 million and the principal paydowns of $11,000.~~

The Company had specific reserves of $0.4 million on 6 TDRs totaling $2.1 million at December 31, 2020. During the year ended December 31, 2020, TDR disposals, which included payoffs and refinancing, included 3 loans totaling $0.1 million. TDR loan principal curtailment was $53,000 for the year ended December 31, 2020. There was 1 TDR added during the year ended December 31, 2020 totaling $0.2 million.2021.

Allowance for ~~Loan~~Credit Losses ("~~ALLL"~~ACL")

The following tables detail activity in the ~~ALLL~~ACL at and for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.


Three Months Ended	March 31, 2022
(dollars in thousands)	Beginning Balance		Impact of ASC 326 Adoption		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	13,095	$	3,734	$	—	$	—	$	484	$	17,313
Residential first mortgages	1,002		(679)		—		—		(39)		284
Residential rentals	2,175		(586)		—		—		(43)		1,546
Construction and land development	260		(82)		—		—		(41)		137
Home equity and second mortgages	274		(86)		—		—		(10)		178
Commercial loans	582		(290)		—		1		26		319
Consumer loans	58		2		—		—		13		73
Commercial equipment	971		483		—		18		60		1,532


	$	18,417	$	2,496	$	—	$	19	$	450	$	21,382

**There is no allowance for loan loss on the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.

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Three Months Ended	Three Months Ended	March 31, 2021										Three Months Ended	March 31, 2021
(dollars in thousands)	(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance		(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	Commercial real estate	$	13,744	$	(1,247)	$	1	$	787	$	13,285	Commercial real estate	$	13,744	$	(1,247)	$	1	$	787	$	13,285
Residential first mortgages	Residential first mortgages	1,305		(142)		0		(139)		1,024		Residential first mortgages	1,305		(142)		—		(139)		1,024
Residential rentals	Residential rentals	1,413		(46)		0		(6)		1,361		Residential rentals	1,413		(46)		—		(6)		1,361
Construction and land development	Construction and land development	401		0		0		(36)		365		Construction and land development	401		—		—		(36)		365
Home equity and second mortgages	Home equity and second mortgages	261		0		1		1		263		Home equity and second mortgages	261		—		1		1		263
Commercial loans	Commercial loans	1,222		(50)		5		(165)		1,012		Commercial loans	1,222		(50)		5		(165)		1,012
Consumer loans	Consumer loans	20		0		0		9		29		Consumer loans	20		—		—		9		29
Commercial equipment	Commercial equipment	1,058		0		15		(156)		917		Commercial equipment	1,058		—		15		(156)		917
		$	19,424	$	(1,485)	$	22	$	295	$	18,256		$	19,424	$	(1,485)	$	22	$	295	$	18,256

Purchase Credit Impaired**	Purchase Credit Impaired**	$	0	$	0	$	0	$	0	$	0	Purchase Credit Impaired**	$	—	$	—	$	—	$	—	$	—

**There is no allowance for loan loss on the PCI or the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.

Three Months Ended March 31, 2020
(dollars in thousands) Beginning Balance Charge-offs Recoveries Provisions Ending Balance
Commercial real estate $ 7,398 $ 0 $ 0 $ 1,685 $ 9,083
Residential first mortgages 464 0 0 398 862
Residential rentals 397 0 0 305 702
Construction and land development 273 0 0 163 436
Home equity and second mortgages 149 0 1 108 258
Commercial loans 1,086 0 5 1,175 2,266
Consumer loans 10 0 0 5 15
Commercial equipment 1,165 0 13 261 1,439
$ 10,942 $ 0 $ 19 $ 4,100 $ 15,061
Purchase Credit Impaired** $ 0 $ 0 $ 0 $ 0 $ 0

**~~There is no allowance for loan loss on the PCI or the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.~~

~~Table of Contents~~

The following ~~tables detail loan receivable and allowance balances disaggregated on~~table presents the amortized cost basis of ~~the Company’s impairment methodology at March 31, 2021 and 2020 and December 31, 2020.~~collateral-dependent loans by class of loans.

March 31, 2021 December 31, 2020 March 31, 2020
(dollars in thousands) Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Purchase Credit Impaired Total Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Purchase Credit Impaired Total Ending balance: individually evaluated for impairment Ending balance: collectively evaluated for impairment Purchase Credit Impaired Total
Loan Receivables:
Commercial real estate $ 11,931 $ 1,067,630 $ 1,550 $ 1,081,111 $ 17,714 $ 1,029,861 $ 1,572 $ 1,049,147 $ 22,314 $ 953,634 $ 1,730 $ 977,678
Residential first mortgages 751 115,052 0 115,803 1,989 131,790 0 133,779 1,738 169,057 0 170,795
Residential rentals 736 136,786 0 137,522 625 138,434 0 139,059 656 132,360 0 133,016
Construction and land development 0 38,446 0 38,446 0 37,520 0 37,520 0 38,627 0 38,627
Home equity and second mortgages 651 28,309 403 29,363 555 28,168 406 29,129 519 35,023 395 35,937
Commercial loans 0 42,689 — 42,689 0 52,921 — 52,921 2,906 68,065 — 70,971
Consumer loans 0 1,415 — 1,415 0 1,027 — 1,027 0 1,134 — 1,134
Commercial equipment 544 60,290 — 60,834 512 61,181 — 61,693 926 61,005 — 61,931
$ 14,613 $ 1,490,617 $ 1,953 $ 1,507,183 $ 21,395 $ 1,480,902 $ 1,978 $ 1,504,275 $ 29,059 $ 1,458,905 $ 2,125 $ 1,490,089
Allowance for loan losses:
Commercial real estate $ 854 $ 12,431 $ — $ 13,285 $ 1,316 $ 12,428 $ — $ 13,744 $ 367 $ 8,716 $ — $ 9,083
Residential first mortgages — 1,024 — 1,024 — 1,305 — 1,305 0 862 — 862
Residential rentals — 1,361 — 1,361 — 1,413 — 1,413 — 702 — 702
Construction and land development — 365 — 365 — 401 — 401 — 436 — 436
Home equity and second mortgages — 263 — 263 — 261 — 261 — 258 — 258
Commercial loans 0 1,012 — 1,012 0 1,222 — 1,222 932 1,334 — 2,266
Consumer loans 0 29 — 29 0 20 — 20 0 15 — 15
Commercial equipment 37 880 — 917 40 1,018 — 1,058 350 1,089 — 1,439
$ 891 $ 17,365 $ — $ 18,256 $ 1,356 $ 18,068 $ — $ 19,424 $ 1,649 $ 13,412 $ — $ 15,061


	March 31, 2022
(dollars in thousands)	Business/Other Assets		Real Estate
Commercial real estate	$	—	$	4,987
Residential first mortgages	—		1,149
Residential rentals	—		672

Home equity and second mortgages	—		376
Commercial loans	25		—

Commercial equipment	1,109		—


Total	$	1,134	$	7,184

Table of Contents

Credit Quality Indicators

Credit quality indicators as of March 31, ~~2021 and December 31, 2020~~2022 were as follows:

Credit Risk Profile by Internally Assigned Grade

Commercial Real Estate Construction and Land Dev. Residential Rentals
(dollars in thousands) 3/31/2021 12/31/2020 3/31/2021 12/31/2020 3/31/2021 12/31/2020
Unrated $ 0 $ 162,434 $ 0 $ 1,036 $ 0 $ 47,605
Pass 1,065,163 866,648 38,446 36,484 136,786 90,633
Special mention 3,890 2,417 0 0 0 821
Substandard 12,058 17,648 0 0 736 0
Doubtful 0 0 0 0 0 0
Loss 0 0 0 0 0 0
Total $ 1,081,111 $ 1,049,147 $ 38,446 $ 37,520 $ 137,522 $ 139,059
The risk category of loans by class of loans is as follows:


	Term Loans by Origination Year
(dollars in thousands)	Prior		2018		2019		2020		2021		2022		Revolving Loans		Total

Commercial Real Estate
Pass	$	367,685	$	77,563	$	122,999	$	196,400	$	281,702	$	111,430	$	—	$	1,157,779
Watch	—		4,253		—		5,564		—		7,012		—		16,829
Special Mention	—		—		—		—		—		—		—		—
Substandard	3,153		—		—		—		—		—		—		3,153
Total	$	370,838	$	81,816	$	122,999	$	201,964	$	281,702	$	118,442	$	—	$	1,177,761

Residential Rentals
Pass	$	47,557	$	4,788	$	23,584	$	44,156	$	67,567	$	2,741	$	—	$	190,393
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	672		—		—		—		—		—		—		672
Total	$	48,229	$	4,788	$	23,584	$	44,156	$	67,567	$	2,741	$	—	$	191,065

Construction and Land Development
Pass	$	8,560	$	10,797	$	6,642	$	1,669	$	2,968	$	13	$	—	$	30,649
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Total	$	8,560	$	10,797	$	6,642	$	1,669	$	2,968	$	13	$	—	$	30,649

Commercial Loans
Pass	$	27,484	$	6,331	$	5,006	$	1,848	$	6,865	$	1,414	$	—	$	48,948
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Total	$	27,484	$	6,331	$	5,006	$	1,848	$	6,865	$	1,414	$	—	$	48,948

Commercial Equipment
Pass	$	10,247	$	6,330	$	18,746	$	9,076	$	15,259	$	4,623	$	—	$	64,281
Watch	30		185		—		—		—		—		—		215
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		166		—		—		—		—		166
Total	$	10,277	$	6,515	$	18,912	$	9,076	$	15,259	$	4,623	$	—	$	64,662








Total loans by risk category	$	465,388	$	110,247	$	177,143	$	258,713	$	374,361	$	127,233	$	—	$	1,513,085

Table of Contents

Commercial Loans Commercial Equipment Total Commercial Portfolios
(dollars in thousands) 3/31/2021 12/31/2020 3/31/2021 12/31/2020 3/31/2021 12/31/2020
Unrated $ 0 $ 12,962 $ 0 $ 26,585 $ 0 $ 250,622
Pass 42,689 39,959 56,872 31,091 1,339,956 1,064,815
Special mention 0 0 3,879 3,977 7,769 7,215
Substandard 0 0 83 40 12,877 17,688
Doubtful 0 0 0 0 0 0
Loss 0 0 0 0 0 0
Total $ 42,689 $ 52,921 $ 60,834 $ 61,693 $ 1,360,602 $ 1,340,340

Loans evaluated by performance category are as follows:


	Term Loans by Origination Year
(dollars in thousands)	Prior		2018		2019		2020		2021		2022		Revolving Loans		Total

Residential First Mortgages
Performing	$	44,141	$	4,112	$	20,427	$	8,958	$	6,052	$	1,990	$	—	$	85,680
Non-performing	182		—		554		—		—		—		—		736
Total	$	44,323	$	4,112	$	20,981	$	8,958	$	6,052	$	1,990	$	—	$	86,416

Home Equity and Second Mortgages
Performing	$	17,581	$	1,295	$	1,150	$	2,120	$	3,078	$	844	$	—	$	26,068
Non-performing	377		—		—		—		—		—		—		377
Total	$	17,958	$	1,295	$	1,150	$	2,120	$	3,078	$	844	$	—	$	26,445

Consumer Loans
Performing	$	66	$	4	$	167	$	183	$	798	$	291	$	2,063	$	3,572
Non-performing	—		0		—		0		0		0		20		20
Total	$	66	$	4	$	167	$	183	$	798	$	291	$	2,083	$	3,592

U.S. SBA PPP Loans
Performing	$	—	$	—	$	—	$	1,137	$	14,141	$	—	$	—	$	15,278
Non-performing	—		—		—		1		—		—		—		1
Total	$	—	$	—	$	—	$	1,138	$	14,141	$	—	$	—	$	15,279

Total loans evaluated by performing status	$	62,347	$	5,411	$	22,298	$	12,399	$	24,069	$	3,125	$	2,083	$	131,732

Total Recorded Investment	$	527,735	$	115,658	$	199,441	$	271,112	$	398,430	$	130,358	$	2,083	$	1,644,817

Credit quality indicators as of December 31, 2021 were as follows:


	Commercial Real Estate		Construction and Land Development		Residential Rentals
(dollars in thousands)	12/31/2021		12/31/2021		12/31/2021
Unrated	$	—	$	—	$	—
Pass	1,111,857		35,590		194,093
Special mention	—		—		—
Substandard	3,628		—		942
Doubtful	—		—		—
Loss	—		—		—
Total	$	1,115,485	$	35,590	$	195,035

Table of Contents


		Non-Commercial Portfolios **				U.S. SBA PPP Loans				Total Loans Portfolios					Commercial Loans		Commercial Equipment		Total Commercial Portfolios
(dollars in thousands)	(dollars in thousands)	3/31/2021		12/31/2020		6/30/2020		12/31/2019		3/31/2021		12/31/2020		(dollars in thousands)	12/31/2021		12/31/2021		12/31/2021
Unrated	Unrated	$	121,171	$	136,792	$	115,700	$	110,320	$	236,871	$	497,734	Unrated	$	—	$	—	$	—
Pass	Pass	24,471		25,125		0		0		1,364,427		1,089,940		Pass	50,574		62,326		1,454,440
Special mention	Special mention	0		457		0		0		7,769		7,672		Special mention	—		—		—
Substandard	Substandard	939		1,561		0		0		13,816		19,249		Substandard	—		173		4,743
Doubtful	Doubtful	0		0		0		0		0		0		Doubtful	—		—		—
Loss	Loss	0		0		0		0		0		0		Loss	—		—		—
Total	Total	$	146,581	$	163,935	$	115,700	$	110,320	$	1,622,883	$	1,614,595	Total	$	50,574	$	62,499	$	1,459,183


	Non-Commercial Portfolios **		U.S. SBA PPP Loans		Total Loans Portfolios
(dollars in thousands)	12/31/2021		12/31/2021		12/31/2021
Unrated	$	100,403	$	27,276	$	127,679
Pass	18,889		—		1,473,329
Special mention	—		—		—
Substandard	468		—		5,211
Doubtful	—		—		—
Loss	—		—		—
Total	$	119,760	$	27,276	$	1,606,219

**Non-commercial portfolios are generally evaluated based on payment activity but may be risk graded if part of a larger commercial relationship or are credit impaired (e.g. non-accrual loans, TDRs).

Credit Risk Profile Based on Payment Activity

Residential First Mortgages Home Equity and Second Mtg. Consumer Loans
(dollars in thousands) 3/31/2021 12/31/2020 3/31/2021 12/31/2020 3/31/2021 12/31/2020
Performing $ 115,753 $ 133,444 $ 29,161 $ 28,927 $ 1,415 $ 1,027
Nonperforming 50 335 202 202 0 0
Total $ 115,803 $ 133,779 $ 29,363 $ 29,129 $ 1,415 $ 1,027

~~Table of Contents~~


	Residential First Mortgages		Home Equity and Second Mortgages		Consumer Loans
(dollars in thousands)	12/31/2021		12/31/2021		12/31/2021
Performing	$	90,670	$	25,436	$	3,002
Nonperforming	450		202		—
Total	$	91,120	$	25,638	$	3,002

A risk-grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. At December 31, 2020 and prior, only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater were subject to being risk rated. During the quarter ended March 31, 2021, the Bank's policy was amended to risk rate all commercial loan relationships.

Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned ("OAEM") or higher risk rating due to a delinquency payment history.

~~Management regularly reviews credit quality indicators as part of its individual loan reviews and on a quarterly basis.~~ The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk-grading scale, the level and trends of net charge-offs, nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. 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 and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.

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.

Table of Contents

Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention

These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality 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. OAEM loans 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 strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. 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 and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.

Rating 10 – Loss

Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however, it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be non-collectable.

TDRs included in the impaired loan schedules above, as of March 31, 2022 and December 31, 2021 were as follows:


	March 31, 2022			December 31, 2021
(dollars in thousands)	Number of Loans	Recorded Investments		Number of Loans	Recorded Investments
Commercial real estate	—	$	—	—	$	—






Commercial equipment	1	442		1	447


Total TDRs	1	$	442	1	$	447
Less: TDRs included in non-accrual loans	—	—		—	—
Total accrual TDR loans	1	$	442	1	$	447

The Company had 0 specific reserves on TDRs at March 31, 2022 and at December 31, 2021. During the year ended December 31, 2021, TDR disposals, which included payoffs and refinancing, included 3 loans totaling $0.1 million. TDR loan principal curtailment was $5,000 for the quarter ended March 31, 2022 and $19,000 for the year ended December 31, 2021. There were 0 TDRs added during the three months ended March 31, 2022 or the year ended December 31, 2021.

Table of Contents

Prior to adoption of CECL

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Impaired loans, including TDRs, at March 31, 2021 and at December 31, 2021 were as follows:


	March 31, 2021
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Quarter Average Recorded Investment		Quarter Interest Income Recognized		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	12,029	$	5,641	$	6,290	$	11,931	$	854	$	11,937	$	110	$	11,937	$	110
Residential first mortgages	794		751		—		751		—		756		11		756		11
Residential rentals	741		736		—		736		—		744		10		744		10

Home equity and second mortgages	666		651		—		651		—		657		4		657		4
Commercial loans	—		—		—		—		—		—		—		—		—

Commercial equipment	559		507		37		544		37		565		12		565		12
Total	$	14,789	$	8,286	$	6,327	$	14,613	$	891	$	14,659	$	147	$	14,659	$	147


	December 31, 2021
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	4,994	$	4,797	$	93	$	4,890	$	93	$	4,866	$	254
Residential first mortgages	879		866		—		866		—		874		32
Residential rentals	982		942		—		942		—		959		48

Home equity and second mortgages	626		601		—		601		—		604		14
Commercial loans	—		—		—		—		—		—		—

Commercial equipment	1,200		1,022		173		1,195		173		2,184		99
Total	$	8,681	$	8,228	$	266	$	8,494	$	266	$	9,487	$	447

Table of Contents

The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at March 31, 2021 and December 31, 2021.


	December 31, 2021								March 31, 2021
(dollars in thousands)	Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total
Loan Receivables:
Commercial real estate	$	4,890	$	1,109,479	$	1,116	$	1,115,485	$	11,931	$	1,067,630	$	1,550	$	1,081,111
Residential first mortgages	866		90,254		—		91,120		751		115,052		—		115,803
Residential rentals	942		194,093		—		195,035		736		136,786		—		137,522
Construction and land development	—		35,590		—		35,590		—		38,446		—		38,446
Home equity and second mortgages	601		25,037		—		25,638		651		28,309		403		29,363
Commercial loans	—		50,574		—		50,574		—		42,689		—		42,689
Consumer loans	—		3,002		—		3,002		—		1,415		—		1,415
Commercial equipment	1,195		61,304		—		62,499		544		60,290		—		60,834
	$	8,494	$	1,569,333	$	1,116	$	1,578,943	$	14,613	$	1,490,617	$	1,953	$	1,507,183
Allowance for loan losses:
Commercial real estate	$	93	$	13,002	$	—	$	13,095	$	854	$	12,431	$	—	$	13,285
Residential first mortgages	—		1,002		—		1,002		—		1,024		—		1,024
Residential rentals	—		2,175		—		2,175		—		1,361		—		1,361
Construction and land development	—		260		—		260		—		365		—		365
Home equity and second mortgages	—		274		—		274		—		263		—		263
Commercial loans	—		582		—		582		—		1,012		—		1,012
Consumer loans	—		58		—		58		—		29		—		29
Commercial equipment	173		798		—		971		37		880		—		917
	$	266	$	18,151	$	—	$	18,417	$	891	$	17,365	$	—	$	18,256

Purchased Credit-Impaired Loans and Acquired Loans ("PCI")

~~PCI loans had an unpaid principal balance of $2.3 million and a carrying value of $2.0 million at March 31, 2021. The carrying value of PCI loans represented 0.09% of total assets at March 31, 2021.~~ Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest considering prepayment assumptions. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carryover of a previously established allowance for loan losses from acquisition.

A summary of changes in the accretable yield for PCI loans for the three months ended March 31, 2021 and ~~2020 and~~ the year ended December 31, ~~2020~~2021 follows:


		Three Months Ended March 31,				Three Months Ended March 31,				Year Ended
(dollars in thousands)	(dollars in thousands)	2021		2020			(dollars in thousands)	2021			December 31, 2021
Accretable yield, beginning of period	Accretable yield, beginning of period	$	342	$	677		Accretable yield, beginning of period	$	342		$	342
Additions	Additions	0		0			Additions	—			—
Accretion	Accretion	(31)		(139)			Accretion	(31)			(117)
Reclassification from nonaccretable difference	Reclassification from nonaccretable difference	0		0			Reclassification from nonaccretable difference	—			43
Other changes, net	Other changes, net	0		0			Other changes, net	—			55
Accretable yield, end of period	Accretable yield, end of period	$	311	$	538		Accretable yield, end of period	$	311		$	323

At March 31, 2021 performing acquired loans, which totaled $55.4 million, included a $0.7 million net acquisition accounting fair market value adjustment, representing a 1.22% discount; and PCI loans which totaled $2.0 million, included a $0.3 million adjustment, representing a 14.24% discount. At December 31, ~~2020~~2021 acquired performing loans, which totaled ~~$59.0~~$41.1 million, included a $0.8 million net acquisition accounting fair market value adjustment, representing a 1.25% discount; and PCI loans which totaled ~~$2.0~~$1.1 million, included a $0.3 million adjustment, representing a 14.95% discount.

During the three months ended March 31, 2021 ~~and 2020~~ there was ~~$90,000 and $0.2~~$0.1 million ~~respectively,~~ of accretion interest.

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Accounting standards require a periodic recast of the expected cash flows on the PCI loan portfolio. The recast was performed during the fourth quarter of ~~2020~~2021 which resulted in a reclassification of $0.5 million, from the credit (nonaccretable) portion of the discount to the liquidity (accretable) portion of the discount.

The following is a summary of acquired and non-acquired loans as of ~~March 31, 2021 and~~ December 31, ~~2020:~~2021:


BY ACQUIRED AND NON-ACQUIRED	BY ACQUIRED AND NON-ACQUIRED	March 31, 2021		%		December 31, 2020		%		BY ACQUIRED AND NON-ACQUIRED	December 31, 2021		%
Acquired loans - performing	Acquired loans - performing	$	55,381	3.41	%	$	58,999	3.66	%	Acquired loans - performing	$	41,066	2.56	%
Acquired loans - purchase credit impaired ("PCI")	Acquired loans - purchase credit impaired ("PCI")	1,953		0.12	%	1,978		0.12	%	Acquired loans - purchase credit impaired ("PCI")	1,116		0.07	%
Total acquired loans	Total acquired loans	57,334		3.53	%	60,977		3.78	%	Total acquired loans	42,182		2.63	%
U.S. SBA PPP loans	U.S. SBA PPP loans	115,700		7.13	%	110,320		6.83	%	U.S. SBA PPP loans	27,276		1.70	%
Non-acquired loans**	Non-acquired loans**	1,449,849		89.34	%	1,443,298		89.39	%	Non-acquired loans**	1,536,761		95.67	%
Gross loans	Gross loans	1,622,883				1,614,595				Gross loans	1,606,219
Net deferred fees	Net deferred fees	(2,336)		(0.14)	%	(1,096)		(0.07)	%	Net deferred fees	(1,011)		(0.06)	%
Total loans, net of deferred fees	Total loans, net of deferred fees	$	1,620,547			$	1,613,499			Total loans, net of deferred fees	$	1,605,208

**Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.

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NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are presented in the tables below.


(dollars in thousands)	(dollars in thousands)	As of March 31, 2021		As of December 31, 2020		(dollars in thousands)	As of March 31, 2022		As of December 31, 2021

Goodwill	Goodwill	$	10,835	$	10,835	Goodwill	$	10,835	$	10,835


		As of March 31, 2021						As of December 31, 2020							As of March 31, 2022						As of December 31, 2021
(dollars in thousands)	(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets		Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets		(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets		Gross Carrying Amount		Accumulated Amortization		Net Intangible Assets

Core deposit intangible	Core deposit intangible	$	3,590	$	(2,196)	$	1,394	$	3,590	$	(2,063)	$	1,527	Core deposit intangible	$	3,590	$	(2,666)	$	924	$	3,590	$	(2,558)	$	1,032

The estimated aggregate future amortization expense for intangible assets remaining as of March 31, ~~2021~~2022 is as follows:


(dollars in thousands)	(dollars in thousands)			(dollars in thousands)

Remainder of 2021		$	362
2022		398
Remainder of 2022				Remainder of 2022	$	290
2023	2023	302		2023	302
2024	2024	205		2024	205
2025	2025	109		2025	109
Thereafter		18
2026				2026	18
		$	1,394
					$	924

As of March 31, ~~2021,~~2022, the Company did not have impairment to goodwill or core deposit intangibles ("CDI"). At March 31, ~~2021~~2022 the Company had goodwill of $10.8 million or ~~5.40%~~5.61% of equity and CDI of ~~$1.4~~$0.9 million or ~~0.69%~~0.48% of equity.

In the third quarter of 2020, management determined that the COVID-19 pandemic and its impact on the banking industry, was deemed a triggering event that required an interim impairment test for goodwill. Management engaged an independent consultant to perform a quantitative goodwill and CDI impairment analysis for the Company's single reporting unit, the Bank, as of September 15, 2020 ("the measurement date"). The impairment analysis used both market and income valuation approaches. The market approach analyzed transaction and control premium information for the Company and a selected peer group. The income approach analyzed discounted cash flows. The results of the methods were weighted to determine an overall value. Significant estimates and assumptions included, but were not limited to, projected profitability ratios, discount rates, cash flows projections selection and evaluation and selection of control premiums in appropriate market transactions and selection of peers.

~~In accordance with the Bank's policy, management~~ performed its annual ~~analyses~~analysis of goodwill and CDI during the fourth quarter of ~~2020~~2021 and concluded that there was 0no impairment at December 31, ~~2020.~~2021. At March 31, ~~2021,~~2022, management's analysis concluded that there were no0 changes in the Company's financial statements or operations subsequent to the ~~measurement date and the~~ fourth quarter ~~2020~~2021 annual analyses that would indicate that it was more likely than not that goodwill or CDI was impaired.

It is possible that the length and severity of the COVID-19 crisis could cause the Company's goodwill or CDI to become impaired in future periods due to a sustained decline in the Company's stock price or other financial or qualitative measures. In the event that the Company concludes that all or a portion of its goodwill and CDI are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings in that quarter. Such a charge would have no impact on tangible capital or regulatory capital.

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NOTE 5 – OTHER REAL ESTATE OWNED (“OREO”)

OREO assets are presented net of the valuation allowance. The Company considers OREO as classified assets for regulatory and financial reporting. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. An analysis of ~~OREO~~ activity follows.

Three Months Ended March 31, Years Ended December 31,
(dollars in thousands) 2021 2020 2020
Balance at beginning of year $ 3,109 $ 7,773 $ 7,773
Additions of underlying property 0 0 1,240
Disposals of underlying property (600) (703) (2,882)
Valuation allowance (180) (732) (3,022)
Balance at end of period $ 2,329 $ 6,338 $ 3,109

During the three months ended March 31, 2021 and 2020, there were 0 OREO additions. During the three months ended March 31, 2021, the Company recognized net gains of $22,000 on the disposal of $0.6 million of residential lots. During the three months ended March 31, 2020, the Company disposed of a commercial lot with a carrying value of $0.7 million for proceeds of $0.7 million resulting in a loss of $3,000.

~~To adjust properties to current appraised values, additions to the valuation allowance were taken for the three months ended March 31, 2021 and 2020 and the year ended December 31, 2020.~~


	Three Months Ended March 31,				Years Ended December 31,
(dollars in thousands)	2022		2021		2021
Balance at beginning of year	$	—	$	3,109	$	3,109
Additions of underlying property	—		—		—
Disposals of underlying property	—		(600)		(1,722)
Valuation allowance	—		(180)		(1,387)
Balance at end of period	$	—	$	2,329	$	—

Expenses applicable to OREO assets included the following.


		Three Months Ended March 31,					Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021

Valuation allowance	Valuation allowance	$	180	$	732	Valuation allowance	$	—	$	180
Losses (gains) on dispositions	Losses (gains) on dispositions	(22)		3		Losses (gains) on dispositions	—		(22)
Operating expenses	Operating expenses	23		47		Operating expenses	6		23
		$	181	$	782		$	6	$	181

~~There were 0~~The Company had $0.4 million impaired loans secured by residential real estate for which formal foreclosure proceedings were in process as of March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.

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NOTE 6 – DEPOSITS

Deposits consist of the following:


(dollars in thousands)	(dollars in thousands)	March 31, 2021				December 31, 2020				(dollars in thousands)	March 31, 2022				December 31, 2021
		Balance		%		Balance		%			Balance		%		Balance		%
Noninterest-bearing demand	Noninterest-bearing demand	$	406,319	21.75	%	$	362,079	20.74	%	Noninterest-bearing demand	$	644,385	30.75	%	$	445,778	21.68	%
Interest-bearing:	Interest-bearing:									Interest-bearing:
Demand	Demand	651,639		34.89	%	590,159		33.81	%	Demand	618,869		29.54	%	790,481		38.45	%
Money market deposits	Money market deposits	355,680		19.04	%	340,725		19.52	%	Money market deposits	387,700		18.51	%	372,717		18.13	%
Savings	Savings	105,590		5.65	%	98,783		5.66	%	Savings	124,038		5.92	%	119,767		5.82	%
Certificates of deposit	Certificates of deposit	348,668		18.67	%	353,856		20.27	%	Certificates of deposit	320,091		15.28	%	327,421		15.92	%
Total interest-bearing	Total interest-bearing	1,461,577		78.25	%	1,383,523		79.26	%	Total interest-bearing	1,450,698		69.25	%	1,610,386		78.32	%

Total Deposits	Total Deposits	$	1,867,896	100.00	%	$	1,745,602	100.00	%	Total Deposits	$	2,095,083	100.00	%	$	2,056,164	100.00	%

The aggregate amount of certificates of deposit that exceed the FDIC insurance limit of $250,000 at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$67.3~~$56.6 million and ~~$64.3~~$57.6 million, respectively.

The Company monitors all customer deposit concentrations at or above 2% of total deposits. At March 31, ~~2021, the Bank had 3 customer deposit relationships that exceeded 2% of total deposits, totaling $308.9 million which represented 16.5% of total deposits. At December 31, 2020,~~2022, the Bank had 2 customer deposit relationships that exceeded 2% of total deposits, totaling ~~$238.8~~$308.7 million which represented ~~13.7%~~14.7% of total deposits. ~~The reported concentrations at March~~At December 31, 2021, ~~and December 31, 2020~~the Bank had 2 customer deposit relationships that exceeded 2% of total deposits, totaling $335.6 million which represented 16.3% of total deposits. These concentrations were with local municipal agencies.

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NOTE 7 – LEASE COMMITMENTS & CONTINGENCIES

Operating Leases

The Company's, operating lease agreements are primarily for leases of branches and office space. All of these leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheet. ~~With the adoption of~~ Topic 842 requires operating lease agreements ~~are required~~ to be recognized on the consolidated balance sheet as a right-of-use-asset with a corresponding lease liability.

The table below details the Right of Use asset (net of accumulated amortization), lease liability and other information related to the Company's operating leases:

(dollars in thousands) March 31, 2021 December 31, 2020
Operating Leases
Operating lease right of use asset, net $ 6,391 $ 7,831
Operating lease liability $ 6,614 $ 8,088
Weighted average remaining lease term 17.43 years 18.21 years
Weighted average discount rate 3.49 % 3.52 %
Remaining lease term - min 0.0 years 0.7 years
Remaining lease term - max 24.0 years 24.0 years

During the quarter ended March 31, 2021, the Bank purchased the land under one of its existing branch locations and simultaneously terminated the associated land lease. Accordingly, the remaining unamortized right-of-use asset and the corresponding liability of approximately $1.4 million each were reduced to 0.


(dollars in thousands)	March 31, 2022			December 31, 2021
Operating Leases
Operating lease right of use asset, net	$	6,033		$	6,124
Operating lease liability	$	6,266		$	6,343
Weighted average remaining lease term	16.53 years			17.21 years
Weighted average discount rate	3.51		%	3.51		%
Remaining lease term - min	5.5 years			6.3 years
Remaining lease term - max	22.0 years			23.0 years

The table below details the Company's lease cost, which is included in occupancy expense in the Unaudited Consolidated Statements of Income.

~~Table of Contents~~


		Three Months Ended March 31,				Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020			(dollars in thousands)	2022		2021

Operating lease cost	Operating lease cost	$	197	$	198		Operating lease cost	$	146	$	197

Cash paid for lease liability	Cash paid for lease liability	$	1,545	$	172		Cash paid for lease liability	$	131	$	176

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:


(dollars in thousands)	As of March 31, ~~2021~~2022

Lease payments due:
Within one year	$	~~572~~532
After one but within two years	~~532~~539
After two but within three years	~~539~~547
After three but within four years	~~547~~588
After four but within five years	~~588~~595
After five years	~~6,272~~5,677
Total undiscounted cash flows	$	~~9,050~~8,478
Discount on cash flows	~~2,436~~2,212
Total lease liability	$	~~6,614~~6,266

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NOTE 8 – GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES (“TRUPs”)

On June 15, 2005, Tri-County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly-owned by the Company, issued $5.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this issuance, along with the $0.2 million for Capital Trust II’s common securities, to purchase $5.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company.

On July 22, 2004, Tri-County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly owned by the Company, issued $7.0 million of variable-rate capital securities in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from this issuance, along with the Company’s $0.2 million capital contribution for Capital Trust I’s common securities, to purchase $7.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. These debentures qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust I and the junior subordinated debentures are scheduled to mature on July 22, 2034, unless called by the Company.

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NOTE 9 – SUBORDINATED NOTES

On October 14, 2020, the Company entered into Subordinated Note Purchase Agreements (collectively, the "Purchase Agreements'') with qualified institutional buyers and accredited investors (collectively, the "Purchasers") pursuant to which the Company issued and sold $20.0 million in aggregate principal amount of its 4.75% Fixed to Floating Rate Subordinated Notes due 2030 (the "Notes"). The Notes were sold by the Company in a private offering. The Notes mature on October 15, 2030 and bear interest at a fixed rate of 4.75% to October 14, 2025. From October 15, 2025 to the maturity date or early redemption date, the interest rate will reset quarterly to ~~an interest rate per annum, expected to be~~ the ~~then-current-three-month~~three-month Secured Overnight Financing Rate ("SOFR") ~~provided by the Federal Reserve Bank of New York~~ plus 458 basis points. The Company may redeem the Notes at any time after October 14, 2025, and at any time in whole, but not in part, upon the occurrence of certain events. Any redemption of the Notes will be subject to prior regulatory approval. The Company incurred debt issuance costs for placement fees, legal and other out-of-pocket expenses of approximately $0.6 million, which are being amortized over the life of the Notes. The Company recognized amortization expense of $14,000 and $58,000 for the quarters ended March 31, 2022 and 2021, respectively.

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NOTE 10 – REGULATORY CAPITAL

The Bank’s primary regulator is the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation, supervision and regular examination by the Maryland Commissioner of Financial Regulation (the “Commissioner”) and the FDIC. The Company is subject to regulation, examination and supervision by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the “BHCA”).

The Company and Bank are subject to the Basel III Capital Rules which establish a comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s “Basel III” framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules.ratios.

The rules include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.50%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio (“Min. Ratio”) of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer (“CCB”) is also established above the regulatory minimum capital requirements. ~~Strict eligibility criteria for regulatory capital instruments were also implemented under the rules.~~ The rules revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

On April 13, 2020, the regulatory agencies published an interim final rule, which permits banking organizations to exclude from regulatory capital requirements U.S. SBA PPP covered loans pledged under the PPPLF. The interim final rule also clarifies that U.S. SBA PPP covered loans as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) receive a zero percent risk weight.

The interim final rule modifies the agencies’ capital rule and allows PPPLF-eligible banking organizations to neutralize the regulatory effects of U.S. SBA PPP covered loans on their risk-based capital ratios, as well as U.S. SBA PPP covered loans pledged under the PPPLF on their leverage capital ratios. When calculating leverage capital ratios, a banking organization may exclude from average total consolidated assets and, as applicable, total leverage exposure a U.S. SBA PPP covered loan as of the date that it has been pledged under the PPPLF. Accordingly, a U.S. SBA PPP covered loan that has not been pledged as collateral in connection with an extension of credit under the PPPLF would be included in the calculation of the banking organization’s average total consolidated assets and, as applicable, total leverage exposure. On November 30, 2020, the Federal Reserve Board and U.S. Department of Treasury jointly announced the extension of the PPPLF facility to March 31, 2021.

As of March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company and Bank were well-capitalized under the regulatory framework for prompt corrective action ("PCA") under the new Basel III Capital Rules. Management believes, as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. The Company’s and the Bank’s actual regulatory capital amounts and ratios are presented in the following table.

~~Table of Contents~~


Regulatory Capital and Ratios	Regulatory Capital and Ratios			The Company						The Bank						Regulatory Capital and Ratios			The Company						The Bank
(dollars in thousands)	(dollars in thousands)			March 31, 2021			December 31, 2020			March 31, 2021			December 31, 2020			(dollars in thousands)			March 31, 2022			December 31, 2021			March 31, 2022			December 31, 2021
Common equity	Common equity			$	200,759		$	198,013		$	221,447		$	217,142		Common equity			$	193,140		$	208,133		$	222,753		$	236,561
Goodwill	Goodwill			(10,835)			(10,835)			(10,835)			(10,835)			Goodwill			(10,835)			(10,835)			(10,835)			(10,835)
Core deposit intangible (net of deferred tax liability)	Core deposit intangible (net of deferred tax liability)			(1,031)			(1,129)			(1,031)			(1,129)			Core deposit intangible (net of deferred tax liability)			(685)			(766)			(685)			(766)
AOCI (gains) losses				(1,684)			(4,504)			(1,684)			(4,504)
AOCI losses																AOCI losses			18,969			1,952			18,969			1,952
Common Equity Tier 1 Capital	Common Equity Tier 1 Capital			187,209			181,545			207,897			200,674			Common Equity Tier 1 Capital			200,589			198,484			230,202			226,912
TRUPs	TRUPs			12,000			12,000			—			—			TRUPs			12,000			12,000			—			—
Tier 1 Capital	Tier 1 Capital			199,209			193,545			207,897			200,674			Tier 1 Capital			212,589			210,484			230,202			226,912
Allowable reserve for credit losses and other Tier 2 adjustments	Allowable reserve for credit losses and other Tier 2 adjustments			18,307			19,475			18,307			19,475			Allowable reserve for credit losses and other Tier 2 adjustments			21,619			18,468			21,619			18,468
Subordinated notes	Subordinated notes			19,468			19,526			—			—			Subordinated notes			19,524			19,510			—			—
Tier 2 Capital	Tier 2 Capital			$	236,984		$	232,546		$	226,204		$	220,149		Tier 2 Capital			$	253,732		$	248,462		$	251,821		$	245,380

Risk-Weighted Assets ("RWA")	Risk-Weighted Assets ("RWA")			$	1,597,777		$	1,582,581		$	1,596,308		$	1,580,786		Risk-Weighted Assets ("RWA")			$	1,731,539		$	1,665,296		$	1,729,914		$	1,663,831
Average Assets ("AA")	Average Assets ("AA")			$	2,053,796		$	2,025,061		$	2,052,412		$	2,023,325		Average Assets ("AA")			$	2,319,531		$	2,281,210		$	2,317,923		$	2,279,835
Regulatory Min. Ratio + CCB (1)
Regulatory Minimum Ratio + CCB (1)																Regulatory Minimum Ratio + CCB (1)
Common Tier 1 Capital to RWA	Common Tier 1 Capital to RWA	7.00	%	11.72		%	11.47		%	13.02		%	12.69		%	Common Tier 1 Capital to RWA	7.00	%	11.58		%	11.92		%	13.31		%	13.64		%
Tier 1 Capital to RWA	Tier 1 Capital to RWA	8.50		12.47			12.23			13.02			12.69			Tier 1 Capital to RWA	8.50		12.28			12.64			13.31			13.64
Tier 2 Capital to RWA	Tier 2 Capital to RWA	10.50		14.83			14.69			14.17			13.93			Tier 2 Capital to RWA	10.50		14.65			14.92			14.56			14.75
Tier 1 Capital to AA (Leverage) (2)	Tier 1 Capital to AA (Leverage) (2)	n/a		9.70			9.56			10.13			9.92			Tier 1 Capital to AA (Leverage) (2)	n/a		9.17			9.23			9.93			9.95

(1)The regulatory minimum capital ratio ("Min. Ratio") + the capital conservation buffer ("CCB").

(2)Tier 1 Capital to AA (Leverage) has no capital conservation buffer defined. The PCA well capitalized is defined as 5.00%.

Dividends paid by the Company are substantially funded from dividends received from the Bank. Federal and holding company regulations, as well as Maryland law, impose certain restrictions on capital distributions, including dividend payments and share repurchases. These restrictions generally require advanced approval from the Bank's regulator for payment of dividends in excess of the sum of net income for the current calendar year and the retained net income of the prior two calendar years.

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NOTE 11 – FAIR VALUE MEASUREMENTS

The Company adopted FASB ASC Topic 820, “Fair Value Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides a framework for measuring and disclosing fair value under U.S. GAAP. FASB ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, AFS investment securities) or on a nonrecurring basis (for example, impaired loans).

FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. AFS securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded, and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:

Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s quarterly valuation process. Intra-quarter transfers in and out of level 3 assets and liabilities recorded at fair value on a recurring basis are disclosed. There were no such transfers during the quarter ended March 31, ~~2021~~2022 or the year ended December 31, ~~2020.~~2021.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities Available for Sale

AFS investment securities are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities (“GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

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Equity Securities Carried at Fair Value Through Income

Equity securities carried at fair value through income are recorded at fair value on a recurring basis. Standard inputs include quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 equity securities include those traded on an active exchange, such as the New York Stock Exchange. Level 2 equity securities include mutual funds with asset-backed securities issued by government sponsored entities (“GSEs”) as the underlying investment supporting the fund. Equity securities classified as Level 3 include mutual funds with asset-backed securities in less liquid markets.

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Loans held for sale

The Company has elected to carry loans held for sale at fair value. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of residential mortgage loans are recorded as a component of noninterest income in the Consolidated Statements of Income. As such, loans subjected to fair value adjustments are classified as Level 2 valuation

Loans Receivable

The Company does not record loans at fair value on a recurring basis; however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, or discounted cash flows. Impaired loans not requiring a specific allowance are those for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, substantially all of the impaired loans were evaluated based upon the fair value of the collateral.

In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral (loans with impairment) require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the loan as nonrecurring Level 2. When the fair value of the impaired loan is derived from an appraisal, the Company records the loan as nonrecurring Level 3. Fair value is re-assessed at least quarterly or more frequently when circumstances occur that indicate a change in the fair value. The fair values of impaired loans that are not measured based on collateral values are measured using discounted cash flows and considered to be Level 3 inputs.

~~Premises and Equipment Held for Sale~~

Premises and equipment are adjusted to fair value upon transfer of the assets to premises and equipment held for sale. Subsequently, premises and equipment held for sale are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the asset as nonrecurring Level 2. When the fair value of premises and equipment is derived from an appraisal or a cash flow analysis, the Company records the asset as nonrecurring Level 3.

Other Real Estate Owned ("OREO")

OREO is adjusted for fair value upon transfer of the loans to foreclosed assets. Subsequently, OREO is reported at the lower of carrying value or fair value. Fair value is based on independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price (e.g., contracted sales price), the Company records the foreclosed asset as nonrecurring Level 2. When the fair value is derived from an appraisal, the Company records the foreclosed asset at nonrecurring Level 3.

Mortgage Banking Derivatives

~~Table~~The mortgage banking derivative comprises interest rate lock commitments for residential loans to be sold on a best-efforts basis. The significant unobservable input used in the fair value measurement of ~~Contents~~

the Bank's interest rate lock commitments is the pull-through rate, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The pull-through rate is estimated based on mortgage banking activity in 2021. All interest rate lock commitments are considered to be Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 measured at fair value on a recurring basis.

(dollars in thousands) March 31, 2021
Description of Asset Fair Value Level 1 Level 2 Level 3
AFS securities
Asset-backed securities issued by GSEs and U.S. Agencies
MBS $ 38,380 $ — $ 38,380 $ —
CMOs 132,648 — 132,648 —
Asset-backed securities issued by Others:
Residential CMOs 275 — 275 —
Student Loan Trust ABSs 40,480 — 40,480 —
U.S. government obligations 4,444 — 4,444 —
Municipal bonds 37,121 — 37,121 —
Total AFS securities $ 253,348 $ — $ 253,348 $ —
Equity securities carried at fair value through income
CRA investment fund $ 4,787 $ — $ 4,787 $ —
Non-marketable equity securities
Other equity securities $ 207 $ — $ 207 $ —

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(dollars in thousands)	March 31, 2022
Description of Asset	Fair Value		Level 1		Level 2		Level 3
AFS securities
Asset-backed securities issued by GSEs and U.S. Agencies
MBS	$	121,520	$	—	$	121,520	$	—
CMOs	189,799		—		189,799		—
U.S. Agency	13,410		—		13,410		—
Asset-backed securities issued by Others:
Residential CMOs	199		—		199		—
Student Loan Trust ABSs	53,469		—		53,469		—

Municipal bonds	90,827		—		90,827		—
Corporate bonds	2,960		—		2,960		—
U.S. government obligations	35,343		—		35,343		—
Total AFS securities	$	507,527	$	—	$	507,527	$	—

Equity securities carried at fair value through income
CRA investment fund	$	4,562	$	—	$	4,562	$	—

Non-marketable equity securities
Other equity securities	$	207	$	—	$	207	$	—

Loans held for sale	$	373	$	—	$	373	$	—

Mortgage banking derivative
Interest rate lock commitments	$	—	$	—	$	—	$	—


(dollars in thousands)	(dollars in thousands)	December 31, 2020								(dollars in thousands)	December 31, 2021
Description of Asset	Description of Asset	Fair Value		Level 1		Level 2		Level 3		Description of Asset	Fair Value		Level 1		Level 2		Level 3
AFS securities	AFS securities									AFS securities
Asset-backed securities issued by GSEs and U.S. Agencies	Asset-backed securities issued by GSEs and U.S. Agencies									Asset-backed securities issued by GSEs and U.S. Agencies
MBS	MBS	$	34,953	$	—	$	34,953	$	—	MBS	$	119,916	$	—	$	119,916	$	—
CMOs	CMOs	127,447		—		127,447		—		CMOs	197,123		—		197,123		—

U.S. Agency										U.S. Agency	14,304		—		14,304		—
Asset-backed securities issued by others:	Asset-backed securities issued by others:									Asset-backed securities issued by others:
Residential CMOs	Residential CMOs	288		—		288		—		Residential CMOs	221		—		221		—
Student Loan Trust ABSs	Student Loan Trust ABSs	37,439		—		37,439		—		Student Loan Trust ABSs	56,574		—		56,574		—

Municipal bonds										Municipal bonds	92,841		—		92,841		—

U.S. government obligations	U.S. government obligations	1,500		—		1,500		—		U.S. government obligations	16,860		—		16,860		—
Municipal bonds		44,478		—		44,478		—
Total AFS securities	Total AFS securities	$	246,105	$	—	$	246,105	$	—	Total AFS securities	$	497,839	$	—	$	497,839	$	—

Equity securities carried at fair value through income	Equity securities carried at fair value through income									Equity securities carried at fair value through income
CRA investment fund	CRA investment fund	$	4,855	$	—	$	4,855	$	—	CRA investment fund	$	4,772	$	—	$	4,772	$	—

Non-marketable equity securities	Non-marketable equity securities									Non-marketable equity securities
Other equity securities	Other equity securities	$	207	$	—	$	207	$	—	Other equity securities	$	207	$	—	$	207	$	—

Mortgage banking derivative										Mortgage banking derivative
Interest rate lock commitments										Interest rate lock commitments	$	28	$	—	$	—	$	28

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were included in the tables below.


(dollars in thousands)	(dollars in thousands)	March 31, 2021								(dollars in thousands)	March 31, 2022
Description of Asset	Description of Asset	Fair Value		Level 1		Level 2		Level 3		Description of Asset	Fair Value		Level 1		Level 2		Level 3
Loans with impairment
Individually assessed loans										Individually assessed loans
Commercial real estate	Commercial real estate	$	5,436	$	—	$	—	$	5,436	Commercial real estate	$	—	$	—	$	—	$	—
Commercial loans										Commercial loans	—		—		—		—
Commercial equipment										Commercial equipment	427		—		—		427
Total loans with impairment										Total loans with impairment	$	427	$	—	$	—	$	427

Total loans with impairment		$	5,436	$	—	$	—	$	5,436
Premises and equipment held for sale		$	430	$	—	$	—	$	430
Other real estate owned		$	2,329	$	—	$	—	$	2,329

(dollars in thousands) December 31, 2020
Description of Asset Fair Value Level 1 Level 2 Level 3
Loans with impairment
Commercial real estate $ 4,483 $ — $ — $ 4,483
Total loans with impairment $ 4,483 $ — $ — $ 4,483
Premises and equipment held for sale $ 430 $ — $ — $ 430
Other real estate owned $ 3,109 $ — $ — $ 3,109

(dollars in thousands)

December 31, 2021

Description of Asset

Fair Value

Level 1

Level 2

Level 3

Loans with impairment

Commercial real estate

—

Commercial loans

—

Commercial equipment

—

Total loans with impairment

—

Premises and equipment held for sale

—

Other real estate owned

—

Loans with impairment had unpaid principal balances of ~~$6.3~~$0.7 million and ~~$5.8~~$0.3 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.

March 31, ~~2021~~2022

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

(dollars in thousands)

Description of Asset

Loans with impairment

~~5,436~~427

Third party appraisals and in-house real estate evaluations of fair value

Management discount for property type, selling costs and current market conditions

0% - 50% - ~~14%~~40%

~~Premises and equipment held for sale~~

~~430~~

~~Third party appraisals, in-house real estate evaluations of fair value and contracts to sell.~~

~~Management discount for property type and current market conditions~~

~~0% - 25% - 10%~~

~~Other real estate owned~~

~~2,329~~

~~Third party appraisals and in-house real estate evaluations of fair value~~

~~Management discount for property type and current market conditions~~

~~0% - 50% - 49%~~

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December 31, ~~2020~~2021

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

(dollars in thousands)

Description of Asset

~~Loans with impairment~~Interest rate lock commitments

~~4,483~~28

~~Third party appraisals and in-house real estate evaluations~~Freddie Mac pricing of ~~fair value~~loans with comparable terms

~~Management discount for property type, selling costs and current market conditions~~Pull-through rate

0% - ~~50%~~100% - ~~23%~~75%

~~Premises and equipment held for sale~~

~~430~~

~~Third party appraisals, in-house real estate evaluations of fair value and contracts to sell.~~

~~Management discount for property type and current market conditions~~

~~0% - 25% - 10%~~

~~Other real estate owned~~

~~3,109~~

~~Third party appraisals and in-house real estate evaluations of fair value~~

~~Management discount for property type and current market conditions~~

~~0% - 50% - 47%~~

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NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments require disclosure of fair value information, whether or not recognized in the consolidated balance sheets, when it is practical to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contractual obligation which requires the exchange of cash. Certain items are specifically excluded from the financial instrument fair value disclosure requirements, including the Company’s common stock, OREO, premises and equipment and other assets and liabilities.

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Therefore, any aggregate unrealized gains or losses should not be interpreted as a forecast of future earnings or cash flows. Furthermore, the fair values disclosed should not be interpreted as the aggregate current value of the Company.

The Company’s estimated fair values of financial instruments are presented in the following tables.

March 31, 2021 Carrying Amount Fair Value Fair Value Measurements
Description of Asset (dollars in thousands)
Level 1 Level 2 Level 3
Assets
Investment securities - AFS $ 253,348 $ 253,348 $ — $ 253,348 $ —
Equity securities carried at fair value through income 4,787 4,787 — 4,787
Non-marketable equity securities in other financial institutions 207 207 — 207 —
FHLB Stock 2,036 2,036 — 2,036 —
Net loans receivable 1,602,291 1,606,510 — — 1,606,510
Accrued Interest Receivable 7,337 7,337 — 7,337 —
Investment in BOLI 38,275 38,275 — 38,275 —
Liabilities
Savings, NOW and money market accounts $ 1,519,228 $ 1,519,228 $ — $ 1,519,228 $ —
Time deposits 348,668 349,925 — 349,925 —
Long-term debt 27,285 27,001 — 27,001 —
TRUPs 12,000 10,473 — 10,473 —

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March 31, 2022	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Investment securities - AFS	$	507,527	$	507,527	$	—	$	507,527	$	—

Equity securities carried at fair value through income	4,562		4,562		—		4,562		—
Non-marketable equity securities in other financial institutions	207		207		—		207		—
FHLB Stock	1,685		1,685		—		1,685		—
Loans held for sale	373		373		—		373		—
Net loans receivable	1,623,435		1,581,251		—		—		1,581,251
Accrued interest receivable	5,389		5,389		—		5,389		—
Investment in BOLI	39,145		39,145		—		39,145		—
Mortgage banking derivatives	—		—		—		—		—

Liabilities
Savings, NOW and money market accounts	$	1,774,992	$	1,774,992	$	—	$	1,774,992	$	—
Time deposits	320,091		320,447		—		320,447		—

Long-term debt	12,213		12,235		—		12,235		—
TRUPs	12,000		12,049		—		12,049		—
Subordinated notes	19,524		20,478		—		20,478		—

See the Company’s methodologies disclosed in Note 21 of the Company’s ~~2020~~2021 Form 10-K for the fair value methodologies used as of December 31, ~~2020:~~2021:

December 31, 2020 Carrying Amount Fair Value Fair Value Measurements
Description of Asset (dollars in thousands)
Level 1 Level 2 Level 3
Assets
Investment securities - AFS $ 246,105 $ 246,105 $ — $ 246,105 $ —
Equity securities carried at fair value through income 4,855 4,855 — 4,855 —
Non-marketable equity securities in other financial institutions 207 207 — 207 —
FHLB Stock 2,777 2,777 — 2,777 —
Net loans receivable 1,594,075 1,581,922 — — 1,581,922
Accrued Interest Receivable 8,717 8,717 — 8,717 —
Investment in BOLI 38,061 38,061 — 38,061 —
Liabilities
Savings, NOW and money market accounts $ 1,391,746 $ 1,391,746 $ — $ 1,391,746 $ —
Time deposits 353,856 355,478 — 355,478 —
Short-term borrowings 0 0 — 0 —
Long-term debt 27,302 27,805 — 27,805 —
TRUPs 12,000 9,444 — 9,444 —
Subordinated notes 19,526 20,106 — 20,106 —

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December 31, 2021	Carrying Amount		Fair Value		Fair Value Measurements
Description of Asset (dollars in thousands)					Level 1		Level 2		Level 3
Assets
Investment securities - AFS	$	497,839	$	497,839	$	—	$	497,839	$	—

Equity securities carried at fair value through income	4,772		4,772		—		4,772		—
Non-marketable equity securities in other financial institutions	207		207		—		207		—
FHLB Stock	1,472		1,472		—		1,472		—

Net loans receivable	1,586,791		1,578,032		—		—		1,578,032
Accrued interest receivable	5,588		5,588		—		5,588		—
Investment in BOLI	38,932		38,932		—		38,932		—
Mortgage ranking derivatives	28		28		—		—		28

Liabilities
Savings, NOW and money market accounts	$	1,728,743	$	1,728,743	$	—	$	1,728,743	$	—
Time deposits	327,421		328,083		—		328,083		—

Long-term debt	12,231		12,391		—		12,391		—
TRUPs	12,000		11,589		—		11,589		—
Subordinated notes	19,510		20,979		—		20,979		—

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had outstanding loan commitments and standby letters of credit with customers of ~~$86.9~~$68.8 million and ~~$66.5~~$64.4 million, respectively, and ~~$22.9~~$23.7 million and ~~$20.0~~$22.0 million, respectively. Additionally, at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, customers had ~~$225.0~~$222.6 million and ~~$225.5~~$241.7 million, respectively, available and unused on lines of credit, which include lines of credit for commercial customers, home equity loans as well as builder and construction lines. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these Consolidated Financial Statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

NOTE 13 – ACCUMULATED OTHER COMPREHENSIVE ~~INCOME~~INCOME/LOSS ("AOCI"/"AOCL")

The following table presents the changes in each component of accumulated other comprehensive gain, net of tax, for the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021.


		Three Months Ended March 31, 2021		Three Months Ended March 31, 2020			Three Months Ended March 31, 2022		Three Months Ended March 31, 2021
(dollars in thousands)	(dollars in thousands)	Net Unrealized Gains And Losses		Net Unrealized Gains And Losses		(dollars in thousands)	Net Unrealized Gains And Losses		Net Unrealized Gains And Losses
Beginning of period	Beginning of period	$	4,504	$	1,504	Beginning of period	$	(1,952)	$	4,504
Other comprehensive (loss) gains, net of tax before reclassifications		(3,253)		1,412
Other comprehensive losses, net of tax before reclassifications						Other comprehensive losses, net of tax before reclassifications	(17,017)		(3,253)
Amounts reclassified from accumulated other comprehensive gain	Amounts reclassified from accumulated other comprehensive gain	433		243		Amounts reclassified from accumulated other comprehensive gain	—		433
Net other comprehensive (loss) income		(2,820)		1,655
Net other comprehensive losses						Net other comprehensive losses	(17,017)		(2,820)

End of period	End of period	$	1,684	$	3,159	End of period	$	(18,969)	$	1,684

As of the three months ended March 31, ~~2021~~2022 and March 31, ~~2020,~~2021, reclassification adjustments were due to the gain on sale of AFS investment securities of ~~$0.6~~$0.0 million and ~~$0.3~~$0.6 million, respectively.

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NOTE 14 – EARNINGS PER SHARE (“EPS”)

Basic earnings per common share represent income available to common shareholders, divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may have been issued by the Company related to outstanding unvested restricted stock unit and performance stock unit awards were determined using the treasury stock ~~method.~~method

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and included in the calculation of dilutive common stock equivalents. The Company has not granted any stock options since 2007 and all outstanding options expired on July 17, 2017.

As of March 31, ~~2021,~~2022, and ~~2020,~~2021, there were 0no unvested restricted stock and performance stock unit awards which were excluded from the calculation as their effect would be anti-dilutive. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:

(dollars in thousands, except per share amounts) Three Months Ended March 31,
2021 2020
Net Income $ 6,299 $ 2,748
Average number of common shares outstanding 5,888,250 5,886,981
Dilutive effect of common stock equivalents 9,448 0
Average number of shares used to calculate diluted EPS 5,897,698 5,886,981
Earnings Per Common Share
Basic $ 1.07 $ 0.47
Diluted $ 1.07 $ 0.47


(dollars in thousands, except per share amounts)	Three Months Ended March 31,
	2022		2021

Net Income	$	6,288	$	6,299

Average number of common shares outstanding	5,688,221		5,888,250
Dilutive effect of common stock equivalents	10,817		9,448
Average number of shares used to calculate diluted EPS	5,699,038		5,897,698

Anti-dilutive shares	—		—

Earnings Per Common Share
Basic	$	1.11	$	1.07
Diluted	$	1.10	$	1.07

NOTE 15 – INCOME TAXES

The Company files a consolidated federal income tax return with its subsidiaries. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. If it is more likely than not that some portion or the entire deferred tax asset will not be realized, deferred tax assets will be reduced by a valuation allowance. It is the Company’s policy to recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.


(dollars in thousands)	(dollars in thousands)	Three Months Ended March 31,						(dollars in thousands)	Three Months Ended March 31,
		2021			2020				(dollars in thousands)		2022				2021
Current income tax expense	Current income tax expense	$	1,895		$	739					$	1,927			$	1,895
Deferred income tax benefit		232			(796)
Deferred income tax expense										Deferred income tax expense		206				232
Income tax expense as reported	Income tax expense as reported	$	2,127		$	(57)				Income tax expense as reported		$	2,133			$	2,127

Effective tax rate	Effective tax rate	25.2		%	(2.1)		%			Effective tax rate		25.3		%		25.2		%

Net deferred tax assets totaled ~~$8.7~~$15.5 million at March 31, ~~2021~~2022 and ~~$7.9~~$9.0 million at December 31, ~~2020. NaN~~2021. No valuation allowance for deferred tax assets was recorded at March 31, ~~2021~~2022 as management believes it is more likely than not that deferred tax assets will be realized against deferred tax liabilities and projected future taxable income.

The increase in income tax expense for the three months ended March 31, 2021 was primarily due to a change in the Company's state tax apportionment approach which was implemented during the first quarter of 2020 and included the impact of amended income tax filings of the Company and Bank. Management determined the change in tax position qualified as a change in estimate under FASB ASC Section 250.

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~~The~~ effective tax rate differed from the statutory federal and state income rates during 2022 and 2021 primarily due to the effect of tax-exempt loans, life insurance policies, the income tax effects associated with stock-based compensation and certain non-deductible expenses for state income taxes. The Company’s consolidated effective tax rate is expected to be between 25.00% and 26.06% in ~~2021.~~

The effective income tax rates differed from the statutory federal and state income tax rates during 2020 primarily due to an adjustment of $0.7 million related to state apportionment of interest income on loans. In addition, the effective income tax rates differed from the statutory federal and state income tax rates due to the effect of tax-exempt loans, life insurance policies, the income tax effects associated with stock-based compensation and certain non-deductible expenses for state income taxes.

~~NOTE 16 – OTHER EXPENSES~~

~~The Company had the following other noninterest expenses for the three months ended March 31, 2021 and 2020:~~

Three Months Ended March 31,
(dollars in thousands) 2021 2020
Deposit account expenses $ 118 $ 111
Insurance 99 49
ATM expenses 81 86
Fraud losses 1,329 7
Other expenses 604 566
$ 2,231 $ 819

For the three months ended March 31, 2021, fraud losses include a $1.3 million charge related to an isolated wire transfer fraud incident. NaN additional expense is expected to be incurred relating to this incident and the Company have submitted an insurance claim that could result in a recovery of a portion of the expense. In addition, through April 30, 2021 the Company recovered approximately $0.2 million from other financial institutions that will be recognized in the second quarter.

~~NOTE 17 – SUBSEQUENT EVENTS~~

On April 21, 2021, the Bank purchased a branch building in Spotsylvania, Virginia for $1.3 million The full service branch is expected to open in late 2021 and will provide banking, lending and wealth management services with a focus on digital banking. The Company estimates the renovation and equipment costs to be in the range of $1.1 million to $1.5 million.

On April 28, 2021, the Bank entered into a contract to sell an undeveloped commercial OREO property with expected proceeds of approximately $0.3 million. The carrying value of the property at March 31, 2021 was approximately $0.8 million. A valuation allowance of $0.5 million will be recognized in the second quarter of 2021.2022.

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ITEM 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~SELECTED FINANCIAL INFORMATION AND RATIOS~~

The following table shows selected historical consolidated financial data for the Company for the three months ended March 31, 2021 and 2020 and as of March 31, 2021 and December 31, 2020. This table should be read together with the Company's Consolidated Financial Statements and related notes and Item 6. Selected Financial Data as presented in the Company’s Form 10-K for the year ended December 31, 2020.

(Unaudited)
Three Months Ended March 31,
2021 2020
KEY OPERATING RATIOS
Return on average assets ("ROAA") 1.22 % 0.61 %
Pre-tax Pre-Provision ROAA** 1.68 1.51
Return on average common equity ("ROACE") 12.53 6.00
Pre-tax Pre-Provision ROACE** 17.34 14.82
Return on Average Tangible Common Equity ("ROATCE")** 13.56 6.83
Average total equity to average total assets 9.71 10.20
Interest rate spread 3.43 3.21
Net interest margin 3.50 3.43
Cost of funds 0.25 0.93
Cost of deposits 0.18 0.82
Cost of debt 2.50 2.61
Efficiency ratio (1)
53.78 58.78
Non-interest expense to average assets 1.96 2.15
Net operating expense to average assets (2)
1.50 1.68
Avg. int-earning assets to avg. int-bearing liabilities 128.84 124.44
Net charge-offs to average portfolio loans 0.40 —
COMMON SHARE DATA
Basic net income per common share $ 1.07 $ 0.47
Diluted net income per common share 1.07 0.47
Cash dividends paid per common share 0.125 0.125
Weighted average common shares outstanding:
Basic 5,888,250 5,886,981
Diluted 5,897,698 5,886,981

**~~Non-GAAP financial measure. See reconciliation of GAAP and non-GAAP measures.~~

~~(1)Efficiency ratio is defined as noninterest expense divided by the sum of net interest income plus noninterest income.~~

~~(2)The net operating expense ratio is defined as noninterest expense less noninterest income divided by average assets.~~

~~Table of Contents~~

(Unaudited)
(dollars in thousands, except per share amounts) March 31, 2021 December 31, 2020
COMMON SHARE DATA
Book value per common share $ 34.04 $ 33.54
Tangible book value per common share** 31.97 31.45
Common shares outstanding at end of period 5,897,685 5,903,613
OTHER DATA
Full-time equivalent employees 192 189
Branches 11 12
Loan Production Offices 4 4
CAPITAL RATIOS
Tier 1 capital to average assets 9.70 % 9.56 %
Tier 1 common capital to risk-weighted assets 11.72 11.47
Tier 1 capital to risk-weighted assets 12.47 12.23
Total risk-based capital to risk-weighted assets 14.83 14.69
Common equity to assets 9.34 9.77
Tangible common equity to tangible assets 8.82 9.22

**~~Non-GAAP financial measure. See reconciliation of GAAP and non-GAAP measures.~~

~~Table of Contents~~

~~USE OF NON-GAAP FINANCIAL MEASURES~~

Statements included in management’s discussion and analysis include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures. The Company’s management uses these non-GAAP financial measures and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company. Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP. See Non-GAAP reconciliation schedules that immediately follow:

~~RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)~~

Reconciliation of U.S. GAAP total assets, common equity, common equity to assets and book value to Non-GAAP tangible assets, tangible common equity, tangible common equity to tangible assets and tangible book value.

This Form 10-Q, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with GAAP. This financial information includes certain performance measures, which exclude intangible assets. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

(dollars in thousands, except per share amounts) March 31, 2021 December 31, 2020 March 31, 2020
Total assets $ 2,149,531 $ 2,026,439 $ 1,826,621
Less: intangible assets
Goodwill 10,835 10,835 10,835
Core deposit intangible 1,394 1,527 1,961
Total intangible assets 12,229 12,362 12,796
Tangible assets $ 2,137,302 $ 2,014,077 $ 1,813,825
Total common equity $ 200,759 $ 198,013 $ 185,267
Less: intangible assets 12,229 12,362 12,796
Tangible common equity $ 188,530 $ 185,651 $ 172,471
Common shares outstanding at end of period 5,897,685 5,903,613 5,910,064
Common equity to assets 9.34 % 9.77 % 10.14 %
Tangible common equity to tangible assets 8.82 % 9.22 % 9.51 %
Common book value per share $ 34.04 $ 33.54 $ 31.35
Tangible common book value per share $ 31.97 $ 31.45 $ 29.18

~~Table of Contents~~

~~RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2021 AND 2020~~

~~Pre-Tax Pre-Provision ("PTPP") Income, PTPP Return on Average Assets ("ROAA"), PTPP Return on Average Common Equity ("ROACE"), and Return on Average Tangible Common Equity ("ROATCE")~~

Management believes that PTPP income, which reflects the Company's profitability before income taxes and loan loss provisions, allows investors to better assess the Company's operating income and expenses in relation to the Company's core operating revenue by removing the volatility that is associated with credit provisions and different state income tax rates for comparable institutions. ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. Management also believes that during a crisis such as the COVID-19 pandemic, this information is useful as the impact of the pandemic on the loan loss provisions of various institutions will likely vary based on the geography of the communities served by a particular institution.

Three Months Ended March 31,
(dollars in thousands) 2021 2020
Net income (as reported) $ 6,299 $ 2,748
Provision for loan losses 295 4,100
Income tax expenses 2,127 (57)
Non-GAAP PTPP income $ 8,721 $ 6,791
ROAA 1.22 % 0.61 %
Pre-tax Pre-Provision ROAA 1.68 % 1.51 %
ROACE 12.53 % 6.00 %
Pre-tax Pre-Provision ROACE 17.34 % 14.82 %
ROATCE 13.56 % 6.83 %
Average assets $ 2,070,575 $ 1,797,426
Average equity $ 201,124 $ 183,272
Average tangible common equity $ 188,808 $ 170,373

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that involve significant judgments and uncertainties and could result in materially different results under different assumptions and conditions. The Company considers its determination of the allowance for ~~loan~~credit losses ("~~ALLL"~~ACL"), goodwill impairment, ~~the valuation of foreclosed real estate (OREO)~~ and the valuation of deferred tax assets to be critical accounting policies. The Company believes that the most critical accounting policies upon which its financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020,~~2021, as filed with the SEC.

For additional information regarding the ~~ALLL,~~ACL, Goodwill, ~~OREO~~ and the valuation of deferred taxes, refer to Notes 1, 3, 4, 6 and 14 in the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021.

On January 1, 2022, the Company adopted FASB ASU 2016-13, which changes the accounting for the allowance for credit losses. For a discussion of this new accounting policy, refer to Note 1 "Basis of Presentation" to the Consolidated Financial Statements.

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OVERVIEW

Community Bank of the Chesapeake (the “Bank”) is headquartered in Southern Maryland with 11 branches located in Maryland and Virginia. The Bank is a wholly-owned subsidiary of The Community Financial Corporation (the “Company”). The Company provides financial services to individuals and businesses through its offices in Southern Maryland and Fredericksburg, Virginia. Its primary deposit products are demand, savings and time deposits, and its primary lending products are commercial and residential mortgage loans, commercial loans, construction and land development loans, home equity and second mortgages and commercial equipment loans.

Our customer focus is to serve small and medium sized commercial businesses as well as local municipal agencies and not-for-profits. Relationship teams provide customers with specific banker contacts and a support team to address product and service demands. The Bank believes that its ability to offer fast, flexible, local decision-making will continue to attract significant new business relationships. Our structure provides a consistent and superior level of professional service and excelling at customer service is a critical part of our culture. The Bank’s marketing is directed towards increasing its balances of transactional deposit accounts. The Bank believes that increases in these account types will lessen the Bank’s dependence on higher-cost funding, such as certificates of deposit and borrowings.

The Company’s income is primarily earned from interest received on its loans and investments. The Company's primary source of funds for making these loans and investments is its deposits. One of the key measures of the Company's success is its net interest income, or the difference between the income on its interest-earning assets, such as loans and investments, and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield the Company earns on these interest-earning assets and the rate the Company pays on interest-bearing liabilities, which is called net interest spread. In addition to earning interest on loans and investments, the Company earns income through fees and other charges for services to clients.

Management will continue to focus on delivering strong results during ~~2021~~2022 to drive profitability and operating efficiency. During the first quarter of ~~2021,~~2022, we ~~significantly reduced nonperforming assets, introduced two new product lines~~had robust portfolio loan growth, strong non-interest bearing and transaction deposit growth, and continued to optimize our branch and virtual banking operations.

•Net income totaled $6.3 million for the quarter ended March 31, 2022, or $1.10 per diluted common share compared to net income of $6.3 million or $1.07 per diluted common share for the quarter ended March 31, 2021 and $6.8 million or $1.18 per diluted common share for the quarter ended December 31, 2021.

•Total portfolio loans increased to $1,629.5 million, an increase of $50.7 million or 12.9% annualized, compared to the prior quarter, and $121.5 million or 8.1% from March 31, 2021. The loan pipeline at March 31, 2022 was $193.0 million compared to $160.0 million at December 31, 2021.

•Non-interest-bearing accounts increased $198.6 million to $644.4 million or 30.75% of deposits at March 31, 2022 from 21.68% of deposits at December 31, 2021. In January 2022, the Bank provided customers with required regulatory notifications to change the terms of certain transaction deposit accounts from low interest-bearing to non-interest bearing accounts. Transaction deposits increased $46.2 million, or 10.7% annualized, to $1,775.0 million in the first quarter of 2022.

•During the first quarter of 2022, total common equity decreased $15.0 million or 7.2% to $193.1 million, and tangible common equity ("TCE") decreased $14.9 million or 7.6% to $181.4 million at March 31, 2022. The decreases were primarily due to an increase of $17.0 million in accumulated other comprehensive losses ("AOCL") in the Bank's available for sale ("AFS") securities portfolio due to changes in interest rates.

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•Portfolio loan end of period contractual rates increased by one basis point to 3.85% at March 31, 2021 compared to December 31, 2021. The loan portfolio is positioned for rising rates with $517.7 million or 32% of net loans, excluding the allowance for credit losses, scheduled to reprice monthly or in the next three months and an additional $50.0 million or 3% repricing the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years at March 31, 2022. In addition, increased non-interest bearing accounts as a percentage of deposits also better positions the Company for a rising rate environment.

•In March 2021, we improved asset quality with the sale of impaired non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $9.1 million, net of charge-offs of $1.4 million. ~~The Company's sale of these impaired loans decreased the specific reserve, improved asset quality and improved several ALLL qualitative factors.~~

•In March 2021, the Bank introduced a new residential mortgage program and retail and commercial credit card program that merge the technology and expertise of two proven FinTech firms with our business development team's demonstrated capabilities. These two new programs are examples of how our community bank can provide local businesses and consumers best of class FinTech products and services.

•~~On March 31, 2020, the Bank consolidated its St. Patrick's Drive branch in Waldorf, Maryland into the Bank's nearby main office branch.~~

•On April 21, 2021, the Bank purchased its second branch location in Virginia at 5831 Plank Road, Spotsylvania. The full-service branch is expected to open in ~~late 2021~~second quarter of 2022 and will provide banking, lending and wealth management services with a focus on digital banking. At March 31, ~~2021,~~2022, loans in the greater Fredericksburg, Virginia area accounted for ~~approximately 40%~~almost 50% of the Bank's outstanding portfolio loans, and Fredericksburg branch deposits were ~~$89~~$101 million with an average cost of deposits of ~~six~~three basis points. Management believes the greater Fredericksburg area provides significant opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology.

The ~~net financial impact of the new Spotsylvania branch and the closing of the St. Patrick's Drive branch is expected to be neutral to the Company's expense run rate.~~

~~The COVID-19 pandemic has presented both economic and operational challenges in 2021 and 2020. Despite these challenges, the Company's balance sheet and operating results have remained strong.~~ ~~The addition of new customers during~~ ~~2020~~ ~~continued our success in increasing lower cost transaction deposits in every year of the last five years.~~ Over the last 18 months, our core profitability has increased from a stable net interest margin primarily due to improved funding composition, increased non-interest income from additional products and services and expense control.

~~Table of Contents~~

~~The~~ Company is addressing COVID-19 credit concerns by maintaining an adequate allowance for ~~loan losses, resolving multiple OREO assets and strengthening regulatory capital with the October 2020 addition of subordinated debt.~~credit losses. We believe current market disruptions in the banking industry caused by both the COVID-19 pandemic as well as industry consolidation will provide opportunities for continued organic growth in ~~2021. In the first quarter of 2021, we continued to help our community and customers navigate economic uncertainty by originating U.S.~~ ~~SBA PPP loans and offering payment deferral programs for our portfolio loans. The subsequent decrease in payment deferrals on our portfolio loans is a positive sign that~~ ~~our local economy is rebounding.~~

Throughout the COVID-19 pandemic, the Company has remained focused on the financial and personal well-being of our customers and employees. The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020. There have been additional clarifications to regulation and legislation since the original law was passed, including the recent legislation that authorized another round of federal government funding for U.S. Small Business Administration Paycheck Protection Program ("U.S. SBA PPP") in December 2020.2022.

For additional information regarding the Company's COVID-19 programs, including risk factors and accounting treatment, refer to Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020,~~2021, as filed with the SEC. ~~In addition, refer to Notes 1, 3, and 11 in the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, 2020.~~ The following summarizes major activities we remain engaged in related to the pandemic at and for the three months ended March 31, ~~2021:~~2022:

•The Company offered payment deferral programs for its business and individual customers. Generally, depending on the demonstrated need of the client, the Company deferred either the full loan payment or the principal component of the loan payment between 90 and 180 days. AsManagement closely monitors previously COVID-19 deferred loans in reviews of ~~March 31, 2021, the Bank's~~credit quality indicators as part of individual loan ~~deferrals had decreased to $23.1 million, which represented 1.5% of gross portfolio loans from $35.4 million or 2.4% of gross portfolio loans~~and relationship reviews and changes classification ratings as ~~of December 31, 2020.~~needed.

•The Company actively assisted customers and community businesses with applications for resources through the U.S. SBA PPP program. As of March 31, ~~2021,~~2022, the Company had ~~865~~114 U.S. SBA PPP loans with balances of ~~$115.7~~$15.3 million. ~~The Bank has continued to make U.S. SBA PPP loans as additional funding is authorized.~~

•The Bank continues to work with customers using its mobile banking and other online channels as well as in-branch services to ensure our customers are able to transact business through the various stages of the pandemic.

Subsequent events

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USE OF NON-GAAP FINANCIAL MEASURES

RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)


(dollars in thousands, except per share amounts)	March 31, 2022			December 31, 2021			March 31, 2021
Total assets	$	2,351,923		$	2,327,306		$	2,149,531
Less: intangible assets
Goodwill	10,835			10,835			10,835
Core deposit intangible	924			1,032			1,394
Total intangible assets	11,759			11,867			12,229
Tangible assets	$	2,340,164		$	2,315,439		$	2,137,302

Total common equity	$	193,140		$	208,133		$	200,759
Less: intangible assets	11,759			11,867			12,229
Tangible common equity	$	181,381		$	196,266		$	188,530

Common shares outstanding at end of period	5,686,799			5,718,528			5,897,685

GAAP common equity to assets	8.21		%	8.94		%	9.34		%
Non-GAAP tangible common equity to tangible assets	7.75		%	8.48		%	8.82		%

GAAP common book value per share	$	33.96		$	36.40		$	34.04
Non-GAAP tangible common book value per share	$	31.90		$	34.32		$	31.97

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RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED)

Return on Average Common Equity ("ROACE")

The ROACE is a financial ratio that measures the profitability of a company in relation to the average shareholders' equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders' equity for a specific period of time.


	Three Months Ended March 31,
(dollars in thousands)	2022			2021

Net income (as reported)	$	6,288		$	6,299

ROACE	12.30		%	12.53		%

Average equity	$	204,554		$	201,124

Return on Average Tangible Common Equity ("ROATCE")

ROATCE is computed by dividing net earnings applicable to common shareholders by average tangible common shareholders' equity. Management believes that ROATCE is meaningful because it measures the performance of a business consistently, whether acquired or internally developed. ROATCE is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.


	Three Months Ended March 31,
(dollars in thousands)	2022			2021

Net income (as reported)	$	6,288		$	6,299
Core deposit intangible amortization (net of tax)	81			99
Net earnings applicable to common shareholders	$	6,369		$	6,398

ROATCE	13.22		%	13.56		%

Average tangible common equity	$	192,725		$	188,808

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COMPARISON OF RESULTS OF OPERATIONS ~~FOR THE THREE MONTHS ENDED MARCH~~

A comparison of the results of operations for the quarter ended March 31, 2022, and March 31, 2021 ~~AND 2020~~is presented below.


	(Unaudited)
	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2022		2021
OPERATING DATA
Interest and dividend income	$	17,336	$	17,678
Interest expenses	867		1,169
Net interest income ("NII")	16,469		16,509
Provision for credit losses	450		295
Provision (recovery) for unfunded commitments	(31)		—
NII after provision for credit losses and unfunded commitments	16,050		16,214
Noninterest income	1,451		2,360
Noninterest expenses	9,080		10,148
Income before income taxes	8,421		8,426
Income taxes	2,133		2,127
Net income	6,288		6,299

Income available to common shares	$	6,288	$	6,299


	(Unaudited)
	Three Months Ended March 31,
	2022		2021
KEY OPERATING RATIOS
Return on average assets ("ROAA")	1.08	%	1.22	%
Return on average common equity ("ROACE")	12.30		12.53
Return on Average Tangible Common Equity ("ROATCE")	13.22		13.56
Average total equity to average total assets	8.79		9.71
Interest rate spread	3.05		3.43
Net interest margin	3.12		3.50
Efficiency ratio (1)	50.67		53.78
Non-interest expense to average assets	1.56		1.96
Net operating expense to average assets (2)	1.31		1.50

_______________________________________

(1) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.

(2) Net operating expense is the sum of non-interest expense offset by non-interest income.

Summary of Financial Results

The Company reported net income for the three months ended March 31, ~~2021~~2022 of $6.3 million or diluted earnings per share of ~~$1.07~~$1.10 compared to net income of ~~$2.7~~$6.3 million or ~~$0.47~~$1.07 per diluted earnings per share for the three months ended March 31, ~~2020.~~2021. The Company’s ROAA and ROACE were ~~1.22%~~1.08% and ~~12.53%~~12.30% for the three months ended March 31, ~~2021~~2022 compared to ~~0.61%~~1.22% and ~~6.00%~~12.53% in March 31, ~~2020.~~2021.

~~The $3.6 million increase to net~~Net income in the first quarter of ~~2021~~2022 remained relatively flat as compared to the same quarter in ~~2020~~2021. In the quarter ended March 31, 2021, we recorded a $1.3 million charge related to an isolated wire transfer fraud incident, there was primarily due to a decreased provision for loan losses and increased net interest income, partially offset by an increase in income tax expense. The increase in income tax expense was due to a change in the Company's state tax apportionment approach that was implemented in the first quarter of 2020 as well as higher pre-tax income. The Company's effective tax rate is more fully explained in the income tax expense section in the discussion of results forno comparable loss during the three months ended March 31, ~~2021~~2022. The decrease in ~~this MD&A.~~other expenses was offset by decreased noninterest income, increased provision for credit losses and decreased net interest income.

Three Months Ended March 31,
(dollars in thousands) 2021 2020 $ Change % Change
Interest and dividend income $ 17,678 $ 18,039 $ (361) (2.0) %
Interest expense 1,169 3,686 (2,517) (68.3) %
Net interest income 16,509 14,353 2,156 15.0 %
Provision for loan losses 295 4,100 (3,805) (92.8) %
Noninterest income 2,360 2,121 239 11.3 %
Noninterest expense 10,148 9,683 465 4.8 %
Income before income taxes 8,426 2,691 5,735 213.1 %
Income tax (income) expense 2,127 (57) 2,184 (3,831.6) %
Net income $ 6,299 $ 2,748 $ 3,551 129.2 %

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	Three Months Ended March 31,
(dollars in thousands)	2022		2021		$ Change		% Change

Interest and dividend income	$	17,336	$	17,678	$	(342)	(1.9)	%
Interest expense	867		1,169		(302)		(25.8)	%
Net interest income	16,469		16,509		(40)		(0.2)	%
Provision for credit losses	450		295		155		52.5	%
Provision (recovery) for unfunded commitments	(31)		—		(31)		—	%
Noninterest income	1,451		2,360		(909)		(38.5)	%
Noninterest expense	9,080		10,148		(1,068)		(10.5)	%
Income before income taxes	8,421		8,426		(5)		(0.1)	%
Income tax (income) expense	2,133		2,127		6		0.3	%
Net income	$	6,288	$	6,299	$	(11)	(0.2)	%

Net Interest Income

Net interest income is the difference between income earned on assets and interest paid on the deposits and borrowings used to fund them. Net interest income is affected by the difference between the yields earned on the Company’s interest-earning assets and the rates paid on interest-bearing liabilities, as well as the relative amounts of such assets and liabilities. Net interest income, divided by average interest-earning assets, represents the Company’s net interest margin. The following table shows the components of net interest income and the dollar and percentage changes for the periods presented.


		Three Months Ended March 31,									Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		$ Change		% Change		(dollars in thousands)	2022		2021		$ Change		% Change
Interest and Dividend Income	Interest and Dividend Income									Interest and Dividend Income
Loans, including fees	Loans, including fees	$	16,592	$	16,502	$	90	0.5	%	Loans, including fees	$	15,610	$	16,592	$	(982)	(5.9)	%
Taxable interest and dividends on investment securities	Taxable interest and dividends on investment securities	1,064		1,469		(405)		(27.6)	%	Taxable interest and dividends on investment securities	1,666		1,064		602		56.6	%
Interest on deposits with banks	Interest on deposits with banks	22		68		(46)		(67.6)	%	Interest on deposits with banks	60		22		38		172.7	%
Total Interest and Dividend Income	Total Interest and Dividend Income	17,678		18,039		(361)		(2.0)	%	Total Interest and Dividend Income	17,336		17,678		(342)		(1.9)	%

Interest Expenses	Interest Expenses									Interest Expenses
Deposits	Deposits	802		3,044		(2,242)		(73.7)	%	Deposits	513		802		(289)		(36.0)	%
Short-term borrowings		—		69		(69)		(100.0)	%

Long-term debt	Long-term debt	367		573		(206)		(36.0)	%	Long-term debt	354		367		(13)		(3.5)	%
Total Interest Expenses	Total Interest Expenses	1,169		3,686		(2,517)		(68.3)	%	Total Interest Expenses	867		1,169		(302)		(25.8)	%

Net Interest Income (NII)	Net Interest Income (NII)	$	16,509	$	14,353	$	2,156	15.0	%	Net Interest Income (NII)	$	16,469	$	16,509	$	(40)	(0.2)	%

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Average Balances and Yields

The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


		Three Months Ended March 31,													Three Months Ended March 31,
		2021						2020							2022						2021
(dollars in thousands)	(dollars in thousands)	Average Balance		Interest		Avg. Yield/Cost		Average Balance		Interest		Avg. Yield/Cost		(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets	Assets													Assets
Commercial real estate	Commercial real estate	$	1,059,803	$	10,696	4.04	%	$	955,035	$	11,245	4.71	%	Commercial real estate	$	1,112,108	$	10,737	3.86	%	$	1,059,803	$	10,696	4.04	%
Residential first mortgages	Residential first mortgages	124,984		914		2.93	%	170,994		1,512		3.54	%	Residential first mortgages	86,805		713		3.29	%	124,984		914		2.93	%
Residential rentals	Residential rentals	139,220		1,445		4.15	%	131,920		1,353		4.10	%	Residential rentals	197,312		1,831		3.71	%	139,220		1,445		4.15	%
Construction and land development	Construction and land development	36,091		402		4.46	%	37,106		467		5.03	%	Construction and land development	33,669		407		4.84	%	36,091		402		4.46	%
Home equity and second mortgages	Home equity and second mortgages	29,272		248		3.39	%	36,028		453		5.03	%	Home equity and second mortgages	25,946		245		3.78	%	29,272		248		3.39	%
Commercial and equipment loans		105,284		1,070		4.07	%	126,535		1,459		4.61	%
Commercial loans														Commercial loans	46,668		550		4.71	%	44,740		551		4.93	%
Commercial equipment loans														Commercial equipment loans	61,715		642		4.16	%	60,544		519		3.43	%
U.S. SBA PPP loans	U.S. SBA PPP loans	116,003		1,802		6.21	%	—		—		—	%	U.S. SBA PPP loans	20,444		452		8.84	%	116,003		1,802		6.21	%
Consumer loans	Consumer loans	1,320		15		4.55	%	1,118		13		4.65	%	Consumer loans	3,213		33		4.11	%	1,320		15		4.55	%
Allowance for loan losses	Allowance for loan losses	(19,614)		—		—		(11,203)		—		0.00	%	Allowance for loan losses	(21,043)		—		—		(19,614)		—		0.00	%
Loan portfolio (1)	Loan portfolio (1)	1,592,363		16,592		4.17	%	1,447,533		16,502		4.56	%	Loan portfolio (1)	1,566,837		15,610		3.99	%	1,592,363		16,592		4.17	%
Taxable investment securities	Taxable investment securities	229,810		951		1.66	%	215,500		1,482		2.75	%	Taxable investment securities	484,157		1,572		1.30	%	229,810		951		1.66	%
Nontaxable investment securities	Nontaxable investment securities	20,841		114		2.19	%	—		—		—	%	Nontaxable investment securities	17,513		94		2.15	%	20,841		114		2.19	%
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	25,064		14		0.22	%	6,547		39		2.38	%	Interest-bearing deposits in other banks	42,608		60		0.56	%	25,064		14		0.22	%
Federal funds sold	Federal funds sold	18,721		7		0.15	%	4,028		16		1.59	%	Federal funds sold	—		—		—	%	18,721		7		0.15	%
Interest-Earning Assets ("IEAs")	Interest-Earning Assets ("IEAs")	1,886,799		17,678		3.75	%	1,673,608		18,039		4.31	%	Interest-Earning Assets ("IEAs")	2,111,115		17,336		3.28	%	1,886,799		17,678		3.75	%
Cash and cash equivalents	Cash and cash equivalents	82,669						24,108						Cash and cash equivalents	116,560						82,669
Goodwill	Goodwill	10,835						10,835						Goodwill	10,835						10,835
Core deposit intangible	Core deposit intangible	1,481						2,064						Core deposit intangible	994						1,481
Other assets	Other assets	88,791						86,811						Other assets	86,488						88,791
Total Assets	Total Assets	$	2,070,575					$	1,797,426					Total Assets	$	2,325,992					$	2,070,575

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity													Liabilities and Stockholders’ Equity
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	381,059	$	—	—	%	$	246,304	$	—	—	%	Noninterest-bearing demand deposits	$	609,945	$	—	—	%	$	381,059	$	—	—	%
Interest-bearing demand deposits	Interest-bearing demand deposits													Interest-bearing demand deposits
Savings	Savings	101,782		13		0.05	%	71,086		18		0.10	%	Savings	121,236		15		0.05	%	101,782		13		0.05	%
Interest-bearing demand and money market accounts		952,554		195		0.08	%	784,758		1,324		0.67	%
Demand deposits														Demand deposits	625,241		103		0.07	%	602,836		97		0.06	%
Money market deposits														Money market deposits	378,781		100		0.11	%	349,718		98		0.11	%
Certificates of deposit	Certificates of deposit	351,365		594		0.68	%	390,528		1,702		1.74	%	Certificates of deposit	322,346		295		0.37	%	351,365		594		0.68	%
Total interest-bearing deposits	Total interest-bearing deposits	1,405,701		802		0.23	%	1,246,372		3,044		0.98	%	Total interest-bearing deposits	1,447,604		513		0.14	%	1,405,701		802		0.23	%
Total Deposits	Total Deposits	1,786,760		802		0.18	%	1,492,676		3,044		0.82	%	Total Deposits	2,057,549		513		0.10	%	1,786,760		802		0.18	%
Long-term debt	Long-term debt	27,291		41		0.60	%	55,095		260		1.89	%	Long-term debt	12,219		25		0.82	%	27,291		41		0.60	%
Short-term borrowings		—		—		—	%	16,533		69		1.67	%

Subordinated Notes	Subordinated Notes	19,490		251		5.15	%	14,912		184		4.94	%	Subordinated Notes	19,515		251		5.14	%	19,490		251		5.15	%
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		75		2.50	%	12,000		129		4.30	%	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		78		2.60	%	12,000		75		2.50	%
Total Debt	Total Debt	58,781		367		2.50	%	98,540		642		2.61	%	Total Debt	43,734		354		3.24	%	58,781		367		2.50	%
Interest-Bearing Liabilities ("IBLs")		1,464,482		1,169		0.32	%	1,344,912		3,686		1.10	%
Total Funds		1,845,541		1,169		0.25	%	1,591,216		3,686		0.93	%
Other liabilities		23,910						22,938

4847

Table of Contents


		Three Months Ended March 31,													Three Months Ended March 31,
		2021						2020							2022						2021
(dollars in thousands)	(dollars in thousands)	Average Balance		Interest		Avg. Yield/Cost		Average Balance		Interest		Avg. Yield/Cost		(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Interest-Bearing Liabilities ("IBLs")														Interest-Bearing Liabilities ("IBLs")	1,491,338		867		0.23	%	1,464,482		1,169		0.32	%
Total Funds														Total Funds	2,101,283		867		0.17	%	1,845,541		1,169		0.25	%
Other liabilities														Other liabilities	20,155						23,910
Stockholders’ equity	Stockholders’ equity	201,124						183,272						Stockholders’ equity	204,554						201,124
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	2,070,575					$	1,797,426					Total Liabilities and Stockholders’ Equity	$	2,325,992					$	2,070,575

Net interest income	Net interest income			$	16,509					$	14,353			Net interest income			$	16,469					$	16,509

Interest rate spread	Interest rate spread					3.43	%					3.22	%	Interest rate spread					3.05	%					3.43	%
Net yield on interest-earning assets	Net yield on interest-earning assets					3.50	%					3.43	%	Net yield on interest-earning assets					3.12	%					3.50	%
Avg. loans to avg. deposits	Avg. loans to avg. deposits					89.12	%					96.98	%	Avg. loans to avg. deposits					76.15	%					89.12	%
Avg. transaction deposits to total avg. deposits **	Avg. transaction deposits to total avg. deposits **					80.34	%					73.84	%	Avg. transaction deposits to total avg. deposits **					84.33	%					80.34	%
Ratio of average IEAs to average IBLs	Ratio of average IEAs to average IBLs					128.84	%					124.44	%	Ratio of average IEAs to average IBLs					141.56	%					128.84	%

__________________________

(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was ~~$90,000~~$50,000 and ~~$222,000~~$90,000 of accretion interest during the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively.

**Transaction deposits exclude time deposits

Table of Contents

The following table presents changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume). Changes in rate-volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.


For the Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
For the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021								For the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
(dollars in thousands)	(dollars in thousands)	Volume		Due to Rate		Total		(dollars in thousands)	Volume		Due to Rate		Total
Interest income:	Interest income:							Interest income:
Loan portfolio (1)	Loan portfolio (1)	$	1,509	$	(1,419)	$	90	Loan portfolio (1)
Investment securities, federal funds sold and interest-bearing deposits		253		(704)		(451)
Commercial real estate								Commercial real estate	$	505	$	(464)	$	41
Residential first mortgages								Residential first mortgages	(314)		113		(201)
Residential rentals								Residential rentals	539		(153)		386
Construction and land development								Construction and land development	(29)		34		5
Home equity and second mortgages								Home equity and second mortgages	(31)		28		(3)
Commercial loans								Commercial loans	23		(24)		(1)
Commercial equipment loans								Commercial equipment loans	12		111		123
SBA PPP loans								SBA PPP loans	(2,113)		763		(1,350)
Consumer loans								Consumer loans	19		(1)		18
Taxable investment securities								Taxable investment securities	826		(205)		621
Nontaxable investment securities								Nontaxable investment securities	(18)		(2)		(20)
Interest-bearing deposits in other banks								Interest-bearing deposits in other banks	25		21		46
Federal funds sold								Federal funds sold	—		(7)		(7)
Total interest-earning assets	Total interest-earning assets	$	1,762	$	(2,123)	$	(361)	Total interest-earning assets	$	(556)	$	214	$	(342)

Interest-bearing liabilities:	Interest-bearing liabilities:							Interest-bearing liabilities:
Savings	Savings	$	4	$	(9)	$	(5)	Savings	$	2	$	—	$	2
Interest-bearing demand and money market accounts		34		(1,163)		(1,129)
Demand deposits								Demand deposits	4		2		6
Money market deposits								Money market deposits	8		(6)		2
Certificates of deposit	Certificates of deposit	(66)		(1,042)		(1,108)		Certificates of deposit	(27)		(272)		(299)
Long-term debt	Long-term debt	(42)		(177)		(219)		Long-term debt	(31)		15		(16)
Short-term borrowings		—		(69)		(69)

Subordinated Notes		59		8		67

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	—		(54)		(54)		Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	—		3		3
Total interest-bearing liabilities	Total interest-bearing liabilities	$	(11)	$	(2,506)	$	(2,517)	Total interest-bearing liabilities	$	(43)	$	(259)	$	(302)
Net change in net interest income	Net change in net interest income	$	1,773	$	383	$	2,156	Net change in net interest income	$	(513)	$	473	$	(40)

(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was ~~$90,000~~$50,000 and ~~$0.2~~$0.1 million of accretion interest during the three months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively.

~~Table of Contents~~

Fluctuations in net interest income can result from the combination of changes in the average balances of asset and liability categories and changes in interest rates. Interest rates earned and paid are affected by general economic conditions, particularly changes in market interest rates, and by competitive factors, government policies and actions of regulatory authorities. In response to the ~~potential~~inflation effects on the economy, ~~of the pandemic,~~ the Federal Open Market Committee ~~reduced~~increased the federal funds interest rate by 25 basis points from ~~a target range of 1.50% to 1.75% to~~ a target range of 0.00% to 0.25% ~~during 2020, where it remained as~~to a target range of ~~March 31, 2021.~~

~~Net~~0.25% to 0.50%. The federal funds interest rate increase did not have a significant impact on our net interest income ~~increased $2.16 million or 15.0%~~ for the ~~three months~~quarter ended March 31, ~~2021 compared to the three months ended March 31, 2020.~~ 2022.

The ~~increase~~stability in net interest income resulted primarily from ~~significant~~ decreases in interest expense from lower funding ~~costs.~~costs substantially offsetting lower interest income. Interest income decreased ~~from significantly~~due to lower asset yields and lower U.S. SBA PPP income due to loan payoffs partially offset by increased interest income from larger average ~~balances~~commercial real estate and ~~accelerated~~residential rental loan ~~fee recognition following~~portfolios and taxable investment securities balance. Interest income from the ~~forgiveness of~~Company's participation in the U.S. SBA PPP ~~loans. Interest income increased $1.5~~program was $0.5 million ~~from acceleration of net deferred fee recognition upon the forgiveness of U.S. SBA PPP loans~~and $1.8 million for the three months ended March 31, 2022 and March 31, 2021, ~~as compared to none for the comparable quarter in 2020.~~respectively.

Net interest margin of 3.12% for the three months ended March 31, 2022 was 38 basis points lower than the 3.50% for the three months ended March 31, 2021 was seven basis points higher than the 3.43% for the three months ended March 31, 2020. The sharp decline in interest rates in 2020 not only reduced interest income on floating-rate commercial loans and liquid interest-earning assets, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. In 2020, the Company increased its net interest margin in the first quarter, had stable margins during the second and third quarters and slightly increased margins during the fourth quarter2021.

Table of ~~2020 after adjusting for U.S. SBA PPP loan and funding activity.~~Contents

The ~~increase~~decrease in net interest margin from the first quarter of ~~2020~~2021 resulted primarily from the Company’s overall ~~funding costs~~interest earning asset yields decreasing at a faster rate than ~~interest earning asset yields.~~funding costs. The Company’s cost of funds decreased 67nine basis points from ~~0.93% for the three months ended March 31, 2020 to~~ 0.25% for the three months ended March 31, ~~2021.~~2021 to 0.17% for the three months ended March 31, 2022. The ~~Company’s cost of funds continued to decrease during the first quarter of 2021. The prepayment of $30.0 million of FHLB advances with a 2.2% average rate in the last six months of 2020, the~~ repricing of time deposits, the increase in non-interest bearing accounts as a percentage of total deposits and lower costs for transaction deposit accounts all contributed to lowering the Bank's cost of funds in ~~2020~~2022 and 2021. Interest earning asset yields decreased 5646 basis points from ~~4.31% for the three months ended March 31, 2020 to~~ 3.75% for the three months ended March 31, ~~2021.~~2021 to 3.28% for the three months ended March 31, 2022.

For the three months ended March 31, 2022 and March 31, 2021, net interest margin increased six basis point and 18 basis points as a result of net U.S. SBA PPP loan interest income and accelerated loan fee recognition. ~~The Bank began funding U.S. SBA PPP loans in the second quarter of 2020 so there was no impact on net interest margin for the first quarter of 2020.~~ Loan yields decreased from ~~4.56% for the three months ended March 31, 2020 to~~ 4.17% for the three months ended March 31, ~~2021.~~2021 to 3.99% for the three months ended March 31, 2022. Loan yields, excluding U.S. SBA PPP loan interest income, were 3.92% and 4.01% for the three months ended March 31, 2022 and March 31, 2021.

Excluding the acceleration of interest income with U.S. SBA PPP loan forgiveness, ~~compression of our~~a stable to increasing net interest margin is ~~probable in~~possible during the ~~second quarter~~balance of ~~2021 as~~2022 assuming interest-earning assets reprice faster than interest-bearing ~~liabilities.~~liabilities and the Bank maintains its current favorable funding mix. We expect U.S. SBA PPP loan forgiveness to ~~positively impact~~modestly improve margins and net interest income in the second and third quarters of ~~2021~~2022 with the recognition of remaining net deferred fees.

Provision for Loan Losses

The following table shows the dollar and percentage changes for the provision for loan losses for the periods presented.


		Three Months Ended March 31,									Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		$ Change		% Change		(dollars in thousands)	2022		2021		$ Change		% Change

Provision for loan losses		$	295	$	4,100	$	(3,805)	(92.80)	%
Provision for credit losses										Provision for credit losses	$	450	$	295	$	155	52.54	%

The provision for loan losses is a function of the calculation of the allowance for ~~loan~~credit loss on the Company's end of period loan portfolios. See further discussion of the provision and the allowance under the caption “Asset Quality” in the Comparison of Financial Condition section of this MD&A.

Table of Contents

Noninterest Income

The following table shows the components of noninterest income and the dollar and percentage changes for the periods presented.


		Three Months Ended March 31,									Three Months Ended March 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		$ Change		% Change		(dollars in thousands)	2022		2021		$ Change		% Change
Noninterest Income	Noninterest Income									Noninterest Income
Loan appraisal, credit, and miscellaneous charges	Loan appraisal, credit, and miscellaneous charges	$	198	$	14	$	184	1,314.3	%	Loan appraisal, credit, and miscellaneous charges	$	176	$	198	$	(22)	(11.1)	%

Net gains on sale of investment securities	Net gains on sale of investment securities	586		329		257		78.1	%	Net gains on sale of investment securities	—		586		(586)		(100.0)	%
Unrealized gain (losses) on equity securities		(85)		75		(160)		(213)	%
Unrealized (losses) gain on equity securities										Unrealized (losses) gain on equity securities	(222)		(85)		(137)		161	%

Income from bank owned life insurance	Income from bank owned life insurance	214		219		(5)		(2.3)	%	Income from bank owned life insurance	214		214		—		—	%
Service charges	Service charges	1,187		982		205		20.9	%	Service charges	926		1,187		(261)		(22.0)	%
Referral fee income	Referral fee income	451		502		(51)		(10.2)	%	Referral fee income	361		451		(90)		(20.0)	%
Net (losses) gain on sale of loans originated for sale										Net (losses) gain on sale of loans originated for sale	(4)		—		(4)		—	%
Loss on sale of loans	Loss on sale of loans	(191)		—		(191)		—	%	Loss on sale of loans	—		(191)		191		(100.0)	%
Total Noninterest Income	Total Noninterest Income	$	2,360	$	2,121	$	239	11.3	%	Total Noninterest Income	$	1,451	$	2,360	$	(909)	(38.5)	%

Noninterest income for the three months ended March 31, ~~2021 increased~~2022 decreased from the three months ended March 31, ~~2020.~~2021. The ~~increase~~decrease for the comparable periods was primarily due to ~~increased~~decreased gains on the sale of investment securities, ~~and increased~~decreased service charge income and increased unrealized losses on equity securities, partially offset by a loss on the sale of impaired ~~loans.~~loans in the first quarter of 2021. During the quarter ended March 31, 2021, the Bank sold classified and non-accrual commercial real estate and residential loans with an aggregate amortized cost, net of charge-offs, of $9.1 million and recognized a $0.2 million loss on the sale. ~~During the three months ended March 31, 2021, the Company recognized net gains of $0.6 million on the sale of 10 AFS securities with an aggregate carrying value of $11.9 million.~~ Noninterest income as a percentage of average assets was ~~0.46%~~0.25% and ~~0.47%~~0.46%, respectively, for the three months ended March 31, ~~2021~~2022 and ~~2020.~~

2021.

Noninterest Expense

The following tables show the components of noninterest expense and the dollar and percentage changes for the periods presented.

Three Months Ended March 31,
(dollars in thousands) 2021 2020 $ Change % Change
Noninterest Expense
Compensation and benefits $ 4,788 $ 5,188 $ (400) (7.7) %
OREO valuation allowance and expenses 181 782 (601) (76.9) %
Sub-total 4,969 5,970 (1,001) (16.8) %
Operating Expenses
Occupancy expense 761 734 27 3.7 %
Advertising 79 121 (42) (34.7) %
Data processing expense 936 928 8 0.9 %
Professional fees 640 626 14 2.2 %
Depreciation of premises and equipment 147 158 (11) (7.0) %
FDIC Insurance 252 170 82 48.2 %
Core deposit intangible amortization 133 157 (24) (15.3) %
Other expenses 2,231 819 1,412 172.4 %
Total Operating Expenses $ 5,179 $ 3,713 $ 1,466 39.5 %
Total Noninterest Expense $ 10,148 $ 9,683 $ 465 4.8 %


	Three Months Ended March 31,
(dollars in thousands)	2022		2021		$ Change		% Change
Noninterest Expense
Compensation and benefits	$	5,055	$	4,788	$	267	5.6	%
OREO valuation allowance and expenses	6		181		(175)		(96.7)	%

Sub-total	5,061		4,969		92		1.9	%
Operating Expenses
Occupancy expense	732		761		(29)		(3.8)	%
Advertising	64		79		(15)		(19.0)	%
Data processing expense	1,007		936		71		7.6	%
Professional fees	731		640		91		14.2	%
Depreciation of premises and equipment	149		147		2		1.4	%


FDIC Insurance	179		252		(73)		(29.0)	%
Core deposit intangible amortization	109		133		(24)		(18.0)	%
Fraud losses	40		1,329		(1,289)		(97.0)	%
Other expenses	1,008		902		106		11.8	%
Total Operating Expenses	$	4,019	$	5,179	$	(1,160)	(22.4)	%
Total Noninterest Expense	$	9,080	$	10,148	$	(1,068)	(10.5)	%

Table of Contents

The ~~4.8% increase~~10.5% decrease in noninterest expense for the comparable periods was primarily due to ~~increases~~decreases in ~~other~~fraud losses expenses, and ~~FDIC insurance,~~OREO expenses, partially offset by ~~decreases~~increases in compensation and benefits, and ~~OREO. Other expenses include~~professional fees. During the first quarter of 2021, the Bank incurred a $1.3 million charge related to an isolated wire transfer fraud incident. Our investigation determined that no information systems of the Bank were compromised, and no employee fraud was involved. No additional expense is expected to be incurred relating to this incident and the Company submitted an insurance ~~claim that could result in a recovery of a portion of the expense.~~claim. Data processing costs are comparable to average 2020 quarterly expense and include the Bank's continued investment in technology. The Company's investments in technology have improved efficiency as the asset size of the Bank has increased. ~~The FDIC insurance increased due to the significant increase in FDIC insured deposits that began in the second quarter of 2020.~~ Decreased OREO expenses reflect management's actions in ~~2020~~2021 to reduce non-performing assets. Compensation and benefits ~~decreased 7.7%~~increased 5.6% or ~~$0.4~~$0.3 million to $4.8 million primarily due to the deferral of $0.3 million of costs for U.S. SBA PPP loans originated during the first quarter of ~~2021. The Company's~~2021, lower health care claims and incentive accruals.

Noninterest expense in the first quarter of 2022 at $9.1 million, was lower than anticipated due primarily to lower compensation and benefits and no credit related costs for OREO. Lower than anticipated health care costs, a lower average full-time equivalent headcount than anticipated and lower benefit and incentive accruals all contributed to a lower expense run rate. Management's projected quarterly expense run rate for the ~~remainder~~second quarter of ~~2021 remains~~2022 is estimated between ~~$9.2-$9.4 million.~~$9.4 million and $9.6 million and includes the base compensation increases given to select employee groups in January 2022 to address local wage competitive pressure.

The Company’s efficiency ratio was 50.67% for the three months ended March 31, 2022 compared to 53.78% for the three months ended March 31, ~~2021 compared to 58.78%~~2021. The Company’s net operating expense ratio was 1.31% for the three months ended March 31, ~~2020. The Company’s net operating expense ratio was~~2022 compared to 1.50% for the three months ended March 31, ~~2021 compared to 1.68% for the three months ended March 31, 2020.~~2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to improve asset quality and generate more ~~noninterest income~~operating revenues while controlling expense growth.

Income Tax Expense

~~Income~~The effective tax ~~expense increased $2.2 million~~rate for the three months ended March 31, ~~2021~~2022 was 25.33% compared to ~~the same quarter in the prior year. The year to date comparative impact is shown in the comparison~~an effective tax rate of ~~results of operations~~25.24% for the three months ended March 31, 2021 and 2020. For the three months ended March 31, 2021 the effective tax rate was 25.2%. The Company’s consolidated effective tax rate was a negative2.1% in the first quarter of 2020. The Company's new state tax apportionment approach was implemented during the first quarter of 2020 and included the impact of amended income tax filings of the Company and Bank. Management evaluated the tax position and determined the change in tax position qualified as a change in estimate under FASB ASC Section 250. The following table shows a breakdown of income tax expense for the three months ended March 31, 2020 split between the apportionment adjustment and a normalized 2020 income tax provision:

Three Months Ended March 31, 2020
(dollars in thousands) Tax Provision Effective Tax Rate
Income tax apportionment adjustment $ (743) (27.6) %
Income taxes before apportionment adjustment 686 25.5 %
Income tax expense as reported $ (57) (2.1) %
Income before income taxes $ 2,691

2021.

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COMPARISON OF FINANCIAL CONDITION AT MARCH 31, ~~2021~~2022 AND DECEMBER 31, ~~2020~~2021

~~ASSETS~~The following table shows selected historical consolidated financial data for the Company, which has been derived from our audited consolidated financial statements. You should read this table together with our consolidated financial statements and related notes included in this Annual 10-K report.


	(Unaudited)
(dollars in thousands, except per share amounts)	March 31, 2022		December 31, 2021
FINANCIAL CONDITION DATA
Total assets	$	2,351,923	$	2,327,306
Loans receivable, net	1,623,435		1,586,791
Investment securities	512,296		502,818
Goodwill	10,835		10,835
Core deposit intangible	924		1,032
Deposits	2,095,083		2,056,164
Borrowings	12,213		12,231
Junior subordinated debentures	12,000		12,000
Subordinated notes - 4.75% **	19,524		19,510

Stockholders’ equity - common	193,140		208,133

**Company issued $20.0 million of 4.75% subordinated notes due 2030 on October 14, 2020.


	(Unaudited)
(dollars in thousands, except per share amounts)	March 31, 2022			December 31, 2021
COMMON SHARE DATA
Basic earnings per common share	$	1.11		$	4.47
Diluted earnings per common share	1.10			4.47
Dividends declared per common share	0.18			0.58
Common dividend payout ratio	0.16			0.13
Book value per common share	33.96			36.40
Tangible book value per common share	31.90			34.32
Common shares outstanding at end of period	5,686,799			5,718,528
Basic weighted average common shares	5,688,221			5,788,003
Diluted weighted average common shares	5,699,038			5,797,525

OTHER DATA
Full-time equivalent employees	191			186
Branches	11			11
Loan Production Offices	4			4

CAPITAL RATIOS
Tier 1 capital to average assets (Leverage)	9.17		%	9.23		%
Tier 1 common capital to risk-weighted assets	11.58			11.92
Tier 1 capital to risk-weighted assets	12.28			12.64
Total risk-based capital to risk-weighted assets	14.65			14.92
Common equity to assets	8.21			8.94
Tangible common equity to tangible assets	7.75			8.48

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Assets

Total assets increased primarily due to growth in ~~cash, federal funds sold,~~net loans, investment securities and net loans. The increase was partially offset by a $1.4 million decrease in the right of use asset following the Company's first quarter 2021 purchase of land that was previously leased and reduction in the OREO balance following the disposition of an OREO commercial lot.deferred tax assets. The differences in allocations between the cash and investment categories reflect operational needs. Total assets and on-balance sheet liquidity increased in the first three months of 2021 from organic loan and deposit ~~growth as wells as COVID-19 government stimulus programs.~~growth.

The following table shows the Company’s assets and the dollar and percentage changes for the periods presented.


(dollars in thousands)	(dollars in thousands)	March 31, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	March 31, 2022		December 31, 2021		$ Change		% Change
Cash and due from banks	Cash and due from banks	$	126,834	$	56,887	$	69,947	123.0	%	Cash and due from banks	$	80,702	$	108,990	$	(28,288)	(26.0)	%
Federal funds sold		43,614		—		43,614		—	%

Interest-bearing deposits with banks	Interest-bearing deposits with banks	17,390		20,178		(2,788)		(13.8)	%	Interest-bearing deposits with banks	32,460		30,664		1,796		5.9	%
Securities available for sale ("AFS"), at fair value	Securities available for sale ("AFS"), at fair value	253,348		246,105		7,243		2.9	%	Securities available for sale ("AFS"), at fair value	507,527		497,839		9,688		1.9	%

Equity securities carried at fair value through income	Equity securities carried at fair value through income	4,787		4,855		(68)		(1.4)	%	Equity securities carried at fair value through income	4,562		4,772		(210)		(4.4)	%
Non-marketable equity securities held in other financial institutions	Non-marketable equity securities held in other financial institutions	207		207		—		—	%	Non-marketable equity securities held in other financial institutions	207		207		—		—	%
FHLB stock - at cost	FHLB stock - at cost	2,036		2,777		(741)		(26.7)	%	FHLB stock - at cost	1,685		1,472		213		14.5	%
Loans held for sale										Loans held for sale	373		—		373		—	%
Net Loans	Net Loans	1,602,291		1,594,075		8,216		0.5	%	Net Loans	1,623,435		1,586,791		36,644		2.3	%
Goodwill	Goodwill	10,835		10,835		—		—	%	Goodwill	10,835		10,835		—		—	%
Premises and equipment, net	Premises and equipment, net	20,540		20,271		269		1.3	%	Premises and equipment, net	21,304		21,427		(123)		(0.6)	%
Premises and equipment held for sale		430		430		—		—	%
Other real estate owned ("OREO")		2,329		3,109		(780)		(25.1)	%

Accrued interest receivable	Accrued interest receivable	7,337		8,717		(1,380)		(15.8)	%	Accrued interest receivable	5,389		5,588		(199)		(3.6)	%
Investment in bank owned life insurance	Investment in bank owned life insurance	38,275		38,061		214		0.6	%	Investment in bank owned life insurance	39,145		38,932		213		0.5	%
Core deposit intangible	Core deposit intangible	1,394		1,527		(133)		(8.7)	%	Core deposit intangible	924		1,032		(108)		(10.5)	%
Net deferred tax assets	Net deferred tax assets	8,671		7,909		762		9.6	%	Net deferred tax assets	15,523		9,033		6,490		71.8	%
Right of use assets, net operating leases	Right of use assets, net operating leases	6,391		7,831		(1,440)		(18.4)	%	Right of use assets, net operating leases	6,033		6,124		(91)		(1.5)	%
Other assets	Other assets	2,822		2,665		157		5.9	%	Other assets	1,819		3,600		(1,781)		(49.5)	%
Total Assets	Total Assets	$	2,149,531	$	2,026,439	$	123,092	6.1	%	Total Assets	$	2,351,923	$	2,327,306	$	24,617	1.1	%

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$187.8~~$113.2 million at March 31, ~~2021,~~2022, compared to ~~$77.1~~$139.7 million at December 31, ~~2020.~~2021. Total cash and cash equivalents fluctuate on a daily basis due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.

~~Table~~ Deferred tax assets increased $6.5 million to $15.5 million primarily due to the day one CECL adjustment and increases in unrealized losses of ~~Contents~~the Bank's AFS investment portfolio related to

changes in interest rates. Other assets decreased $1.8 million or 49.47% due to a decrease in income tax receivables.

Investment Securities and Credit Quality of Investment Securities

Investment securities and FHLB stock at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, estimated fair values were ~~$260.4~~$514.0 million, and ~~$253.9~~$504.3 million, respectively.

Management monitors and manages investment portfolio performance and liquidity through monthly reporting including analyses of expected cash inflows and outflows from investment securities. Management believes the risk characteristics inherent in the investment portfolio are acceptable. The Company did not hold any noninvestment grade securities at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. AFS securities are evaluated quarterly to determine whether a decline in their value is ~~other than temporarily impaired ("OTTI"). No OTTI charge~~the result of a deterioration in credit quality. A reserve for credit losses was not recorded for the periods reported.

At March 31, ~~2021,~~2022, approximately 92%, or ~~$232.0~~$466.3 million of the carrying value of AFS securities were rated AAA by Standard & Poor’s or the equivalent credit rating from another major rating agency compared to approximately ~~90%~~92%, or ~~$220.8~~$456.2 million, at December 31, ~~2020.~~2021.

Gross unrealized losses at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 for AFS securities were ~~$1.8~~$26.1 million and ~~$0.4~~$6.0 million, respectively, of amortized cost of ~~$251.1~~$533.2 million and ~~$240.0~~$500.5 million, respectively (see Note 2 in Consolidated Financial Statements). The change in unrealized losses was the result of changes in interest rates and other non-credit related factors, while credit risks remained stable. The Company intends to, and has the ability to, hold investment securities with unrealized losses until they mature, at which time the Company will receive full value for the securities. Management believes that the investment securities with unrealized losses will either recover in market value or be paid off as agreed.

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The Bank holds ~~69.3%~~70.7% or ~~$174.0~~$376.7 million of its AFS investment securities at amortized cost, as asset-backed securities issued by GSEs or U.S. Agencies, GSE agency bonds or U.S. government obligations. In addition, the Company's amortized cost investment of ~~$39.9~~$54.4 million in student loan trusts, which represent ~~15.9%~~10.2% of the AFS investment portfolio, are 97% U.S. government guaranteed. At March 31, ~~2021,~~2022, the Company also had ~~$36.9~~$98.9 million or ~~14.7%~~18.6% of AFS investments in municipal bonds.

The effective duration of the Company's AFS portfolio at March 31, 2022 was estimated between 3.6 years and 4.0 years.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, AFS asset-backed securities issued and guaranteed by GSEs and U.S. Agencies had an average life of ~~6.41~~6.61 years and ~~5.09~~6.91 years and an average duration of ~~6.03~~5.97 years and ~~4.81~~6.41 years, respectively. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, AFS asset-backed securities issued by student loan ~~trust~~trusts and others had an average life of ~~6.98~~6.15 years and ~~6.47~~6.24 years and an average duration of ~~6.60~~5.76 years and ~~6.14~~6.03 years, respectively. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, AFS municipal bonds issued by states, political subdivisions or agencies had average life of ~~9.55~~9.91 years and ~~9.81~~8.75 years and an average duration of ~~8.31~~8.57 years and ~~8.53~~7.83 years, respectively.

The amortized cost of AFS investment securities by contractual maturity at March 31, 2022 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. The maturities and weighted average yields at March 31, 2022 are shown below.


	One year or Less				After One Through Five Years				After Five Through Ten Years				After Ten Years				Total Investment Securities
(dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Fair Value
AFS Investment securities:
Asset-backed securities issued by GSEs and U.S. Agencies	$	23,176	1.93	%	$	93,246	1.93	%	$	125,338	1.90	%	$	98,104	2.18	%	$	339,864	$	324,729
Asset-backed securities issued by Others	3,725		0.96	%	14,987		0.97	%	20,145		1.02	%	15,767		1.15	%	54,624		53,668
Municipal securities	6,744		2.47	%	27,132		2.47	%	36,469		2.47	%	28,544		2.66	%	98,889		90,827
Corporate bonds	204		3.88	%	823		3.88	%	1,106		3.88	%	867		—	%	3,000		2,960
U.S. Treasury bonds	2,510		1.18	%	10,098		1.24	%	13,573		1.23	%	10,624		—	%	36,805		35,343
Total AFS investment securities	$	36,359	1.89	%	$	146,286	1.90	%	$	196,631	1.96	%	$	153,906	2.26	%	$	533,182	$	507,527

The tables below present the Standard & Poor’s (“S&P”) or equivalent credit rating from other major rating agencies for AFS securities at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 by carrying value. The Company considers noninvestment grade securities rated BB+ or lower as classified assets for regulatory and financial reporting. GSE asset-backed securities and GSE agency bonds with S&P AA+ ratings were treated as AAA based on regulatory guidance.

March 31, 2021 December 31, 2020
Credit Rating Amount Credit Rating Amount
(dollars in thousands) (dollars in thousands)
AAA $ 232,049 AAA $ 220,757
AA 21,025 AA 25,059
A 274 A 289
Total $ 253,348 Total $ 246,105


March 31, 2022			December 31, 2021
Credit Rating	Amount		Credit Rating	Amount
(dollars in thousands)			(dollars in thousands)
AAA	$	466,296	AAA	$	456,162
AA	38,072		AA	41,455
A	199		A	222
BBB	2,960		BBB	—
Total	$	507,527	Total	$	497,839

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Loan Portfolio and U.S. SBA PPP Loans

The Bank's primary market areas consist of Southern Maryland, the city of Fredericksburg, Virginia and Spotsylvania and Stafford counties in Virginia. In 2021, the Bank increased lending in Virginia in the cities and surrounding areas of Culpeper, Orange and Charlottesville. The Bank plans to open a loan production office in Charlottesville, Virginia in 2022. At March 31, ~~2021,~~2022, loans in Maryland and Virginia are almost evenly distributed with approximately 49% of the Bank's outstanding portfolio loans in our expanding Virginia market. Management is optimistic that the Virginia market will continue to provide opportunities for organic growth.

At March 31, 2022, total net loans, which include portfolio loans and U.S. SBA PPP loans, increased ~~2.1%~~9.2% annualized or ~~$8.2~~$36.6 million from December 31, ~~2020. Net~~2021. Total net portfolio loans increased ~~$3.7~~$47.8 million and ~~net~~ U.S. SBA PPP loans ~~increased $4.5~~decreased $11.1 million for the comparable period ends. The commercial real estate portfolio increased in total during the first three months of ~~2021,~~2022, while increasing slightly as a percentage of ~~gross~~total portfolio loans. The Company’s loan pipeline was ~~$133~~$193 million at March 31, ~~2021~~2022 compared to ~~$134~~$160 million at December 31, ~~2020.~~2021.

During 2020 and 2021, the Company originated 1,532 U.S. SBA PPP loans with original balances of $201.3 million. As of March 31, 2022, there were 114 U.S. SBA PPP loans with outstanding balances of $15.8 million. The Company is presently assisting customers with forgiveness applications for outstanding loans.

The following is a breakdown of the Company’s loan portfolio, net of deferred costs and fees at March 31, ~~2021~~2022 and December 31, ~~2020:~~2021:


(dollars in thousands)	(dollars in thousands)	March 31, 2021		%		December 31, 2020		%		$ Change		Annualized % Change		(dollars in thousands)	March 31, 2022		%		December 31, 2021**		%		$ Change		Annualized % Change
BY LOAN TYPE	BY LOAN TYPE													BY LOAN TYPE
Portfolio Loans:	Portfolio Loans:													Portfolio Loans:
Commercial real estate	Commercial real estate	$	1,081,111	71.74	%	$	1,049,147	69.75	%	$	31,964	12.2	%	Commercial real estate	$	1,177,761	72.28	%	$	1,113,793	70.54	%	$	63,968	22.97	%
Residential first mortgages	Residential first mortgages	115,803		7.68	%	133,779		8.89	%	(17,976)		(53.8)	%	Residential first mortgages	86,416		5.30	%	92,710		5.87	%	(6,294)		(27.16)	%
Residential rentals	Residential rentals	137,522		9.12	%	139,059		9.24	%	(1,537)		(4.4)	%	Residential rentals	191,065		11.73	%	194,911		12.35	%	(3,846)		(7.89)	%
Construction and land development	Construction and land development	38,446		2.55	%	37,520		2.49	%	926		9.9	%	Construction and land development	30,649		1.88	%	35,502		2.25	%	(4,853)		(54.68)	%
Home equity and second mortgages	Home equity and second mortgages	29,363		1.95	%	29,129		1.94	%	234		3.2	%	Home equity and second mortgages	26,445		1.62	%	25,661		1.63	%	784		12.22	%
Commercial loans	Commercial loans	42,689		2.83	%	52,921		3.52	%	(10,232)		(77.3)	%	Commercial loans	48,948		3.00	%	50,512		3.20	%	(1,564)		(12.39)	%
Consumer loans	Consumer loans	1,415		0.09	%	1,027		0.07	%	388		151.1	%	Consumer loans	3,592		0.22	%	3,015		0.19	%	577		76.55	%
Commercial equipment	Commercial equipment	60,834		4.04	%	61,693		4.10	%	(859)		(5.6)	%	Commercial equipment	64,662		3.97	%	62,706		3.97	%	1,956		12.48	%
Gross portfolio loans		1,507,183		100.00	%	1,504,275		100.00	%	2,908		0.8	%
Net deferred costs		879		0.06	%	1,264		0.08	%	(385)		(121.8)	%
Allowance for loan losses		(18,256)		(1.21)	%	(19,424)		(1.29)	%	1,168		(24.1)	%
		(17,377)				(18,160)				783		(17.3)	%
Net portfolio loans		$	1,489,806			$	1,486,115			$	3,691	1.0	%

U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans		$	115,700			$	110,320			$	5,380	19.5	%
Net deferred fees		(3,215)				(2,360)				(855)		144.9	%
Net U.S. SBA PPP Loans		$	112,485			$	107,960			$	4,525	16.8	%

Total portfolio loans														Total portfolio loans	1,629,538		100.00	%	1,578,810		100.00	%	50,728		12.85	%
Less: Allowance for Credit Losses														Less: Allowance for Credit Losses	(21,382)		(1.31)	%	(18,417)		(1.17)	%	(2,965)		64.40	%
Total net portfolio loans														Total net portfolio loans	1,608,156				1,560,393				47,763		12.24	%
U.S. SBA PPP loans														U.S. SBA PPP loans	15,279				26,398				(11,119)		(168.48)	%
Total net loans	Total net loans	$	1,602,291			$	1,594,075			$	8,216	2.1	%	Total net loans	$	1,623,435			$	1,586,791			$	36,644	9.24	%

Gross Loans		$	1,622,883			$	1,614,595			$	8,288	2.1	%

~~The Company recognized accretion interest of $0.1 million and $0.2 million for the three months ended March~~**December 31, 2021 reported balance are shown net of deferred costs and ~~2020, respectively. Net interest income was impacted by acceleration of net deferred fee recognition of $1.5 million upon~~fees to conform with the ~~forgiveness of U.S. SBA PPP loans for the three months ended March 31, 2021 as compared to none for the comparable year's quarter.~~current period's presentation.

Loan Concentrations

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, commercial loans, including residential rentals, represented ~~87.7%~~91.0% and ~~86.6%~~90.1%, respectively, of ~~gross~~total portfolio loans. The Bank's commercial loans are concentrated in its market area; however, these loans are distributed among many different borrowers and industries.

Non-owner occupied commercial real estate as a percentage of risk-based capital at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$741~~$872 million or ~~328%~~347% and ~~$696~~$813 million or ~~316%~~331%, respectively. Construction loans as a percentage of risk-based capital at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$126~~$138 million or ~~56%~~55% and ~~$139~~$140 million or ~~63%~~57%, respectively.

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Asset Quality

The following tables show asset quality ratios at March 31, ~~2021~~2022 and December 31, ~~2020.~~2021.


		(Unaudited)											(Unaudited)
(dollars in thousands, except per share amounts)	(dollars in thousands, except per share amounts)	March 31, 2021			December 31, 2020			$ Change		% Change		(dollars in thousands, except per share amounts)	March 31, 2022			December 31, 2021
ASSET QUALITY	ASSET QUALITY											ASSET QUALITY
Total assets		$	2,149,531		$	2,026,439		$	123,092	6.1	%
Gross portfolio loans (1)		1,507,183			1,504,275			2,908		0.2
Total portfolio loans												Total portfolio loans	$	1,629,538		$	1,578,810
Classified Assets	Classified Assets	16,145			22,358			(6,213)		(27.8)		Classified Assets	4,745			5,211
Allowance for loan losses		18,256			19,424			(1,168)		(6.0)
Allowance for credit losses												Allowance for credit losses	21,382			18,417

Past due loans - 31 to 89 days	Past due loans - 31 to 89 days	1,373			179			1,194		667.0		Past due loans - 31 to 89 days	386			568
Past due loans >=90 days		5,453			11,965			(6,512)		(54.4)
Past due loans >=90 days (1)												Past due loans >=90 days (1)	1,233			961
Total past due (delinquency) loans	Total past due (delinquency) loans	6,826			12,144			(5,318)		(43.8)		Total past due (delinquency) loans	1,619			1,529

Non-accrual loans (2)	Non-accrual loans (2)	13,623			18,222			(4,599)		(25.2)		Non-accrual loans (2)	7,465			7,631
Accruing troubled debt restructures (TDRs) (3)	Accruing troubled debt restructures (TDRs) (3)	504			572			(68)		(11.9)		Accruing troubled debt restructures (TDRs) (3)	442			447
Other real estate owned (OREO)	Other real estate owned (OREO)	2,329			3,109			(780)		(25.1)		Other real estate owned (OREO)	—			—
Non-accrual loans, OREO and TDRs	Non-accrual loans, OREO and TDRs	$	16,456		$	21,903		$	(5,447)	(24.9)	%	Non-accrual loans, OREO and TDRs	$	7,907		$	8,078

ASSET QUALITY RATIOS (4)	ASSET QUALITY RATIOS (4)											ASSET QUALITY RATIOS (4)
Classified assets to total assets	Classified assets to total assets	0.75		%	1.10		%					Classified assets to total assets	0.20		%	0.22		%
Classified assets to risk-based capital	Classified assets to risk-based capital	6.81			9.61							Classified assets to risk-based capital	1.87			2.10
Allowance for loan losses to total loans		1.21			1.29
Allowance for loan losses to total portfolio loans												Allowance for loan losses to total portfolio loans	1.31			1.17
Allowance for loan losses to non-accrual loans	Allowance for loan losses to non-accrual loans	134.01			106.60							Allowance for loan losses to non-accrual loans	286.43			241.34
Past due loans - 31 to 89 days to total loans		0.09			0.01
Past due loans >=90 days to total loans		0.36			0.80
Total past due (delinquency) to total loans		0.45			0.81
Non-accrual loans to total loans		0.90			1.21
Non-accrual loans and TDRs to total loans		0.94			1.25
Past due loans - 31 to 89 days to total portfolio loans												Past due loans - 31 to 89 days to total portfolio loans	0.02			0.04
Past due loans >=90 days to total portfolio loans												Past due loans >=90 days to total portfolio loans	0.08			0.06
Total past due (delinquency) to total portfolio loans												Total past due (delinquency) to total portfolio loans	0.10			0.10
Non-accrual loans to total portfolio loans												Non-accrual loans to total portfolio loans	0.46			0.48
Non-accrual loans and TDRs to total portfolio loans												Non-accrual loans and TDRs to total portfolio loans	0.49			0.51
Non-accrual loans and OREO to total assets	Non-accrual loans and OREO to total assets	0.74			1.05							Non-accrual loans and OREO to total assets	0.32			0.33
Non-accrual loans and OREO to total loans and OREO		1.06			1.42
Non-accrual loans and OREO to total portfolio loans and OREO												Non-accrual loans and OREO to total portfolio loans and OREO	0.46			0.48
Non-accrual loans, OREO and TDRs to total assets	Non-accrual loans, OREO and TDRs to total assets	0.77			1.08							Non-accrual loans, OREO and TDRs to total assets	0.34			0.35

(1)~~Portfolio~~ Nonperforming loans include all ~~loan portfolios except the U.S. SBA PPP loan portfolio. Asset quality ratios for~~ loans ~~exclude U.S. SBA PPP loans.~~that are 90 days or more delinquent.

(2)Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer. Non-accrual loans can include loans that are current with all loan payments. At March 31, 2021 and December 31, 2020, the Company had current non-accrual loans of $8.2 million and $6.3 million, respectively.

(3)~~At March 31, 2021~~ TDR loans include both non-accrual and ~~December 31, 2020, the Bank had total TDRs of $0.5 million and $2.1 million, respectively, with $2,000 and $1.5 million, respectively, in non-accrual status. These~~accruing performing loans. All TDR loans are ~~classified as non-accrual loans for~~included in the calculation of asset quality financial ratios.

~~(4)Asset quality ratios~~ Non-accrual TDR loans are ~~calculated using total portfolio loans. Portfolio~~included in the non-accrual balance and accruing TDR loans ~~include all loan portfolios except~~are included in the ~~U.S. SBA PPP loan portfolio.~~accruing TDR balance.

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Allowance for ~~Loan~~Credit Losses and Provision for Credit Losses

Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to: overall loss experience; current economic conditions; size, growth and composition of the loan portfolio; financial condition of the borrowers; current appraised values of underlying collateral and other factors that, in management’s judgment, warrant recognition in determining an adequate allowance. Improvements to baseline charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as improvements in classified assets were offset by deterioration in other qualitative factors. Although, first quarter of 2021 charge-offs of $1.5 million increased compared to recent quarterly trends, the impact to the ALLL charge-off factor was not significant due to average low charge-off activity for the periods used to evaluate the allowance. The specific allowance is based on management’s estimate of realizable value for particular loans. Management believes that the specific and general components of the allowance are adequate. The following is ~~a summary roll-forward of the allowance and~~ a breakdown of the Company’s general and specific allowances as a percentage of gross portfolio loans at and for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 and year ended December 31, ~~2020:~~2021:

Three Months Ended March 31, Year Ended
(dollars in thousands) 2021 2020 December 31, 2020
Beginning of period $ 19,424 $ 10,942 $ 18,829
Charge-offs (1,485) — (30)
Recoveries 22 19 25
Net charge-offs (1,463) 19 (5)
Provision for loan losses 295 4,100 600
End of period $ 18,256 $ 15,061 $ 19,424
Net charge-offs to average loans (annualized) (0.40) % 0.01 % — %

Breakdown of general and specific allowance as a percentage of ~~gross~~total portfolio loans (1)


		March 31, 2021			March 31, 2020			December 31, 2020				March 31, 2022			March 31, 2021			December 31, 2021
General allowance	General allowance	$	17,365		$	13,412		$	18,068		General allowance	$	21,087		$	17,365		$	18,151
Specific allowance	Specific allowance	891			1,649			1,356			Specific allowance	295			891			266
		$	18,256		$	15,061		$	19,424			$	21,382		$	18,256		$	18,417
General allowance	General allowance	1.15		%	0.90		%	1.20		%	General allowance	1.29		%	1.15		%	1.15		%
Specific allowance	Specific allowance	0.06		%	0.11		%	0.09		%	Specific allowance	0.02		%	0.06		%	0.02		%
Allowance to gross loans		1.21		%	1.01		%	1.29		%
Allowance to total portfolio loans											Allowance to total portfolio loans	1.31		%	1.21		%	1.17		%

Allowance to non-acquired gross loans		1.26		%	1.06		%	1.35		%
Allowance to non-acquired loans (2)											Allowance to non-acquired loans (2)	n/a			1.26		%	1.20		%

Total acquired loans(2)	Total acquired loans(2)	$	57,334		$	71,330		$	60,977		Total acquired loans(2)	n/a			$	57,334		$	42,182
Non-acquired loans**(2)	Non-acquired loans**(2)	$	1,449,849		$	1,418,759		$	1,443,298		Non-acquired loans**(2)	n/a			$	1,449,849		$	1,536,761
Gross portfolio loans		$	1,507,183		$	1,490,089		$	1,504,275
Total portfolio loans											Total portfolio loans	$	1,629,538		$	1,507,183		$	1,578,943

**Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments. Non-acquired loans exclude U.S. SBA PPP loans.

57(1)Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.

~~Table~~(2)Allowance to non-acquired loans is no longer relevant as the ACL considers all portfolio loans.

On January 1, 2022, the Company adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of ~~Contents~~

Credit Losses on Financial Instruments, which replaced the incurred loss methodology for determining our provision for credit losses and ACL with an expected loss methodology that is referred to as the current expected credit loss model ("CECL"). The ACL is a valuation account that is deducted from loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The ~~Company's allowance reflects~~Bank uses a range of data to estimate expected credit losses under CECL, including information about past events, current conditions, and reasonable and supportable forecasts relevant to assessing the ~~continued~~collectability of the cash flows of the loans. Historical loss experience serves as the foundation for our estimated credit losses. Adjustments to our historical loss experience are made for differences in current loan portfolio segment credit risk characteristics such as the impact of changing unemployment rates, changes in U.S. Treasury yields, portfolio concentrations, the volume of classified loans, and other prevailing economic ~~uncertainty from~~conditions and factors that may affect the ~~COVID-19 pandemic. The ALLL increased~~borrower’s ability to repay, or reduce the estimated value of any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

We adopted ASU 2016-13 using the modified retrospective method. Results for reporting periods beginning after January 1, 2022 are presented under ASU 2016-13 while prior period amounts continue to be reported in ~~2020 primarily due~~accordance with previously applicable GAAP.

Upon the adoption of ASC 326, the Company recorded a $2.5 million increase to the ~~economic effects~~ACL. At March 31, 2022, the ACL was $21.4 million increased $3.0 million or 16.1% when compared to $18.4 million at December 31, 2021. The increase is related to the impact of adoption and the ~~COVID-19 pandemic. The Company's allowance methodology considers quantitative historical loss factors and qualitative factors~~current quarter's provision.

ACL levels increased to ~~determine the estimated level of incurred losses in the Company's loan portfolios. ALLL levels decreased to 1.21%~~1.31% of portfolio loans at March 31, ~~2021~~2022 compared to ~~1.29%~~1.17% at December 31, ~~2020.~~2021. At and for the three months ended March 31, ~~2021,~~2022, the Company's ~~ALLL decreased $1.2~~ACL increased $3.0 million or ~~6.0%~~16.1% to ~~$18.3~~$21.4 million at March 31, ~~2021~~2022 from ~~$19.4~~$18.4 million at December 31, ~~2020.~~2021. The ~~decrease~~increase in the general allowance was primarily ~~due~~related to ~~improvements in~~ the ~~qualitative factors~~impact of ~~delinquency~~adoption of ASC-326 and ~~risk classification rating, as well as slower~~portfolio loan growth partially offset by higher charge-offs in the first quarter. The specific allowance decreased as specifically identified impaired loans were resolved. U.S. SBA PPP loans are excluded from the Bank's allowance methodology as they are guaranteed by the U.S. government.growth.

The Company recorded ~~a decrease~~an increase in its provision for ~~loan~~credit loss expense for the three months ended March 31, ~~2021~~2022 compared to the same periods in the prior year. Net charge-offs also ~~increased~~decreased for the comparable periods from ~~a $19,000 recovery in the first quarter of 2020 to~~ $1.5 million in net charge-offs in the first quarter of ~~2021.~~2021 to $19,000 in net recoveries in the first quarter of 2022. During the three months ended March 31, 2021, the Bank sold

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non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $9.1 million, net of charge-offs of $1.4 million, and recognized a loss on the sale of ~~$191,000.The Company's sale of these impaired loans decreased the specific reserve, improved asset quality and improved several ALLL qualitative factors.~~$191,000.

Management believes that loans included in the COVID-19 deferral program in 2020 and 2021 are more likely to default in the future and the identification and resolution of problem credits could be delayed. In our evaluation of current and previously deferred loans, we considered the customer industry, the length of the deferral period, and the type and amount of collateral. Consistent with regulatory guidance, if new information during the deferral period indicates that there is evidence of default, the Bank may change the classification rating (e.g., change from passing credit to substandard) and accrual status (e.g., change from accrual to non-accrual status) as deemed appropriate. As of March 31, 2021, and December 31, 2020, there were a $1.0 million and $3.4 million, respectively, of COVID-19 deferred loan deemed to be non-accrual and substandard based on reviews. All COVID-19 deferred loans were current prior to the crisis and will not be considered delinquent or troubled debt restructures ("TDRs") upon completion of the modification agreements due to provisions in the CARES Act and regulations that permit U.S. financial institutions to temporarily suspend U.S. GAAP requirements to treat such loan modifications as TDRs.

~~Below are schedules that provide information on~~As of March 31, 2022 there were previously COVID-19 deferred loans as of $1.0 million (two relationships - both were current but non-accrual) deemed to be non-accrual and substandard based on internal reviews. As of December 31, 2021 there were $3.9 million of COVID-19 deferred loans deemed to be non-accrual and substandard. In our evaluation of previously deferred loans, we considered the length of the deferral period, the type and amount of collateral and customer industries.

Management believes that the allowance is adequate at March 31, ~~2021:~~2022. The ACL as a percent of total loans may increase or decrease in future periods based on economic conditions. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio. For additional information regarding the allowance for credit losses, refer to Notes 1 and 3 of the Consolidated Financial Statements and the Critical Accounting Policy section of the MD&A.

COVID-19 Deferred Loans (Unaudited)
March 31, 2021 Accrual Loans Non-Accrual Loans
(dollars in thousands) Loan Balances % of Deferred Loans % of Gross Portfolio Loans Loan Balances Number of Loans Loan Balances Number of Loans
Commercial real estate $ 17,970 77.71 % 1.19 % $ 16,993 5 $ 977 1
Residential first mortgages 1,402 6.06 % 0.09 % 1,402 3 — —
Commercial equipment 3,754 16.23 % 0.25 % 3,754 15 — —
Total $ 23,126 100.00 % 1.53 % $ 22,149 23 $ 977 1
The following table allocates the ACL and ALLL by portfolio loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.


	March 31, 2022				December 31, 2021
(dollars in thousands)	Amount		% (1)		Amount		% (1)
Commercial real estate	$	17,313	72.28	%	$	13,095	70.66	%
Residential first mortgages	284		5.30	%	1,002		5.77	%
Residential rentals	1,546		11.73	%	2,175		12.35	%
Construction and land development	137		1.88	%	260		2.25	%
Home equity and second mortgages	178		1.62	%	274		1.62	%
Commercial loans	319		3.00	%	582		3.20	%
Consumer loans	73		0.22	%	58		0.19	%
Commercial equipment	1,532		3.97	%	971		3.96	%


Total allowance for credit losses	$	21,382	100.00	%	$	18,417	100.00	%

(1) Percent of loans in each category to total portfolio loans

COVID-19 Deferred Loans - Next Payment Due by Month (Unaudited)
(dollars in thousands) Loan Balances % Number of Loans
April-21 $ 5,305 22.94 % 5
May-21 9,736 42.10 % 4
June-21 4,580 19.80 % 4
December-21 3,505 15.16 % 11
Total $ 23,126 100.00 % 24

The following table indicates net charge-offs by average portfolio loan category for the quarters ended March 31, 2022 and March 31, 2021, and for the year ended December 31, 2021:

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COVID-19 Deferred Loans by NAICS Industry (Unaudited)
(dollars in thousands) March 31, 2021 Number of Loans
Real Estate Rental and Leasing $ 5,257 1
Accommodation and Food Services 11,599 4
Arts, Entertainment, and Recreation 977 1
Transportation and Warehousing 3,505 11
Retail Trade 386 4
Other Industries, Residential Mortgages and Consumer ** 1,402 3
Total $ 23,126 24
** No NAICS code has been assigned.


	March 31, 2022						March 31, 2021						December 31, 2021
(dollars in thousands)	Net (Charge-off) Recovery		Average Balance		%		Net (Charge-off) Recovery		Average Balance		%		Net (Charge-off) Recovery		Average Balance		%
Commercial real estate	$	—	$	1,112,108	—	%	$	(1,246)	$	1,059,803	(0.12)	%	$	(1,914)	$	1,085,823	(0.18)	%
Residential first mortgages	—		86,805		—		(142)		124,984		(0.11)		(142)		107,011		(0.13)
Residential rentals	—		197,312		—		(46)		139,220		(0.03)		(46)		151,606		(0.03)
Construction and land development	—		33,669		—		—		36,091		—		—		36,891		—
Home equity and second mortgages	—		25,946		—		1		29,272		—		5		28,051		0.02
Commercial loans	1		46,668		—		(45)		44,740		(0.10)		467		46,390		1.01
Consumer loans	—		3,213		—		—		1,320		—		—		1,783		—
Commercial equipment loans	18		61,715		0.03		15		60,544		0.02		37		60,845		0.06
	19		1,567,436		—		(1,463)		1,495,974		(0.10)		(1,593)		1,518,400		(0.10)
Allowance for credit losses	—		(21,043)		—		—		(19,614)		—		—		(18,788)		—
Total net charge-off and average portfolio loans	$	19	$	1,546,393	—	%	$	(1,463)	$	1,476,360	(0.10)	%	$	(1,593)	$	1,499,612	(0.11)	%

Off Balance Sheet Credit Exposure Reserve

The Company's reserve for off balance sheet credit exposures was ~~$51,000~~$0.2 million and ~~did not increase~~increased due to impact of the ASC 326 adoption and a $31,000 recovery in the ~~first three months~~current quarter following a reduction of ~~2021.~~available credit lines. The Company is monitoring line of credit usage and has not seen substantive increases in usage or expected usage. Management believes that many of the Bank's customers presently have sufficient liquidity due to COVID-19 government stimulus programs. The Company will continue to monitor activity for potential increases in the off-balance sheet reserve in future quarters as customers use available liquidity.

Classified Assets and Special Mention Assets

Classified assets decreased ~~$6.2~~$0.5 million from ~~$22.4~~$5.2 million at December 31, ~~2020~~2021 to ~~$16.1~~$4.7 million at March 31, ~~2021.~~2022. Management considers classified assets to be an important measure of asset quality. The Company's risk rating process for classified loans are an important input into the Company's allowance methodology. Risk ratings are expected to be an important indicator in assessing ongoing credit risks of COVID-19 deferred loans. The following is a breakdown of the Company’s classified and special mention assets at March 31, ~~2021,~~2022, and December 31, 2021, 2020, 2019, ~~2018,~~ and ~~2017,~~2018, respectively:


		As of																	As of
(dollars in thousands)	(dollars in thousands)		3/31/2021			12/31/2020			12/31/2019			12/31/2018			12/31/2017			(dollars in thousands)		3/31/2022			12/31/2021			12/31/2020			12/31/2019			12/31/2018
Classified loans	Classified loans																	Classified loans
Substandard	Substandard		$	13,816		$	19,249		$	26,863		$	32,226		$	40,306		Substandard		$	4,745		$	5,211		$	19,249		$	26,863		$	32,226
Doubtful	Doubtful		—			—			—			—			—			Doubtful		—			—			—			—			—

Total classified loans	Total classified loans		13,816			19,249			26,863			32,226			40,306			Total classified loans		4,745			5,211			19,249			26,863			32,226
Special mention loans	Special mention loans		7,769			7,672			—			—			96			Special mention loans		—			—			7,672			—			—
Total classified and special mention loans	Total classified and special mention loans		$	21,585		$	26,921		$	26,863		$	32,226		$	40,402		Total classified and special mention loans		$	4,745		$	5,211		$	26,921		$	26,863		$	32,226

Classified loans	Classified loans		13,816			19,249			26,863			32,226			40,306			Classified loans		$	4,745		$	5,211		$	19,249		$	26,863		$	32,226
Classified securities	Classified securities		—			—			—			482			651			Classified securities		—			—			—			—			482
Other real estate owned	Other real estate owned		2,329			3,109			7,773			8,111			9,341			Other real estate owned		—			—			3,109			7,773			8,111
Total classified assets	Total classified assets		$	16,145		$	22,358		$	34,636		$	40,819		$	50,298		Total classified assets		$	4,745		$	5,211		$	22,358		$	34,636		$	40,819

Total classified assets as a percentage of total assets	Total classified assets as a percentage of total assets		0.75		%	1.10		%	1.93		%	2.42		%	3.58		%	Total classified assets as a percentage of total assets		0.20		%	0.22		%	1.10		%	1.93		%	2.42		%
Total classified assets as a percentage of Risk Based Capital	Total classified assets as a percentage of Risk Based Capital		6.81		%	9.61		%	16.21		%	21.54		%	32.10		%	Total classified assets as a percentage of Risk Based Capital		1.87		%	2.10		%	9.61		%	16.21		%	21.54		%

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In the first quarter of 2021 classified loans decreased $6.3 million from $19.2 million at December 31, 2020 to $13.8 million at March 31, 2021. The sale of $9.1 million in impaired loans during the first quarter of 2021 was a continuation of management's intent to expeditiously resolve non-performing or substandard credits that were not likely to become performing or passing credits in a reasonable time-frame.

Non-Performing Assets


(dollars in thousands)	March 31, 2022		December 31, 2021
Non-accrual loans:
Commercial real estate	$	4,988	$	4,890
Residential first mortgages	736		450
Residential rentals	672		942
Construction and land development	—		—
Home equity and second mortgages	377		601
Commercial loans	25		—
Consumer loans	—		—
Commercial equipment	666		691

U.S. SBA PPP loans	1		57
Total non-accrual loans (1)	7,465		7,631

OREO	—		—

TDRs: (1) (2)
Commercial real estate	—		—
Residential first mortgages	—		—
Residential rentals	—		—
Construction and land development	—		—
Home equity and second mortgages	—		—
Commercial loans	—		—
Consumer loans	—		—
Commercial equipment	442		447

U.S. SBA PPP loans	—		—
Total TDRs	442		447
Total Accrual TDRs	442		447

Total non-accrual loans, OREO and Accrual TDRs	$	7,907	$	8,078

Interest income due at stated rates, but not recognized on non-accruals	$	40	$	102

(1) Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer.

(2) TDR loans include both non-accrual and accruing performing loans. All TDR loans are included in the calculation of asset quality financial ratios. Non-accrual TDR loans are included in the non-accrual balance and accruing TDR loans are included in the accruing TDR balance.

Non-performing assets, which consist of OREO, non-accrual loans and TDRs, decreased ~~$5.4~~$0.2 million from ~~$21.9~~$8.1 million at December 31, ~~2020~~2021 to ~~$16.5~~$7.9 million at March 31, ~~2021.~~2022.

Non-accrual loans and OREO to total portfolio loans and OREO decreased two basis points from 0.48% at December 31, 2021 to 0.46% at March 31, 2022. Non-accrual loans, OREO and TDRs to total assets decreased one basis points from 0.35% at December 31, 2021 to 0.34% at March 31, 2022.

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~~OREO decreased $0.8 million~~All interest accrued but not collected from ~~$3.1 million~~loans that are placed on non-accrual or charged-off is reversed against interest income. Interest income is recognized on a cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. The accrual of interest on loans is discontinued at ~~December 31, 2020~~the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Non-accrual loans include certain loans that are current with all loan payments and are placed on non-accrual status due to ~~$2.3 million at~~customer operating results and cash flows. Non-accrual loans are considered impaired and evaluated for impairment on a loan-by-loan basis.

At March 31, ~~2021. There~~2022, there were ~~no additions to OREO during the three months ended March 31, 2021. OREO disposals~~$6.3 million (84%) of $0.6 million netted losses of $22,000 on disposals for the three months ended March 31, 2021. To adjust properties to current appraised values, additions to the valuation allowance of $0.2 million were taken for the three months ended March 31, 2021. OREO carrying amounts reflect management’s estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs.

~~Non-accrual loans decreased $4.6 million from $18.2 million at December 31, 2020 to $13.6 million at March 31, 2021. The decrease in~~ non-accrual loans ~~during the first three months 2021 was largely the result of the March 2021 sale of several substandard classified relationships. Non-accrual loans of $8.2 million (60%) were~~ current with all payments of principal and interest with specific reserves of ~~$42,000 at March 31, 2021.~~$0.3 million. Delinquent non-accrual loans were ~~$5.5~~$1.2 million ~~(40%~~(16%) of with no specific reserves ~~of $0.7 million~~ at March 31, ~~2021.~~

~~Non-accrual loans and OREO to total gross portfolio loans and OREO decreased 36 basis points from 1.42% at~~2022. At December 31, ~~2020 to 1.06%~~2021, there were $6.7 million (88%) of non-accrual loans current with all payments of principal and interest with no impairment and $0.9 million (12%) of delinquent non-accrual loans with a total of zero specifically reserved. There were no non-accrual TDRs at March 31, ~~2021.~~2022. Non-accrual ~~loans, OREO and TDRs to total assets decreased 31 basis points from 1.08% at December 31, 2020 to 0.77% at March 31, 2021.~~

~~Loan delinquency (90 days or greater delinquent and 31-89 days delinquent) decreased $5.3 million from $12.1 million or 0.81% of portfolio~~ loans at December 31, ~~2020 to $6.8 million, or 0.45%~~2021 included zero TDRs. These loans were classified solely as non-accrual for the calculation of ~~portfolio loans,~~financial ratios.

Other Real Estate Owned

There were no OREO balances at March 31, ~~2021. Early stage delinquency (31-89 days delinquent) increased modestly $1.2 million from $0.2 million~~2022 and at December 31, ~~2020~~2021. For additional information on OREO, refer to ~~$1.4 million at March 31, 2021.~~Note 5 of the Consolidated Financial Statements.

LIABILITIES

The following table shows the Company’s liabilities and the dollar and percentage changes for the periods presented.


(dollars in thousands)	(dollars in thousands)	March 31, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	March 31, 2022		December 31, 2021		$ Change		% Change
Deposits	Deposits									Deposits
Non-interest-bearing deposits	Non-interest-bearing deposits	$	406,319	$	362,079	$	44,240	12.2	%	Non-interest-bearing deposits	$	644,385	$	445,778	$	198,607	44.6	%
Interest-bearing deposits	Interest-bearing deposits	1,461,577		1,383,523		78,054		5.6	%	Interest-bearing deposits	1,450,698		1,610,386		(159,688)		(9.9)	%
Total deposits	Total deposits	1,867,896		1,745,602		122,294		7.0	%	Total deposits	2,095,083		2,056,164		38,919		1.9	%

Long-term debt	Long-term debt	27,285		27,302		(17)		(0.1)	%	Long-term debt	12,213		12,231		(18)		(0.1)	%

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		12,000		—		—	%	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		12,000		—		—	%
Subordinated notes net of debt issuance costs - 4.75%	Subordinated notes net of debt issuance costs - 4.75%	19,468		19,526		(58)		—	%	Subordinated notes net of debt issuance costs - 4.75%	19,524		19,510		14		—	%
Lease liabilities - operating leases	Lease liabilities - operating leases	6,614		8,088		(1,474)		(18.2)	%	Lease liabilities - operating leases	6,266		6,343		(77)		(1.2)	%
Accrued expenses and other liabilities	Accrued expenses and other liabilities	15,509		15,908		(399)		(2.5)	%	Accrued expenses and other liabilities	13,697		12,925		772		6.0	%
Total Liabilities	Total Liabilities	$	1,948,772	$	1,828,426	$	120,346	6.6	%	Total Liabilities	$	2,158,783	$	2,119,173	$	39,610	1.9	%

Funding

The Bank uses retail deposits and wholesale funding. Wholesale funding includes short-term borrowings, long-term debt and brokered deposits. Retail deposits continue to be the most significant source of funds totaling ~~$1,859.9~~$2,087.1 million or ~~98.1%~~99.0% of funding at March 31, ~~2021~~2022 compared to ~~$1,737.6~~$2,048.2 million or ~~98.0%~~99.0% of funding at December 31, ~~2020.~~2021. Wholesale funding, which consists of FHLB advances and brokered deposits, was ~~$35.3~~$20.2 million or ~~1.9%~~1.0% of funding at March 31, ~~2021~~2022 compared to ~~$35.3~~$20.2 million or ~~2.0%~~1.0% of funding at December 31, ~~2020.~~2021.

In addition to funding for operations, the Company had junior subordinated debentures of $12.0 million and subordinated notes of $20.0 million of 4.75% fixed-to-floating rate subordinated notes at March 31, ~~2021~~2022 and December 31, ~~2020.~~

~~Table of Contents~~

2021.

The following is a breakdown of the Company’s deposit portfolio at March 31, ~~2021~~2022 and December 31, ~~2020:~~2021:

March 31, 2021 December 31, 2020
(dollars in thousands) Balance % Balance %
Noninterest-bearing demand $ 406,319 21.75 % $ 362,079 20.74 %
Interest-bearing:
Demand 651,639 34.89 % 590,159 33.81 %
Money market deposits 355,680 19.04 % 340,725 19.52 %
Savings 105,590 5.65 % 98,783 5.66 %
Certificates of deposit 348,668 18.67 % 353,856 20.27 %
Total interest-bearing 1,461,577 78.25 % 1,383,523 79.26 %
Total Deposits $ 1,867,896 100.00 % $ 1,745,602 100.00 %
Transaction accounts $ 1,519,228 81.33 % $ 1,391,746 79.73 %

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	March 31, 2022				December 31, 2021
(dollars in thousands)	Balance		%		Balance		%
Noninterest-bearing demand	$	644,385	30.76	%	$	445,778	21.68	%
Interest-bearing:
Demand	618,869		29.54	%	790,481		38.44	%
Money market deposits	387,700		18.51	%	372,717		18.13	%
Savings	124,038		5.92	%	119,767		5.82	%
Certificates of deposit	320,091		15.28	%	327,421		15.92	%
Total interest-bearing	1,450,698		69.24	%	1,610,386		78.32	%

Total Deposits	$	2,095,083	100.00	%	$	2,056,164	100.00	%

Transaction accounts	$	1,774,992	84.72	%	$	1,728,743	84.08	%

Total deposits increased ~~$122.3~~$38.9 million or ~~7.01% (28.0%~~1.89% (7.6% annualized) at March 31, ~~2021~~2022 compared to December 31, ~~2020.~~2021. The increase ~~comprised of~~reflects a ~~$127.5~~$46.2 million increase to transaction deposits offsetting a ~~$5.2~~$7.3 million decrease to time deposits. The Bank typically experiences a reduction in transaction deposits during the first quarter as its customers use transaction account balances to pay expenses and taxes accrued in the prior year. In the first quarter of ~~2021,~~2022, however, transaction deposits increased due to new customer acquisitions as well as lower levels of consumer and business ~~spending related to the COVID-19 pandemic.~~spending. The Bank's increased customer deposit balances provided additional on-balance sheet liquidity compared to the prior year.

For FDIC call reporting purposes reciprocal deposits are classified as brokered deposits when they exceed 20% of a bank’s liabilities or $5.0 billion. Reciprocal deposits considered brokered deposits for call reporting purposes at March 31, ~~2021~~2022 were ~~$16.6~~$69.2 million compared to ~~zero~~$65.7 million at December 31, ~~2020.~~2021. Reciprocal deposits are included in retail deposits and are used to maximize FDIC insurance available to the Bank's customers.

~~Table of Contents~~

STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL

The following table shows the Company’s equity and the dollar and percentage changes for the periods presented.


(dollars in thousands)	(dollars in thousands)	March 31, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	March 31, 2022		December 31, 2021		$ Change		% Change
Common Stock at par of $0.01	Common Stock at par of $0.01	$	59	$	59	$	—	—	%	Common Stock at par of $0.01	$	57	$	57	$	—	—	%
Additional paid in capital	Additional paid in capital	96,181		95,965		216		0.23	%	Additional paid in capital	97,189		96,896		293		0.30	%
Retained earnings	Retained earnings	103,294		97,944		5,350		5.46	%	Retained earnings	115,179		113,448		1,731		1.53	%
Accumulated other comprehensive income		1,684		4,504		(2,820)		(62.61)	%
Accumulated other comprehensive loss										Accumulated other comprehensive loss	(18,969)		(1,952)		(17,017)		871.77	%
Unearned ESOP shares	Unearned ESOP shares	(459)		(459)		—		—	%	Unearned ESOP shares	(316)		(316)		—		—	%
Total Stockholders’ Equity	Total Stockholders’ Equity	$	200,759	$	198,013	$	2,746	1.39	%	Total Stockholders’ Equity	$	193,140	$	208,133	$	(14,993)	(7.20)	%

Total stockholders’ equity ~~increased~~decreased primarily due to ~~net income of $6.3~~an increase $17.0 million ~~partially offset by a decrease~~ in accumulated other comprehensive ~~income of $2.8 million and~~loss in the Bank's AFS securities portfolio due to changes in interest rates. In addition, equity decreased from common dividends paid of ~~$0.7 million.~~$0.9 million, stock repurchases totaling $1.6 million and $2.0 million for the adoption ASC 326. On February ~~25, 2020,~~24, 2022, the Company announced ~~an increase in the~~a quarterly cash dividend from the previous ~~$0.125~~$0.175 per share of common ~~stock to $0.15 per share.~~stock. The dividend was paid on or about April ~~26, 2021~~25, 2022 to stockholders of record as of the close of business on April 12, ~~2021.~~2022.

The Company had a book value per common share of ~~$34.04~~$33.96 and ~~$33.54,~~$36.40, at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Tangible book value at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$31.97~~$31.90 and ~~$31.45.~~$34.32. The Company's common equity to assets ratio decreased to ~~9.34%~~8.21% at March 31, ~~2021~~2022 from ~~9.77%~~8.94% at December 31, ~~2020.~~2021. The Company’s ratio of ~~tangible common equity ("TCE")~~TCE to tangible assets decreased to ~~8.82%~~7.75% at March 31, ~~2021~~2022 from ~~9.22%~~8.48% at December 31, ~~2020~~2021 (see Non-GAAP reconciliation schedules). The decrease in the TCE ratio was due primarily to ~~significant increases~~increased unrealized losses in ~~cash and loans from COVID-19 government stimulus.~~the Bank's AFS investment portfolio.

In April 2020, banking regulators issued an interim final rule that excluded U.S. SBA PPP loans pledged under the PPPLF from the calculation of the leverage ratio. The Bank did not have any PPPLF advances at March 31, 2021 and December 31, 2020. In addition, the interim final rule excluded U.S. SBA PPP loans from the calculation of risk-based capital ratios by assigning a zero percent risk weight. The Company remains well capitalized at March 31, ~~2021~~2022 with a Tier 1 capital to average assets ("leverage ratio") of ~~9.70%~~9.17% at March 31, ~~2021~~2022 compared to ~~9.56%~~9.23% at December 31, ~~2020.~~2021.

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LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

The Company has no business other than holding the stock of the Bank and does not have significant operating cash needs, except for the payment of dividends declared on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense.

The Company evaluates capital resources by its ability to maintain adequate regulatory capital ratios. The Company and the Bank annually update a three-year strategic capital plan. In developing its plan, the Company considers the impact to capital of asset growth, income accretion, dividends, holding company liquidity, investment in markets and people and stress testing.

Federal banking regulations require the Company and the Bank to maintain specified levels of capital. As of March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the Company and Bank were well-capitalized under the regulatory framework for prompt corrective action under the Basel III Capital Rules. Management believes, as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. See Note 10 of the Consolidated Financial Statements.

Liquidity

Liquidity is our ability to meet cash demands as they arise. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

Based on management’s going concern evaluation, we believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s or the Bank’s ability to continue as a going concern, within one year of the date of the issuance of the financial statements.

The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows. Customer deposits are considered the primary source of funds supporting the Bank’s lending and investment activities.

Liquidity is provided by access to funding sources, which include core depositors and brokered deposits. Other sources of funds include our ability to borrow, such as purchasing federal funds from correspondent banks, sales of securities under agreements to repurchase and advances from the FHLB of Atlanta. The Bank uses wholesale funding (brokered deposits and other sources of funds) to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.

At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had ~~$86.9~~$68.8 million and ~~$66.5~~$64.4 million, respectively, in loan commitments outstanding. In addition, at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had ~~$22.9~~$23.7 million and ~~$20.0~~$22.0 million, respectively, in letters of credit and approximately ~~$225.0~~$222.6 million and ~~$225.5~~$241.7 million, respectively, available under lines of credit. Certificates of deposit due within one year of March 31, ~~2021~~2022 and December 31, ~~2020~~2021 totaled ~~$258.6~~$260.7 million, or ~~74.16%~~81.45% and ~~$266.1~~$256.9 million, or ~~75.21%~~78.45%, respectively, of total certificates of deposit outstanding. If maturing deposits do not remain, the Bank will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than the Bank currently pays on the certificates of deposits. Management believes, however, based on past experience that a significant portion of the Bank's certificates of deposit will remain with the Bank. Management has the ability to attract and retain deposits by adjusting the interest rates offered.

Management has increased oversight and review of customer line of credit usage. If we were to experience increases in draws on customer lines of credit or decreased deposit levels in future periods as a result of the distressed economic conditions in our market areas relating to the COVID-19 pandemic, our level of borrowed funds could increase.

At March 31, ~~2021,~~2022, the Company had on-balance sheet liquidity of ~~$187.8~~$113.2 million in cash and cash equivalents. At March 31, ~~2021,~~2022, the Company had loans and securities pledged or in safekeeping at FHLB which provided for funding availability of ~~$369.5~~$562.7 million at March 31, ~~2021.~~2022.

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Advances from the FHLB are secured by the Bank’s stock in the FHLB, a portion of the Bank’s loan portfolio and certain investments. Generally, the Bank’s ability to borrow from the FHLB of Atlanta is limited by its available collateral and also by an overall limitation of 30% of assets. FHLB long-term debt consists of adjustable-rate advances with rates based upon LIBOR, fixed-rate advances, and convertible advances. As of March 31, ~~2021,~~2022, 100% of the Bank's long-term debt was fixed for rate and term, as the conversion optionality of the advances have either been exercised or expired. In addition, the Bank has established unsecured and secured lines of credit with the Federal Reserve Bank and commercial banks.

For additional information on these agreements, including collateral, see Note 8 of the Consolidated Financial Statements as presented in the Company’s Form 10-K for the year ended December 31, ~~2020.~~2021.

The Company’s net loan to deposit ratio ~~decreased~~increased from ~~91.3%~~77.2% at December 31, ~~2020~~2021 and to ~~85.8%~~77.5% at March 31, ~~2021.~~2022. The Company intends to use available on-balance sheet liquidity to fund loans, increase investments and limit the use of wholesale funding.

The Bank’s principal sources of funds for investment and operations are net income, deposits, sales of loans, borrowings, principal and interest payments on loans, principal and interest received on investment securities and proceeds from the maturity and sale of investment securities. The Bank’s principal funding commitments are for the origination or purchase of loans, the purchase of securities and the payment of maturing deposits.

The Bank is subject to various regulatory restrictions on the payment of dividends.

The Bank’s most liquid assets are cash, cash equivalents and federal funds sold. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated future deposit flows.

During the three months ended March 31, 2022, all financing activities provided $36.4 million in cash compared to $121.4 million in cash for the same period in 2021. Cash ~~and cash equivalents as of~~from financing activities decreased $85.0 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 ~~totaled $187.8 million, an increase of $110.8 million from the December 31, 2020 total of $77.1 million. Ending cash balances increased~~ primarily due to decreased deposit growth of $83.4 million and increases in ~~net deposits~~dividends paid and ~~proceeds from sales and principal payments on investment securities. These increases were partially offset by the excess~~repurchases of loan originations over principal collected and the purchase of investment securities. Changes to the level of cash and cash equivalents have minimal impact on operational needs as the Bank has substantial sources of funds available from other sources.common stock.

During the three months ended March 31, ~~2021,~~2022 all ~~financing~~investing activities ~~provided $121.4~~used $73.6 million in cash compared to $26.0 million in cash for the same period in 2020. The Company additional cash from financing activities in the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to increased deposit growth of $121.5 million, partially offset by a decrease in short term and long term borrowings and subordinated debt activities.

~~During the three months ended March 31, 2021 all investing activities used~~ $19.8 ~~million in cash compared to $40.6~~ million in cash used for the same period in ~~2020.~~2021. The ~~decrease~~increase in cash used was primarily the result of purchases of investment securities and cash used for loan activities, which ~~decreased $18.4~~increased $10.8 million and ~~$17.0~~$21.1 million from ~~$53.9 million and $35.7 million, respectively, for the three months ended March 31, 2020 to~~ $35.6 million and $18.7 million, respectively, for the three months ended March 31, ~~2021.~~2021 to $46.4 million and $39.8 million, respectively, for the three months ended March 31, 2022. Cash used ~~decreased $25.5~~increased $11.9 million as total proceeds from the sales and principal payments of available for sale securities for the three months ended March 31, ~~2021~~2022 decreased over the prior year comparable period.

Operating activities ~~provided~~used cash of ~~$9.2~~$10.7 million, or ~~$1.2~~$1.5 million more cash, for the three months ended March 31, ~~2021,~~2022, compared to ~~$8.0~~$9.2 million of cash provided for the same period of ~~2020.~~2021.

For information on risks relating to liquidity, see Item 1A. "Risk Factors - Liquidity Risk", as presented in the Company's Form 10-K for the year ended December 31, ~~2020.~~2021.

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest rate risk is defined as the exposure to changes in net interest income and capital that arises from movements in interest rates. Depending on the composition of the balance sheet, increasing or decreasing interest rates can negatively affect the Company’s results of operations and financial condition.

The Company measures interest rate risk over the short and long term. The Company measures interest rate risk as the change in net interest income (“~~NII"~~NII”) caused by a change in interest rates over twelve and twenty-four months. The Company’s NII simulations provide information about short-term interest rate risk exposure. The Company also measures interest rate risk by measuring changes in the values of assets and liabilities due to changes in interest rates. The economic value of equity (“EVE”) is defined as the present value of future cash flows from existing assets, minus the present value of future cash flows from existing liabilities. EVE simulations reflect the interest rate sensitivity of assets and liabilities over a longer time period, considering the maturities, average life and duration of all balance sheet accounts.

The Board of Directors has ~~established an~~approved the Company's interest rate risk policy ~~which is administered by~~and assigned oversight to the ~~Bank’s Asset Liability~~Board Risk Oversight Committee (“~~ALCO”~~BROC”). The policy establishes limits on risk, which are quantitative measures of the percentage change in NII and EVE resulting from changes in interest rates. Both NII and EVE simulations assist in identifying, measuring, monitoring and controlling interest rate risk and along with mitigating strategies are used by management and the ALCO Committee to ensure that interest rate risk exposure will be maintained within Board policy guidelines. The ALCO Committee reports quarterly to the Board of Directors. Mitigating strategies are used to maintain interest rate risk exposure within ~~established limits.~~Board policy guidelines.

The Company’s interest rate risk (“IRR”) model uses assumptions which include factors such as call features, prepayment options and interest rate caps and floors included in investment and loan portfolio contracts. ~~Additionally, the~~The IRR model estimates the lives and interest rate sensitivity of the Company’s non-maturity deposits. These assumptions have a significant effect on model results. The assumptions are developed primarily based upon historical behavior of Bank customers. The Company also considers industry and regional data in developing IRR model assumptions. There are inherent limitations in the Company’s IRR model and underlying assumptions. When interest rates change, actual movements of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model.

The Company prepares a current base case and several alternative simulations at least quarterly. Current interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”). In addition, the Company simulates additional rate curve scenarios (e.g., bear flattener). The Company may elect not to use particular scenarios that it determines are impractical in a current rate environment.

The Company’s internal limits for parallel shock scenarios are as follows:


Shock in Basis Points	Net Interest Income	Economic Value of Equity
+ - 400	25%	40%
+ - 300	20%	30%
+ - 200	15%	20%
+ - 100	10%	10%

It is management’s goal to manage the Bank’s portfolios so that net interest income at risk over twelve and twenty-four-month periods and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company did not exceed any Board approved sensitivity limits for percentage change in net interest income. In the first quarter of ~~2021~~2022 the percentage change in economic value of equity exceeded policy guidelines due to already low level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at March 31, ~~2021,~~2022, interest rate shocks of -100, -200, -300 and -400 basis points leave the Bank with near zero down to negative rate instruments and are not considered practical or informative. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments.

~~Table of Contents~~

The below schedule estimates the changes in ~~NII~~net interest income over a twelve-month period for parallel rate shocks for up 200, up 100 and down 100 scenarios:


Estimated Changes in Net Interest Income	Estimated Changes in Net Interest Income							Estimated Changes in Net Interest Income
Change in Interest Rates:	Change in Interest Rates:	+ 200 bp		+ 100 bp		-100 bp		Change in Interest Rates:	+ 200 bp		+ 100 bp		-100 bp
Policy Limit	Policy Limit	(15.00)	%	(10.00)	%	(10.00)	%	Policy Limit	(15.00)	%	(10.00)	%	(10.00)	%

March 31, 2021		(0.89)	%	(0.53)	%	(1.02)	%
December 31, 2020		(1.28)	%	(0.23)	%	(1.17)	%
March 31, 2022								March 31, 2022	(1.83)	%	(0.84)	%	(5.95)	%
December 31, 2021								December 31, 2021	(1.54)	%	(0.74)	%	(1.13)	%

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Measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The below schedule estimates the changes in the EVE at parallel shocks for up 200, up 100 and down 100 scenarios:

Estimated Changes in Economic Value of Equity
Change in Interest Rates: + 200 bp + 100 bp -100 bp
Policy Limit (20.00) % (10.00) % (10.00) %
March 31, 2021 28.56 % 17.31 % (28.84) %
December 31, 2020 52.00 % 32.00 % (47.00) %


Estimated Changes in Economic Value of Equity
Change in Interest Rates:	+ 200 bp		+ 100 bp		-100 bp
Policy Limit	(20.00)	%	(10.00)	%	(10.00)	%



March 31, 2022	13.66	%	9.28	%	(16.40)	%
December 31, 2021	24.45	%	15.16	%	(25.07)	%

ITEM 4 – CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

Effective January 1, 2022, the Company adopted FASB ASU 2016-13. The Company designed new controls and modified existing controls as part of the adoption. Management revised previous internal controls used under legacy GAAP and incorporated new internal controls related to the methodology of the new allowance for credit losses. There were no other changes in the ~~Company’s~~Company's internal control over financial reporting that occurred during the ~~quarter ended March 31, 2021~~period covered by this report that have materially affected, or are ~~reasonable~~reasonably likely to materially affect, the ~~Company’s~~Company's internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

In the normal course of business, the Company becomes involved in litigation arising from the banking, financial and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

Item 1A – Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, “Item 1A- Risk Factors” in the Form 10-K for the year ended December 31, ~~2020~~2021 that the Company filed with the SEC on March ~~4, 2021, and in the Form 10-Q that the Company filed with the SEC on November~~ 3, ~~2020.~~2022. These risk factors could materially affect our business, financial condition or future results. The risks described are not the only risks that the Company face. Additional risks and uncertainties not currently known or that the Company currently deem to be immaterial also may materially adversely affect its business, financial condition and/or operating results. There have been no material changes to the risk factors discussed in the Company's Form 10-K filed on March ~~4, 2021 or the Form 10-Q filed on November~~ 3, ~~2020.~~2022.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not applicable

(b)Not applicable

(c)On October 20, 2020, 184,863 shares were available to be repurchased under the 2015 repurchase plan, and, on that date, the Board of Directors approved an expansion to the 2015 repurchase plan (the "2020 repurchase plan") that allows the Company to repurchase up to 300,000 of the Company’s outstanding shares of common stock using up to $7.0 million of the proceeds the Company raised in its $20.0 million subordinated debt offering completed in October 2020. ~~The~~On July 15, 2021, the Company announced that it had completed the repurchase of the $7.0 million of shares of the Company’s common stock that it was originally authorized to repurchase under the 2020 repurchase plan. On December 9, 2021, the Company announced that its Board of Directors authorized the Company to continue repurchasing shares of the Company’s common stock under the October 2020 repurchase plan ~~will continue until it is completed or terminated by~~using up to $4.0 million in the ~~Company’s Board of Directors.~~aggregate and up to $1.5 million in the aggregate on a quarterly basis. As of March 31, ~~2021, 282,805~~2022, 51,664 shares were available to be repurchased under the 2020 repurchase plan. The following schedule shows the repurchases during the three months ended March 31, ~~2021.~~2022.

Period ( a )
Total Number of Shares Purchased ( b )
Average Price Paid per Share ( c )
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ( d )
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2021 — — — 290,037
February 1 - 28, 2021 5,761 27.95 5,761 284,276
March 1 - 31, 2021 1,471 33.50 1,471 282,805
Total 7,232 29.08 7,232 282,805


Period	( a ) Total Number of Shares Purchased	( b ) Average Price Paid per Share		( c ) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	( d ) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - 31, 2022	20,516	$	39.24	20,516	70,197
February 1 - 28, 2022	14,934	$	40.24	14,934	55,263
March 1 - 31, 2022	3,599	$	40.07	3,599	51,664
Total	39,049	$	39.70	39,049	51,664

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Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None

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Item 6 – Exhibits


Number						Description

31						Rule 13a‑14(a) Certifications
32						Section 1350 Certifications
101						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021,~~2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive ~~Income,~~Income/Loss, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows; and ~~(v)~~(vi) the Notes to the Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE COMMUNITY FINANCIAL CORPORATION

Date: May ~~11, 2021~~9, 2022	By:	/s/ William J. Pasenelli
		William J. Pasenelli
		Chief Executive Officer



Date: May ~~11, 2021~~9, 2022	By:	/s/ Todd L. Capitani
		Todd L. Capitani
		Chief Financial Officer


	Three Months Ended March 31, 2020
(dollars in thousands)	Tax Provision		Effective Tax Rate
Income tax apportionment adjustment	$	(743)	(27.6)	%
Income taxes before apportionment adjustment	686		25.5	%
Income tax expense as reported	$	(57)	(2.1)	%

Income before income taxes	$	2,691


COVID-19 Deferred Loans	(Unaudited)
	March 31, 2021						Accrual Loans			Non-Accrual Loans
(dollars in thousands)	Loan Balances		% of Deferred Loans		% of Gross Portfolio Loans		Loan Balances		Number of Loans	Loan Balances		Number of Loans
Commercial real estate	$	17,970	77.71	%	1.19	%	$	16,993	5	$	977	1
Residential first mortgages	1,402		6.06	%	0.09	%	1,402		3	—		—





Commercial equipment	3,754		16.23	%	0.25	%	3,754		15	—		—
Total	$	23,126	100.00	%	1.53	%	$	22,149	23	$	977	1