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 ~~September~~June 30, ~~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 ~~November 3, 2021,~~July 29, 2022, the registrant had ~~5,725,186~~5,651,269 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~~ Income/Loss						3
Consolidated Statements of Changes in Stockholders’ Equity						4
Consolidated Statements of Cash Flows						6
Notes to Consolidated Financial Statements						8

Item 2 – Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations						3741
Item 3 – Quantitative and Qualitative Disclosures about Market Risk						6974
Item 4 – Controls and Procedures						7075

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings						7176
Item 1A – Risk Factors						7176
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds						7176
Item 3 – Defaults Upon Senior Securities						7176
Item 4 – Mine Safety Disclosures						7176
Item 5 – Other Information						7176
Item 6 – Exhibits						7277

SIGNATURES						7378

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~~or phrases such as “is optimistic”, “project,” “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~~expectations; (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 we have ~~undertaking~~undertaken or that we undertake in the future; (iii) plans and cost savings regarding branch closings or consolidation; (iv) projections related to certain financial ~~metrics;~~metrics, including with respect to the quarterly expense run rate; (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, 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, 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;~~future may or may not be realized within the expected time frames; (vi) the impact of our adoption of the CECL standard; (vii) limitations on our ability to declare and pay dividends or engage in share repurchases; (viii) changes in the ~~Company's~~Company’s or ~~Community Bank of~~ the ~~Chesapeake’s~~Bank’s strategy, costs or difficulties related to integration matters might be greater than expected; (ix) availability of and costs associated with obtaining adequate and timely sources of liquidity; (x) the ability to maintain credit quality; (xi) general economic ~~trends;~~trends and conditions, including inflation and its impacts; (xii) changes in interest rates; (xiii) loss of deposits and loan demand to other financial institutions; (xiv) substantial changes in financial markets; (xv) changes in real estate value and the real estate market; (xxi) regulatory changes; (xvii) the impact of government shutdowns or sequestration; (xviii) the possibility of unforeseen events affecting the industry generally; (xix) the uncertainties associated with newly developed or acquired operations; (xx) the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future; (xxi) market disruptions and other effects of terrorist activities; and (xxii) 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)					(Unaudited)
(dollars in thousands, except per share amounts)	(dollars in thousands, except per share amounts)	September 30, 2021		December 31, 2020		(dollars in thousands, except per share amounts)	June 30, 2022		December 31, 2021
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	112,314	$	56,887	Cash and due from banks	$	16,164	$	108,990

Federal funds sold						Federal funds sold	37,320		—
Interest-bearing deposits with banks	Interest-bearing deposits with banks	34,929		20,178		Interest-bearing deposits with banks	34,659		30,664
Securities available for sale ("AFS"), at fair value	Securities available for sale ("AFS"), at fair value	456,664		246,105		Securities available for sale ("AFS"), at fair value	485,456		497,839

Equity securities carried at fair value through income	Equity securities carried at fair value through income	4,805		4,855		Equity securities carried at fair value through income	4,423		4,772
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
Federal Home Loan Bank ("FHLB") stock - at cost	Federal Home Loan Bank ("FHLB") stock - at cost	1,472		2,777		Federal Home Loan Bank ("FHLB") stock - at cost	1,234		1,472

Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans	Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans	54,807		107,960		Net U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") Loans	5,022		26,398
Portfolio Loans Receivable net of allowance for loan losses of $18,579 and $19,424		1,514,837		1,486,115
Portfolio loans receivable net of allowance for credit losses of $21,404 and $18,417						Portfolio loans receivable net of allowance for credit losses of $21,404 and $18,417	1,631,055		1,560,393
Net loans	Net loans	1,569,644		1,594,075		Net loans	1,636,077		1,586,791
Goodwill	Goodwill	10,835		10,835		Goodwill	10,835		10,835
Premises and equipment, net	Premises and equipment, net	21,795		20,271		Premises and equipment, net	21,802		21,427

Other real estate owned ("OREO")		1,536		3,109

Accrued interest receivable	Accrued interest receivable	6,045		8,717		Accrued interest receivable	6,099		5,588
Investment in bank owned life insurance	Investment in bank owned life insurance	38,713		38,061		Investment in bank owned life insurance	39,363		38,932
Core deposit intangible	Core deposit intangible	1,147		1,527		Core deposit intangible	821		1,032
Net deferred tax assets	Net deferred tax assets	8,790		7,909		Net deferred tax assets	20,223		9,033
Right of use assets - operating leases	Right of use assets - operating leases	6,215		7,831		Right of use assets - operating leases	6,123		6,124
Other assets	Other assets	3,581		3,095		Other assets	2,708		3,600
Total Assets	Total Assets	$	2,278,692	$	2,026,439	Total Assets	$	2,323,514	$	2,327,306
Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Deposits	Deposits					Deposits
Non-interest-bearing deposits	Non-interest-bearing deposits	$	432,606	$	362,079	Non-interest-bearing deposits	$	635,649	$	445,778
Interest-bearing deposits	Interest-bearing deposits	1,572,001		1,383,523		Interest-bearing deposits	1,449,727		1,610,386
Total deposits	Total deposits	2,004,607		1,745,602		Total deposits	2,085,376		2,056,164

Long-term debt	Long-term debt	12,249		27,302		Long-term debt	—		12,231

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%	19,496		19,526		Subordinated notes net of debt issuance costs - 4.75%	19,538		19,510
Lease liabilities - operating leases	Lease liabilities - operating leases	6,418		8,088		Lease liabilities - operating leases	6,372		6,343
Accrued expenses and other liabilities	Accrued expenses and other liabilities	19,794		15,908		Accrued expenses and other liabilities	15,357		12,925
Total Liabilities	Total Liabilities	2,074,564		1,828,426		Total Liabilities	2,138,643		2,119,173

Stockholders’ Equity	Stockholders’ Equity					Stockholders’ Equity
Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,724,011 and 5,903,613 shares, respectively		57		59
Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,649,729 and 5,718,528 shares, respectively						Common stock - par value $0.01; authorized - 15,000,000 shares; issued 5,649,729 and 5,718,528 shares, respectively	56		57
Additional paid in capital	Additional paid in capital	96,649		95,965		Additional paid in capital	97,455		96,896
Retained earnings	Retained earnings	107,890		97,944		Retained earnings	119,523		113,448
Accumulated other comprehensive (loss) income		(9)		4,504
Accumulated other comprehensive losses						Accumulated other comprehensive losses	(31,847)		(1,952)
Unearned ESOP shares	Unearned ESOP shares	(459)		(459)		Unearned ESOP shares	(316)		(316)
Total Stockholders’ Equity	Total Stockholders’ Equity	204,128		198,013		Total Stockholders’ Equity	184,871		208,133
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	2,278,692	$	2,026,439	Total Liabilities and Stockholders’ Equity	$	2,323,514	$	2,327,306

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share amounts)	(dollars in thousands, except per share amounts)	2021		2020		2021		2020		(dollars in thousands, except per share amounts)	2022		2021		2022		2021
Interest and Dividend Income	Interest and Dividend Income									Interest and Dividend Income
Loans, including fees	Loans, including fees	$	16,342	$	16,176	$	49,254	$	48,955	Loans, including fees	$	16,772	$	16,320	$	32,382	$	32,912
Interest and dividends on investment securities	Interest and dividends on investment securities	1,296		1,269		3,461		4,079		Interest and dividends on investment securities	1,924		1,101		3,590		2,165
Interest on deposits with banks	Interest on deposits with banks	21		38		66		126		Interest on deposits with banks	78		23		138		45
Total Interest and Dividend Income	Total Interest and Dividend Income	17,659		17,483		52,781		53,160		Total Interest and Dividend Income	18,774		17,444		36,110		35,122
Interest Expense	Interest Expense									Interest Expense
Deposits	Deposits	594		1,534		2,036		6,515		Deposits	819		640		1,332		1,442
Short-term borrowings	Short-term borrowings	—		14		—		111		Short-term borrowings	16		—		16		—
Long-term debt	Long-term debt	456		567		1,192		1,589		Long-term debt	371		369		725		736
Total Interest Expense	Total Interest Expense	1,050		2,115		3,228		8,215		Total Interest Expense	1,206		1,009		2,073		2,178
Net Interest Income	Net Interest Income	16,609		15,368		49,553		44,945		Net Interest Income	17,568		16,435		34,037		32,944
Provision for loan losses		—		2,500		586		10,100
Net Interest Income After Provision For Loan Losses		16,609		12,868		48,967		34,845
Provision for credit losses										Provision for credit losses	425		291		875		586
Provision (recovery) for unfunded commitments										Provision (recovery) for unfunded commitments	26		—		(5)		—
Net Interest Income After Provision For Credit Losses										Net Interest Income After Provision For Credit Losses	17,117		16,144		33,167		32,358
Noninterest Income	Noninterest Income									Noninterest Income
Loan appraisal, credit, and miscellaneous charges	Loan appraisal, credit, and miscellaneous charges	29		49		271		98		Loan appraisal, credit, and miscellaneous charges	44		44		220		242
Gain on sale or disposition of assets		—		6		68		6
Gain on sale of assets										Gain on sale of assets	—		68		—		68
Net gains on sale of investment securities	Net gains on sale of investment securities	—		229		586		670		Net gains on sale of investment securities	—		—		—		586
Unrealized (loss) gain on equity securities		(22)		—		(94)		115
Provision for loss on premises and equipment held for sale		(20)		—		(20)		—
Unrealized (losses) gains on equity securities										Unrealized (losses) gains on equity securities	(155)		13		(377)		(72)
Income from bank owned life insurance	Income from bank owned life insurance	220		222		652		661		Income from bank owned life insurance	217		218		431		432
Service charges	Service charges	987		839		3,066		2,530		Service charges	1,108		892		2,034		2,079
Referral fee income	Referral fee income	176		321		1,248		1,966		Referral fee income	—		621		361		1,072
Net gain on sale of loans held for sale		30		—		30		—
Loss on sale of loans		—		—		(191)		—
Net gains (losses) on sale of loans originated for sale										Net gains (losses) on sale of loans originated for sale	1		—		(3)		—
Gains (losses) on sale of loans										Gains (losses) on sale of loans	209		—		209		(191)
Total Noninterest Income	Total Noninterest Income	1,400		1,666		5,616		6,046		Total Noninterest Income	1,424		1,856		2,875		4,216
Noninterest Expense	Noninterest Expense									Noninterest Expense
Compensation and benefits	Compensation and benefits	5,650		5,099		15,770		15,001		Compensation and benefits	5,051		5,332		10,106		10,120
Occupancy expense	Occupancy expense	731		734		2,180		2,204		Occupancy expense	820		688		1,552		1,449
Advertising	Advertising	145		129		372		380		Advertising	159		148		223		227
Data processing expense	Data processing expense	840		990		2,766		2,842		Data processing expense	1,008		990		2,015		1,926
Professional fees	Professional fees	676		652		1,920		1,755		Professional fees	845		604		1,576		1,244

Depreciation of equipment		137		142		419		451
Depreciation of premises and equipment										Depreciation of premises and equipment	150		135		299		282

FDIC Insurance	FDIC Insurance	120		249		512		679		FDIC Insurance	177		140		356		392
OREO valuation allowance and expenses	OREO valuation allowance and expenses	20		421		689		2,303		OREO valuation allowance and expenses	—		488		6		669
Core deposit intangible amortization	Core deposit intangible amortization	121		144		380		452		Core deposit intangible amortization	102		126		211		259
Fraud losses (recoveries)										Fraud losses (recoveries)	30		(217)		70		1,112
Other expenses	Other expenses	1,007		891		3,965		2,464		Other expenses	996		944		2,004		1,846
Total Noninterest Expense	Total Noninterest Expense	9,447		9,451		28,973		28,531		Total Noninterest Expense	9,338		9,378		18,418		19,526
Income before income taxes	Income before income taxes	8,562		5,083		25,610		12,360		Income before income taxes	9,203		8,622		17,624		17,048
Income tax expense	Income tax expense	2,158		1,284		6,475		2,363		Income tax expense	2,369		2,190		4,502		4,317
Net Income	Net Income	$	6,404	$	3,799	$	19,135	$	9,997	Net Income	$	6,834	$	6,432	$	13,122	$	12,731
Earnings Per Common Share	Earnings Per Common Share									Earnings Per Common Share
Basic	Basic	$	1.12	$	0.64	$	3.29	$	1.70	Basic	$	1.21	$	1.10	$	2.32	$	2.17
Diluted	Diluted	$	1.12	$	0.64	$	3.29	$	1.70	Diluted	$	1.21	$	1.10	$	2.31	$	2.17

Cash dividends paid per common share										Cash dividends paid per common share	$	0.175	$	0.150	$	0.35	$	0.28

See notes to Consolidated Financial Statements

Table of Contents

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

(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2021 2020 2021 2020
Net Income $ 6,404 $ 3,799 $ 19,135 $ 9,997
Net unrealized holding (loss) gain arising during period, net of tax (benefit) expenses of $(1,083) and $34, and $(1,744) and $940, respectively. (3,072) 94 (4,946) 2,781
Reclassification adjustment for gains included in net income, net of tax expense of $0 and $59, and $153 and $175, respectively. — 169 433 495
Comprehensive Income $ 3,332 $ 4,062 $ 14,622 $ 13,273


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Net Income	$	6,834	$	6,432	$	13,122	$	12,731
Net unrealized holding (losses) gains arising during period, net of tax (benefits) expenses of $(4,539) and $486, and $(10,537) and $(661), respectively.	(12,878)		1,379		(29,895)		(1,874)
Reclassification adjustment for gains included in net income, net of tax expense of $0 and $0, and $0 and $153, respectively.	—		—		—		433
Comprehensive (Loss) Income	$	(6,044)	$	7,811	$	(16,773)	$	11,290

See notes to Consolidated Financial Statements

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

For the Three Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~
(dollars in thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Unearned ESOP Shares Total
Balance at June 30, 2021 $ 58 $ 96,411 $ 104,889 $ 3,063 $ (459) $ 203,962
Net Income — — 6,404 — — 6,404
Unrealized holding loss on investment securities net of tax $(1,083) — — — (3,072) — (3,072)
Cash dividend at $0.150 per common share — — (812) — — (812)
Dividend reinvestment — 45 (45) — — —
Net change in fair market value below cost of leveraged ESOP shares released — 2 — — — 2
Repurchase of common stock (1) — (2,546) — — (2,547)
Stock based compensation — 191 — — — 191
Balance at September 30, 2021 $ 57 $ 96,649 $ 107,890 $ (9) $ (459) $ 204,128
2021


(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 Loss		Unearned ESOP Shares		Total
Balance at March 31, 2022														Balance at March 31, 2022	$	57	$	97,189	$	115,179	$	(18,969)	$	(316)	$	193,140

Balance at June 30, 2020		$	59	$	95,687	$	89,781	$	4,517	$	(602)	$	189,442
Net Income	Net Income	—		—		3,799		—		—		3,799		Net Income	—		—		6,834		—		—		6,834
Unrealized holding gain on investment securities net of tax $93		—		—		—		263		—		263

Cash dividend at $0.125 per common share		—		—		(705)		—		—		(705)
Unrealized holding loss on investment securities, net of tax $(4,539)														Unrealized holding loss on investment securities, net of tax $(4,539)	—		—		—		(12,878)		—		(12,878)
Cash dividend at $0.175 per common share														Cash dividend at $0.175 per common share	—		—		(939)		—		—		(939)
Dividend reinvestment	Dividend reinvestment	—		34		(34)		—		—		—		Dividend reinvestment	—		53		(53)		—		—		—
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	—		(21)		—		—		—		(21)		Net change in fair market value below cost of leveraged ESOP shares released	—		3		—		—		—		3

Repurchase of common stock														Repurchase of common stock	(1)		—		(1,498)		—		—		(1,499)
Stock based compensation	Stock based compensation	—		99		—		—		—		99		Stock based compensation	—		210		—		—		—		210
Balance at September 30, 2020		$	59	$	95,799	$	92,814	$	4,780	$	(602)	$	192,850
Balance at June 30, 2022														Balance at June 30, 2022	$	56	$	97,455	$	119,523	$	(31,847)	$	(316)	$	184,871


(dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Unearned ESOP Shares		Total
Balance at March 31, 2021	$	59	$	96,181	$	103,294	$	1,684	$	(459)	$	200,759
Net Income	—		—		6,432		—		—		6,432
Unrealized holding gain on investment securities, net of tax $486	—		—		—		1,379		—		1,379

Cash dividend at $0.150 per common share	—		—		(841)		—		—		(841)
Dividend reinvestment	—		45		(45)		—		—		—
Net change in fair market value below cost of leveraged ESOP shares released	—		1		—		—		—		1

Repurchase of common stock	(1)		—		(3,951)		—		—		(3,952)
Stock based compensation	—		184		—		—		—		184
Balance at June 30, 2021	$	58	$	96,411	$	104,889	$	3,063	$	(459)	$	203,962

See notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

For the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~
(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 — — 19,135 — — 19,135
Unrealized holding loss on investment securities net of tax $(1,591) — — — (4,513) — (4,513)
Cash dividend at $0.425 per common share — — (2,355) — — (2,355)
Dividend reinvestment — 125 (125) — — —
Net change in fair market value below cost of leveraged ESOP shares released — (2) — — — (2)
Repurchase of common stock (2) — (6,709) — — (6,711)
Stock based compensation — 561 — — — 561
Balance at September 30, 2021 $ 57 $ 96,649 $ 107,890 $ (9) $ (459) $ 204,128
2021

(dollars in thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Unearned ESOP Shares Total
Balance at January 1, 2020 $ 59 $ 95,474 $ 85,059 $ 1,504 $ (602) $ 181,494
Net Income — — 9,997 — — 9,997
Unrealized holding gain on investment securities net of tax $1,115 — — — 3,276 — 3,276
Cash dividend at $0.375 per common share — — (2,115) — — (2,115)
Dividend reinvestment — 100 (100) — — —
Net change in fair market value over cost of leveraged ESOP shares released — (37) — — — (37)
Stock based compensation — 262 — — — 262
Balance at September 30, 2020 $ 59 $ 95,799 $ 92,814 $ 4,780 $ (602) $ 192,850


(dollars in thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		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	—		—		13,122		—		—		13,122
Unrealized holding gain on investment securities net of tax $(10,537)	—		—		—		(29,895)		—		(29,895)
Cash dividend at $0.350 per common share	—		—		(1,888)		—		—		(1,888)
Dividend reinvestment	—		105		(105)		—		—		—
Net change in fair market value below cost of leveraged ESOP shares released	—		9		—		—		—		9
Net change in unearned ESOP shares	—		—		—		—		—		—
Repurchase of common stock	(1)		—		(3,048)		—		—		(3,049)
Stock based compensation	—		445		—		—		—		445
Balance at June 30, 2022	$	56	$	97,455	$	119,523	$	(31,847)	$	(316)	$	184,871


(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	—		—		12,731		—		—		12,731
Unrealized holding gain on investment securities net of tax $(508)	—		—		—		(1,441)		—		(1,441)

Cash dividend at $0.275 per common share	—		—		(1,543)		—		—		(1,543)
Dividend reinvestment	—		80		(80)		—		—		—
Net change in fair market value over cost of leveraged ESOP shares released	—		(4)		—		—		—		(4)
Net change in unearned ESOP shares	—		—		—		—		—		—
Repurchase of common stock	(1)		—		(4,163)		—		—		(4,164)
Stock based compensation			370		—						370
Balance at June 30, 2021	$	58	$	96,411	$	104,889	$	3,063	$	(459)	$	203,962

See notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine Months Ended September 30,					Six Months Ended June 30,
(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	$	19,135	$	9,997	Net income	$	13,122	$	12,731
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		586		10,100
Provision for credit losses						Provision for credit losses	875		586
Recovery for unfunded commitments						Recovery for unfunded commitments	(5)		—
Depreciation and amortization	Depreciation and amortization	1,150		1,185		Depreciation and amortization	746		771
Provision for loss on premises held for sale		20		—

Loans originated for resale	Loans originated for resale	(1,479)		—		Loans originated for resale	(1,600)		—
Proceeds from sale of loans originated for sale	Proceeds from sale of loans originated for sale	1,514		—		Proceeds from sale of loans originated for sale	1,635		—
Net gains on sale of loans held for sale		(30)		—
Loss on sale of loans		191		—
Net (gain) loss on the sale of OREO		(16)		7
Net losses on sale of loans held for sale						Net losses on sale of loans held for sale	3		—
(Gains) losses on sale of loans						(Gains) losses on sale of loans	(209)		191
Net gains on the sale of OREO						Net gains on the sale of OREO	—		(16)
Gains on sales of investment securities	Gains on sales of investment securities	(586)		(670)		Gains on sales of investment securities	—		(586)
Unrealized loss (gain) on equity securities		94		(115)
Gain on sale or disposition of assets		(68)		(6)
Unrealized losses on equity securities						Unrealized losses on equity securities	377		72
Gains on sale of assets						Gains on sale of assets	—		(68)
Net amortization of premium/discount on investment securities	Net amortization of premium/discount on investment securities	636		70		Net amortization of premium/discount on investment securities	1,371		292
Net accretion of merger accounting adjustments	Net accretion of merger accounting adjustments	(256)		(509)		Net accretion of merger accounting adjustments	(105)		(165)
Net amortization of debt issuance costs	Net amortization of debt issuance costs	(30)		—		Net amortization of debt issuance costs	28		(44)
Amortization of core deposit intangible	Amortization of core deposit intangible	380		452		Amortization of core deposit intangible	211		259
Amortization of right of use asset	Amortization of right of use asset	304		377		Amortization of right of use asset	187		214
Net change in right of use assets and lease liabilities	Net change in right of use assets and lease liabilities	(302)		(302)		Net change in right of use assets and lease liabilities	(157)		(208)
Increase in OREO valuation allowance	Increase in OREO valuation allowance	641		2,177		Increase in OREO valuation allowance	—		641
Increase in cash surrender value of bank owned life insurance	Increase in cash surrender value of bank owned life insurance	(652)		(661)		Increase in cash surrender value of bank owned life insurance	(431)		(432)
Decrease (increase) in deferred income tax benefit		710		(2,253)
Decrease (increase) in accrued interest receivable		2,672		(3,956)
Increase in deferred income tax benefit						Increase in deferred income tax benefit	45		278
(Increase) decrease in accrued interest receivable						(Increase) decrease in accrued interest receivable	(511)		2,127
Stock based compensation	Stock based compensation	561		262		Stock based compensation	445		370
Net change due to deficit of fair market value over cost of leveraged ESOP shares released		(2)		(37)
Decrease (increase) in net deferred loan costs		2,324		3,542
Increase (decrease) in accrued expenses and other liabilities		3,886		1,236
(Increase) decrease in other assets		(917)		(917)
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	9		(4)
Decrease in net deferred loan costs						Decrease in net deferred loan costs	301		1,461
Increase in accrued expenses and other liabilities						Increase in accrued expenses and other liabilities	2,219		1,790
Decrease (increase) in other assets						Decrease (increase) in other assets	893		(1,146)
Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities	30,466		19,979		Net Cash Provided by Operating Activities	19,449		19,114

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	(265,704)		(107,351)		Purchase of AFS investment securities	(57,727)		(142,181)
Proceeds from redemption or principal payments of AFS investment securities	Proceeds from redemption or principal payments of AFS investment securities	36,408		26,731		Proceeds from redemption or principal payments of AFS investment securities	28,279		26,381

Proceeds from sale of AFS investment securities	Proceeds from sale of AFS investment securities	12,540		64,109		Proceeds from sale of AFS investment securities	—		12,540
Net decrease (increase) of FHLB stock		1,305		32
Net decrease of FHLB stock						Net decrease of FHLB stock	238		741

Net change in loans	Net change in loans	9,617		(176,388)		Net change in loans	(56,261)		(19,230)
Purchase of premises and equipment	Purchase of premises and equipment	(2,264)		(209)		Purchase of premises and equipment	(1,121)		(2,130)
Proceeds from sale of OREO	Proceeds from sale of OREO	947		2,831		Proceeds from sale of OREO	—		947

Proceeds from sale of loans	Proceeds from sale of loans	11,965		—		Proceeds from sale of loans	3,588		8,858
Proceeds from disposal of asset	Proceeds from disposal of asset	12		21		Proceeds from disposal of asset	—		12
Net Cash Used in Investing Activities	Net Cash Used in Investing Activities	(195,174)		(190,224)		Net Cash Used in Investing Activities	(83,004)		(114,062)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Continued)

~~(Unaudited)~~


		Nine Months Ended September 30,					Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021
Cash Flows from Financing Activities	Cash Flows from Financing Activities					Cash Flows from Financing Activities
Net increase in deposits	Net increase in deposits	$	259,005	$	267,769	Net increase in deposits	$	29,212	$	162,536
Proceeds from long-term debt		—		164,036

Payments of long-term debt	Payments of long-term debt	(15,053)		(76,194)		Payments of long-term debt	(12,231)		(35)
Net increase in short term borrowings		—		(5,000)

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

Dividends paid	Dividends paid	(2,355)		(2,115)		Dividends paid	(1,888)		(1,543)

Repurchase of common stock	Repurchase of common stock	(6,711)		(27)		Repurchase of common stock	(3,049)		(4,164)
Net Cash Provided by Financing Activities	Net Cash Provided by Financing Activities	234,886		325,469		Net Cash Provided by Financing Activities	12,044		156,794
Increase in Cash and Cash Equivalents		70,178		155,224
(Decrease) increase in Cash and Cash Equivalents						(Decrease) increase in Cash and Cash Equivalents	(51,511)		61,846

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 - September 30		$	147,243	$	187,693
Cash and Cash Equivalents - June 30						Cash and Cash Equivalents - June 30	$	88,143	$	138,911

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	$	3,205	$	9,072	Interest	$	2,095	$	2,378
Income taxes	Income taxes	$	6,278	$	7,133	Income taxes	$	3,491	$	4,460

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	$	164	$	303	Issuance of common stock for payment of compensation	$	154	$	—
Transfer from loans to OREO		$	—	$	1,240

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 ~~active~~ subsidiary, Community Bank of the Chesapeake (the “Bank”)., (collectively, the “Company”), included herein are unaudited.

The ~~consolidated financial statements~~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~~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~~Consolidated Financial Statements. 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 ~~nine~~six months ~~September~~June 30, ~~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~~Consolidated Financial Statements should be read in conjunction with the ~~consolidated financial statements~~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~~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~~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~~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 COVID-19 pandemic impacted the Company's customers abilities to fulfill their financial obligations. 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%.

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New Accounting Policy

Allowance for Credit Losses

On January 1, 2022, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) - Measurement of 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 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 foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances, adjusted for the 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”) percentages. At December 31, 2021, the Bank had purchased credit-deteriorated (“PCD”) loans from the County First acquisition with unpaid principal balances of $1.4 million and 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 related and

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

The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the 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 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 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 reduction or a delay in the payment of either interest or principal because of deterioration in the financial condition of the borrower. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not considered a TDR. Once an obligation has been classified as a TDR it continues to be considered 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 a loss when it became probable that a credit loss had occurred, with a model that immediately recognizes the credit loss expected to occur over the lifetime of a financial asset whether originated or purchased. Charge-offs are recorded to the ACL when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the ACL. Management believes the ACL is in accordance with U.S. GAAP and in compliance with appropriate regulatory guidelines.

The ACL includes 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 the impact of 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 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 was 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 compares the Company’s historical loan data to

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various national economic metrics during the same periods. The results show 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 credit 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 of recoveries) at a loan level 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 or not a loss occurred 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 from monthly cash flow schedules to apply PD and LGD assumptions. 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 greater than 89 days delinquent and any other loan identified by management for individual assessment. Reserves on individually assessed loans are measured on a loan-by-loan basis. Generally, consumer loans, including credit cards, are 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 90 days delinquent.

The methodology used to estimate the ACL is designed to be responsive to changes in portfolio credit quality and forecasted economic conditions. Changes due to new information are reflected in the pool-based allowance and in reserves assigned on an individual basis. Executive management closely monitors loss ratios, reviews the appropriateness of the ACL and presents conclusions to the Credit Risk Committee and the Audit Committee. The committees report to the Board as part of Board's quarterly review of our regulatory reporting and consolidated financial statements.

The calculation of the ACL excludes accrued interest receivable balances because these balances are reversed in a timely manner against previously recognized interest income when a loan is placed on non-accrual status.

Allowance for Credit Losses - AFS Debt securities

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

The impairment model for AFS debt securities measures fair value. 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 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 security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected 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 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 an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a noncredit-related impairment. As of June 30, 2022, the Company determined that the unrealized loss positions

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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.

The Bank elected as allowed under ASU No. 2016-13 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 June 30, 2022 and December 31, 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 has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and 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 Net Present Value ("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 generally uses the practical expedient of the fair value of the collateral, net of estimated selling costs, to determine the expected credit loss for 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 commitments is represented by the contractual amount of 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, 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.~~

~~COVID-19 Deferrals~~

On March 22, 2020, federal banking regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, ("the agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, "Receivables - Troubled Debt Restructurings by Creditors," ("ASC 310-40"), a restructuring of debt constitutes a troubled debt restructure ("TDR") if the creditor, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that 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 not to be considered TDRs. Under current law modifications were required to be executed between March 1, 2020, and the earlier of (A) January 1, 2022 or (B) 60 days after the date on which the national COVID-19 emergency terminates. The impacts of the interagency guidance are further described in the consolidated financial statements, notes to consolidated financial statements and Management's Discussion and Analysis of this Form 10Q and the Company’s 2020 Annual Report on Form 10-K.

The Company offered payment deferral programs for its customers who were adversely affected by the pandemic. Depending on the need of the client, the Company deferred full or partial loan payments up to 180 days. Interest and fees accrued to income, until the loan is placed in nonaccrual status, at which time interest income and fees accrued would be reversed. As of September 30, 2021 and December 31, 2020, the Company had $3.4 million and $35.4 million of loan deferrals, respectively.

Under the Coronavirus Aid, Relief and Economic Security ("CARES") Act, borrowers who 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 would not be reported as past due or nonaccrual for regulatory and financial reporting during the deferral period. If new information during the deferral period indicates that there is evidence of default, the Bank will change the classification rating and accrual status.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 ~~Allowance~~allowance for ~~Credit Losses ("ACL").~~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).

~~The Company is planning for CECL adoption. Our CECL model has been substantially developed and our third party model validation is substantially complete. We are conducting parallel runs~~In December 2019, the FASB issued ASU No 2019-10, Financial Instruments - Credit Losses (Topic 326). This update amends the effective date of ~~the loss estimation models throughout 2021. We are refining the qualitative components and forecasting components of our model.~~ ASU 2016-13 ~~will also require the establishment of an allowance for expected credit losses~~ for certain ~~debt securities and other financial assets.~~

~~The Company is required to adopt ASU No. 2016-13 for~~entities, including smaller reporting companies until fiscal years beginning after December 15, ~~2022.~~2022, including interim periods within those fiscal periods. Early adoption ~~is permitted, and the~~was permitted. The FASB has issued other ASUs that clarify items related to ASU 2016-13. The Company ~~expects to adopt ASU No. 2016-13 in the first quarter of 2022. Management expects to recognize a one-time cumulative effect adjustment to the allowance for credit losses as of the~~adopted this guidance effective January 1, 2022. At this time, we expect our implementation of CECL to increase our reserve for credit losses, but cannot reasonably estimate a range of the impact of the adoption. Our fourth quarter refinement of our CECL qualitative framework may impact the cumulative effect adjustment.

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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 historical mean loss rates. For loans that share similar risk characteristics and are collectively assessed, the Company uses a probability of 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 January 1, 2022, we recognized an increase to the opening 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 balance sheet date to estimating lifetime credit losses required by the CECL standard.

The impact of adoption was not significant to the Bank's regulatory capital. The Bank did not elect to phase-in, over a three-year period, the standard's initial impact on regulatory capital as permitted by the 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~~CECL did not have a material effect on available-for-sale securities, which are predominantly composed of ~~ASU 2019-05 on the Company's consolidated financial statements.~~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~~Consolidated Financial Statements.

ASU Update 2022-02 – Financial 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 ~~statements.~~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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized as follows:


		September 30, 2021									June 30, 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
Available-for-Sale ("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")		$	103,173	$	1,302	$	1,791	$	102,684
Residential Mortgage Backed Securities ("MBS")										Residential Mortgage Backed Securities ("MBS")	$	130,329	$	19	$	10,152	$	120,196
Residential Collateralized Mortgage Obligations ("CMOs")	Residential Collateralized Mortgage Obligations ("CMOs")	205,234		1,122		1,468		204,888		Residential Collateralized Mortgage Obligations ("CMOs")	192,524		47		11,601		180,970
U.S. Agency	U.S. Agency	11,773		35		8		11,800		U.S. Agency	14,544		—		1,668		12,876
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	241		7		5		243		Residential CMOs	180		—		16		164
Student Loan Trust ABSs	Student Loan Trust ABSs	57,244		623		155		57,712		Student Loan Trust ABSs	52,333		23		2,083		50,273

Municipal bonds	Municipal bonds	62,571		1,020		718		62,873		Municipal bonds	98,811		—		15,359		83,452

Corporate bonds										Corporate bonds	3,000		—		143		2,857
U.S. government obligations	U.S. government obligations	16,440		29		5		16,464		U.S. government obligations	36,806		—		2,138		34,668
Total AFS Securities	Total AFS Securities	$	456,676	$	4,138	$	4,150	$	456,664	Total AFS Securities	$	528,527	$	89	$	43,160	$	485,456

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	$	4,805	$	—	$	—	$	4,805	CRA investment fund	$	4,423	$	—	$	—	$	4,423

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	$	461,688	$	4,138	$	4,150	$	461,676	Total Investment Securities	$	533,157	$	89	$	43,160	$	490,086


		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
Available-for-Sale ("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 MBS	Residential MBS	$	33,248	$	1,735	$	30	$	34,953	Residential MBS	$	121,125	$	1,057	$	2,266	$	119,916
Residential CMOs	Residential CMOs	125,564		2,180		297		127,447		Residential CMOs	198,780		710		2,367		197,123

ABSs issued by Others:
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		—		44,478		Municipal bonds	92,556		1,169		884		92,841

U.S. government obligations	U.S. government obligations	1,500		—		—		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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~~At September~~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 $1.4 million and $1.1 million as of June 30, ~~2021~~2022, and December 31, ~~2020~~2021, respectively. AIR is included in the “accrued interest receivable” line item on the Company’s consolidated balance sheets.

At June 30, 2022 and December 31, 2021, securities with an amortized cost of ~~$49.5~~$56.9 million and ~~$48.2~~$50.9 million were pledged to secure certain customer deposits.

~~The~~During the quarter ended June 30, 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 AFS securities with aggregate carrying values of $11.9 ~~million for~~million.

Management does not believe that the ~~nine months ended September 30, 2021. During the year ended December 31, 2020, the Company recognized net gains of $1.4 million on the sale of~~ AFS debt securities ~~with carrying values of $62.5 million.~~

~~The Company’s investment portfolio includes securities that are~~ in an unrealized loss position as of ~~September~~June 30, 2021. The Company has no intent to sell these securities, and maintains the ability to hold them until all principal of the securities has been recovered. Declines in the fair values of these securities are due to interest rate movements.2022 have credit loss impairment. As of ~~September~~June 30, 2022, and December 31, 2021, the ~~Company considers all securities with~~gross unrealized loss positions were primarily related to ~~be temporarily impaired,~~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 the U.S. government, are widely recognized as “risk free,” and ~~consequently,~~have a long history of zero credit loss. The Company also performed credit reviews 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 investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not ~~believe~~intend to sell the investment securities that were in an unrealized loss position, and it is not more likely than not that the Company will ~~sustain any material realized losses as a result~~be required to sell the investment securities before recovery of ~~the current temporary decline in fair value. No charges related to OTTI were made during the three and nine months ended September 30, 2021, and the year ended December 31, 2020.~~their amortized cost basis, which may be at maturity. Management believes that the securities will either recover in market value or be paid off as 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 ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020~~2021 were as follows:


September 30, 2021		Less Than 12 Months				More Than 12 Months				Total
June 30, 2022														June 30, 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	$	188,243	$	2,803	$	12,640	$	464	$	200,883	$	3,267	Asset-backed securities issued by GSEs and U.S. Agencies	$	147,515	$	12,749	$	157,883	$	10,672	$	305,398	$	23,421

Residential CMOs		—		—		68		5		68		5
Asset-backed securities issued by Others														Asset-backed securities issued by Others	—		—		164		16		164		16
Student Loan Trust ABSs	Student Loan Trust ABSs	13,339		86		7,109		69		20,448		155		Student Loan Trust ABSs	11,633		1,026		37,072		1,057		48,705		2,083
Municipal bonds	Municipal bonds	28,783		707		1,011		11		29,794		718		Municipal bonds	52,238		9,881		31,214		5,478		83,452		15,359
Corporate bonds														Corporate bonds	2,857		143		—		—		2,857		143
U.S. government obligations	U.S. government obligations	3,997		5		1,500		—		5,497		5		U.S. government obligations	19,138		736		15,530		1,402		34,668		2,138
		$	234,362	$	3,601	$	22,328	$	549	$	256,690	$	4,150		$	233,381	$	24,535	$	241,863	$	18,625	$	475,244	$	43,160


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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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
Residential CMOs — — 87 9 87 9
Student Loan Trust ABSs 12,511 88 — — 12,511 88
$ 44,792 $ 408 $ 757 $ 16 $ 45,549 $ 424

Maturities

The amortized cost and estimated fair value of debt securities at ~~September~~June 30, ~~2021,~~2022, and December 31, ~~2020~~2021 by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call premiums or prepayment penalties.


		September 30, 2021				December 31, 2020					June 30, 2022				December 31, 2021
(dollars in thousands)	(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	Within one year	$	32,679	$	32,678	$	36,165	$	37,084	Within one year	$	36,130	$	33,185	$	36,859	$	36,665
Over one year through five years	Over one year through five years	109,422		109,419		60,669		62,209		Over one year through five years	141,354		129,835		121,308		120,668
Over five years through ten years	Over five years through ten years	167,788		167,784		67,158		68,862		Over five years through ten years	202,767		186,244		191,166		190,158
After ten years	After ten years	146,787		146,783		76,021		77,950		After ten years	148,276		136,192		151,145		150,348
Total AFS securities	Total AFS securities	$	456,676	$	456,664	$	240,013	$	246,105	Total AFS securities	$	528,527	$	485,456	$	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 June 30, 2022:


		September 30, 2021				December 31, 2020					June 30, 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	$	1,088,636	71.02	%	$	1,049,147	69.75	%	Commercial real estate	$	1,178,758	71.33	%
Residential first mortgages	Residential first mortgages	96,835		6.32	%	133,779		8.89	%	Residential first mortgages	84,782		5.13	%
Residential rentals	Residential rentals	172,082		11.22	%	139,059		9.24	%	Residential rentals	210,116		12.72	%
Construction and land development	Construction and land development	37,139		2.42	%	37,520		2.49	%	Construction and land development	31,068		1.88	%
Home equity and second mortgages	Home equity and second mortgages	26,518		1.73	%	29,129		1.94	%	Home equity and second mortgages	25,200		1.53	%
Commercial loans	Commercial loans	48,327		3.15	%	52,921		3.52	%	Commercial loans	43,472		2.63	%
Consumer loans	Consumer loans	2,168		0.14	%	1,027		0.07	%	Consumer loans	4,511		0.27	%
Commercial equipment	Commercial equipment	61,346		4.00	%	61,693		4.10	%	Commercial equipment	74,552		4.51	%
Gross portfolio loans		1,533,051		100.00	%	1,504,275		100.00	%

Total portfolio loans (1)										Total portfolio loans (1)	1,652,459		100.00	%
Less: Allowance for Credit Losses										Less: Allowance for Credit Losses	(21,404)		(1.30)	%
Total net portfolio loans										Total net portfolio loans	1,631,055
U.S. SBA PPP loans (1)										U.S. SBA PPP loans (1)	5,022
Total net loans										Total net loans	$	1,636,077

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:									Adjustments:
Net deferred costs	Net deferred costs	365		0.01	%	1,264		0.08	%	Net deferred costs	(133)		(0.01)	%
Allowance for loan losses	Allowance for loan losses	(18,579)		(1.21)	%	(19,424)		(1.29)	%	Allowance for loan losses	(18,417)		(1.17)	%
		(18,214)				(18,160)					(18,550)
Net portfolio loans	Net portfolio loans	1,514,837				1,486,115				Net portfolio loans	1,560,393

Gross U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans		56,424				110,320
Gross U.S. SBA PPP loans (1)										Gross U.S. SBA PPP loans (1)	27,276
Net deferred fees	Net deferred fees	(1,617)				(2,360)				Net deferred fees	(878)
Net U.S. SBA PPP Loans	Net U.S. SBA PPP Loans	54,807				107,960				Net U.S. SBA PPP Loans	26,398
Total net loans	Total net loans	$	1,569,644			$	1,594,075			Total net loans	$	1,586,791

Gross Loans		$	1,589,475			$	1,614,595
Total gross loans										Total gross loans	$	1,606,219

(1)Excludes accrued interest receivable of $4.7 million and $4.2 million, at June 30, 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.

Table of Contents

Deferred Costs/Fees

~~Net~~Portfolio net deferred ~~costs consist~~fees of $0.5 million at June 30, 2022 included deferred fees paid by customers of $4.6 million offset by deferred costs of $4.1 million. Deferred loan costs include premiums paid for the ~~estimated~~purchase of residential first mortgages and deferred loan origination costs ~~to produce the loans.~~ in accordance with ASC 310-20. Net deferred loan fees of $0.1 million at December 31, 2021 included deferred fees paid by customers of $4.1 million offset by deferred costs of $4.0 million.

U.S. SBA PPP loan net deferred fees ~~consist~~ of $0.2 million at June 30, 2022 included deferred fees paid by the U.S. SBA of $0.2 million partially offset by deferred costs of $18,000. U.S. SBA PPP net deferred loan fees of $0.5 million at December 31, 2021 included deferred fees paid by the SBA of $0.5 million offset by ~~estimated costs. Deferred~~deferred costs of $41,000. The net deferred fees ~~and costs~~ are being amortized ~~into~~as a component of interest income ~~as loans are repaid~~through the contractual maturity date of each U.S. SBA PPP loan. Net deferred fees include fees received by participant banks for each U.S. SBA PPP loan underwritten and funded net of costs incurred to underwrite the loans. Net deferred fees will be recognized in income when the U.S. SBA PPP loan is forgiven or ~~forgiven.~~paid.

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 ~~Bank's~~ commercial loan ~~portfolios include~~portfolio has business loans secured by real estate and real estate development ~~loans, commercial lines of credit and equipment~~ loans. At ~~September~~June 30, ~~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:

~~Table of Contents~~

Commercial Real Estate (“CRE”)

Commercial and other real estate ~~loan balances~~projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction ~~and financing for a variety of commercial properties. Construction~~ balances were ~~4.8%~~6.7% and ~~6.9%~~6.5% of the CRE portfolio at ~~September~~June 30, ~~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.

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.

Residential First Mortgages

Residential first mortgage loans are generally long-term (10 to 30 years) amortizing loans. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages.

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 $13.8 million or 0.8% of total portfolio loans of $1.7 billion at June 30, 2022 compared to $18.9 million or 1.2% of total gross portfolio loans of $1.6 billion at December 31, 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank serviced ~~$18.7~~$20.6 million and ~~$23.9~~$20.9 million, respectively, in residential mortgage loans for others.

Residential Rentals

Residential rental mortgage loans are amortizing long-term loans. ~~The loans are secured by income-producing 1-4 family units and apartments.~~ 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. 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.

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.

Table of Contents

Construction and Land Development

The Bank offers loans for the construction of residential dwellings. 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. Construction and Land Development loans are dependent on the successful completion of the underlying project, or the borrowers guarantee to repay the loan. As such, they are subject to the risks of the project including ~~changing prices~~the borrower’s ability to successfully manage construction and ~~interest rates.~~development activities. The repayment of these loans is also ~~dependent on the borrower’s ability~~subject to ~~successfully manage the construction~~economic risks such as changing prices and ~~development activities.~~interest rates.

Home Equity and Second Mortgage Loans

The Bank maintains a portfolio of home equity and second mortgage loans. 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

Commercial loans including lines of credit are short-term loans (5 years or less) that are secured by the equipment financed, the guarantees of the borrower, and other collateral. These loans are dependent on the success of the underlying business or the strength of the 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.~~credit and credit card loans. The repayment of these loans is dependent on the continued financial stability of 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. These~~security as determined by the Bank. Commercial loans are dependent on the success of the underlying business or the strength of the guarantor.

~~Table of Contents~~

U.S. SBA PPP Loans

U.S. SBA PPP loans 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.

~~Non-accrual and Aging Analysis~~

Table of ~~Current and Past Due~~ Contents

Loans

Non-accrual loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:


		September 30, 2021				June 30, 2022
(dollars in thousands)	(dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans			Total Non-accrual Loans		(dollars in thousands)	Nonaccrual with No Allowance for Credit Losses		Nonaccrual with Allowance for Credit Losses		Total Nonaccrual Loans
Commercial real estate	Commercial real estate	$	758	$	2,378		$	3,136	Commercial real estate	$	4,615	$	87	$	4,702
Residential first mortgages		182		269			451

Residential rentals	Residential rentals	257		704			961		Residential rentals	981		—		981

Home equity and second mortgages	Home equity and second mortgages	202		378			580		Home equity and second mortgages	267		—		267

Commercial loans									Commercial loans	—		25		25

Commercial equipment	Commercial equipment	—		32			32		Commercial equipment	10		250		260
		$	1,399	$	3,761		$	5,160

Total									Total	$	5,873	$	362	$	6,235

Interest Income on Nonaccrual Loans									Interest Income on Nonaccrual Loans	$	95	$	—	$	95


		December 31, 2020				June 30, 2022
(dollars in thousands)	(dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans			Total Non-accrual Loans		(dollars in thousands)	Non-accrual Delinquent Loans		Non-accrual Current Loans		Total Non-accrual Loans
Commercial real estate	Commercial real estate	$	11,428	$	5,184		$	16,612	Commercial real estate	$	—	$	4,702	$	4,702
Residential first mortgages		335		459			794

Residential rentals	Residential rentals	—		275			275		Residential rentals	—		981		981

Home equity and second mortgages	Home equity and second mortgages	202		293			495		Home equity and second mortgages	98		169		267
Commercial loans									Commercial loans	—		25		25

Commercial equipment	Commercial equipment	—		46			46		Commercial equipment	29		231		260
		$	11,965	$	6,257		$	18,222
										$	127	$	6,108	$	6,235


	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 $1.4 million from $7.6 million or 0.46% of total loans at December 31, 2021 to $6.2 million or 0.38% of total loans at June 30, 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.

At December 31, 2021, there were $6.7 million (87%) of non-accrual loans were current with all payments of principal and interest with 0 impairment and $1.0 million (13%) of non-accrual loans were delinquent with specific valuation reserves of $0.3 million.

Non-accrual loans at June 30, 2022 and December 31, ~~2020~~2021 included ~~3 TDRs totaling $1.52 million. There were~~ no ~~non-accrual TDR loans at September 30, 2021.~~

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 ~~$4.4~~$5.9 million and ~~$12.4~~$7.4 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Interest due but not recognized on these balances at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 were~~2021 was $21,000 and $0.1 ~~million and $0.4~~ million, respectively. Non-accrual loans with a specific allowance for impairment amounted to ~~$0.8~~$0.4 million and ~~$5.8~~$0.3 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Interest due but not recognized on these balances at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 were $0.1 million~~2021 was $3,000 and ~~$0.4 million,~~$1,000, respectively.

Table of Contents

The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. ~~Purchase Credit Impaired~~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 ("~~PCI"~~DPD") loans as of June 30, 2022 follows:


	June 30, 2022
(dollars in thousands)	31-60 DPD		61-89 DPD		90 DPD and Still Accruing		90 DPD and Not Accruing		Total Past Due		Current Non-Accrual Loans		Current Accrual Loans		Total Loans
Commercial real estate	$	625	$	—	$	—	$	—	$	625	$	4,702	$	1,173,431	$	1,178,758
Residential first mortgages	—		—		—		—		—		—		84,782		84,782
Residential rentals	—		185		—		—		185		981		208,950		210,116
Construction and land development	—		—		—		—		—		—		31,068		31,068
Home equity and second mortgages	40		—		—		98		138		169		24,893		25,200
Commercial loans	—		—		—		—		—		25		43,447		43,472
Consumer loans	14		7		49		—		70		—		4,441		4,511
Commercial equipment	29		—		—		—		29		231		74,292		74,552

U.S. SBA PPP	—		—		—		—		—		—		5,022		5,022
Total Loans	$	708	$	192	$	49	$	98	$	1,047	$	6,108	$	1,650,326	$	1,657,481

Loan delinquency (total past due) decreased $0.4 million from $1.4 million, or 0.09% of loans, at December 31, 2021 to $1.0 million, or 0.06% of loans, at June 30, 2022.

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 loans as of ~~September 30, 2021 and~~ December 31, ~~2020 were as~~2021 follows:

~~Table of Contents~~

~~Age Analysis of Past Due Loan Receivables and PCI Loans~~

September 30, 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 $ — $ — $ 759 $ 759 $ 1,144 $ 1,086,733 $ 1,088,636
Residential first mortgages — — 182 182 — 96,653 96,835
Residential rentals — 189 257 446 — 171,636 172,082
Construction and land dev. — — — — — 37,139 37,139
Home equity and second mtg. — — 202 202 — 26,316 26,518
Commercial loans — — — — — 48,327 48,327
Consumer loans — — — — — 2,168 2,168
Commercial equipment — — — — — 61,346 61,346
Total portfolio loans $ — $ 189 $ 1,400 $ 1,589 $ 1,144 $ 1,530,318 $ 1,533,051
U.S. SBA PPP loans $ — $ — $ — $ — $ — $ 56,424 $ 56,424

December 31, 2020
(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 $ — $ — $ 11,428 $ 11,428 $ 1,572 $ 1,036,147 $ 1,049,147
Residential first mortgages — — 335 335 — 133,444 133,779
Residential rentals — — — — — 139,059 139,059
Construction and land dev. — — — — — 37,520 37,520
Home equity and second mtg. 167 — 202 369 406 28,354 29,129
Commercial loans — — — — — 52,921 52,921
Consumer loans 8 — — 8 — 1,019 1,027
Commercial equipment — 4 — 4 — 61,689 61,693
Total portfolio loans $ 175 $ 4 $ 11,965 $ 12,144 $ 1,978 $ 1,490,153 $ 1,504,275
U.S. SBA PPP loans $ — $ — $ — $ — $ — $ 110,320 $ 110,320


	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 ~~September 30, 2021 and~~ December 31, ~~2020.~~

~~Table of Contents~~

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

~~Impaired loans, including TDRs, at September 30, 2021 and 2020 and at December 31, 2020 were as follows:~~

September 30, 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 $ 3,205 $ 2,377 $ 759 $ 3,136 $ 291 $ 3,146 $ 25 $ 3,177 $ 80
Residential first mortgages 884 872 — 872 — 873 7 878 25
Residential rentals 990 961 — 961 — 961 13 956 38
Home equity and second mtg. 602 580 — 580 — 581 3 583 10
Commercial equipment 490 455 32 487 32 489 5 493 16
Total $ 6,171 $ 5,245 $ 791 $ 6,036 $ 323 $ 6,050 $ 53 $ 6,087 $ 169

September 30, 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 $ 18,355 $ 16,000 $ 2,148 $ 18,148 $ 468 $ 18,181 $ 74 $ 18,243 $ 299
Residential first mortgages 1,741 1,739 — 1,739 — 1,747 11 1,770 39
Residential rentals 636 636 — 636 — 638 6 648 24
Home equity and second mtg. 552 540 — 540 — 542 3 607 12
Commercial loans 1,807 1,807 — 1,807 — 1,807 — 1,807 —
Consumer loans — — — — — — — — —
Commercial equipment 532 476 42 518 42 527 8 536 29
Total $ 23,623 $ 21,198 $ 2,190 $ 23,388 $ 510 $ 23,442 $ 102 $ 23,611 $ 403

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 — 1,989 — 2,043 70
Residential rentals 626 625 — 625 — 643 32
Home equity and second mtg. 568 555 — 555 — 559 15
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 September 30, 2021 and December 31, 2020 were as follows:~~

September 30, 2021 December 31, 2020
(dollars in thousands) Dollars Number of Loans Dollars Number of Loans
Commercial real estate $ — — $ 1,376 2
Residential first mortgages — — 247 2
Commercial equipment 455 1 471 2
Total TDRs 455 1 2,094 6
Less: TDRs included in non-accrual loans — — (1,522) (3)
Total accrual TDR loans $ 455 1 $ 572 3

~~The Company had specific reserves of $0.4 million on 6 TDRs totaling $2.1 million at December 31, 2020 and no reserves on TDRs at September 30,~~ 2021.

~~Table of Contents~~

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

The following tables detail activity in the ~~ALLL~~ACL at and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. 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 September 30, 2021
(dollars in thousands) Beginning Balance Charge-offs Recoveries Provisions Ending Balance
Commercial real estate $ 13,918 $ (491) $ 4 $ (12) $ 13,419
Residential first mortgages 847 — — 65 912
Residential rentals 1,186 — — 614 1,800
Construction and land development 332 — — 36 368
Home equity and second mortgages 242 — 1 6 249
Commercial loans 1,113 — 529 (733) 909
Consumer loans 28 — — 14 42
Commercial equipment 798 — 20 10 828
18,464 (491) 554 — 18,527
Purchase Credit Impaired 52 — — — 52
Total $ 18,516 $ (491) $ 554 $ — $ 18,579
Nine Months Ended September 30, 2021
(dollars in thousands) Beginning Balance Charge-offs Recoveries Provisions Ending Balance
Commercial real estate $ 13,744 $ (1,739) $ 6 $ 1,408 $ 13,419
Residential first mortgages 1,305 (142) — (251) 912
Residential rentals 1,413 (46) — 433 1,800
Construction and land development 401 — — (33) 368
Home equity and second mortgages 261 — 4 (16) 249
Commercial loans 1,222 (76) 539 (776) 909
Consumer loans 20 — — 22 42
Commercial equipment 1,058 (34) 57 (253) 828
19,424 (2,037) 606 534 18,527
Purchase Credit Impaired — — — 52 52
Total $ 19,424 $ (2,037) $ 606 $ 586 $ 18,579

1821

Table of Contents


Three Months Ended	Three Months Ended	September 30, 2020										Three Months Ended	June 30, 2022
(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	$	11,268	$	(15)	$	15	$	1,852	$	13,120	Commercial real estate	$	17,313	$	(280)	$	—	$	(200)	$	16,833
Residential first mortgages	Residential first mortgages	885		—		—		225		1,110		Residential first mortgages	284		(111)		—		82		255
Residential rentals	Residential rentals	1,059		—		—		420		1,479		Residential rentals	1,546		—		—		114		1,660
Construction and land development	Construction and land development	428		—		—		26		454		Construction and land development	137		—		—		29		166
Home equity and second mortgages	Home equity and second mortgages	259		—		7		46		312		Home equity and second mortgages	178		—		1		(36)		143
Commercial loans	Commercial loans	1,161		—		5		(87)		1,079		Commercial loans	319		(50)		1		(32)		238
Consumer loans	Consumer loans	15		(6)		—		11		20		Consumer loans	73		(6)		—		65		132
Commercial equipment	Commercial equipment	1,243		(44)		49		7		1,255		Commercial equipment	1,532		—		42		403		1,977
		16,318		(65)		76		2,500		18,829

Purchase Credit Impaired		—		—		—		—		—
													$	21,382	$	(447)	$	44	$	425	$	21,404
Total		$	16,318	$	(65)	$	76	$	2,500	$	18,829

Nine Months Ended		September 30, 2020
(dollars in thousands)		Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate		$	7,398	$	(944)	$	15	$	6,651	$	13,120
Residential first mortgages		464		—		—		646		1,110
Residential rentals		397		—		—		1,082		1,479
Construction and land development		273		—		—		181		454
Home equity and second mortgages		149		(25)		8		180		312
Commercial loans		1,086		(1,027)		15		1,005		1,079
Consumer loans		10		(6)		—		16		20
Commercial equipment		1,165		(326)		77		339		1,255
		10,942		(2,328)		115		10,100		18,829

Purchase Credit Impaired		—		—		—		—		—

Total		$	10,942	$	(2,328)	$	115	$	10,100	$	18,829


Three Months Ended	June 30, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	13,285	$	(1)	$	1	$	633	$	13,918
Residential first mortgages	1,024		—		—		(177)		847
Residential rentals	1,361		—		—		(175)		1,186
Construction and land development	365		—		—		(33)		332
Home equity and second mortgages	263		—		2		(23)		242
Commercial loans	1,012		(26)		5		122		1,113
Consumer loans	29		—		—		(1)		28
Commercial equipment	917		(34)		22		(107)		798
	$	18,256	$	(61)	$	30	$	239	$	18,464

Purchase Credit Impaired**	$	—	$	—	$	—	$	52	$	52


Six Months Ended	June 30, 2022
(dollars in thousands)	Beginning Balance		Impact of ASC 326 Adoption		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	13,095	$	3,734	$	(280)	$	—	$	284	$	16,833
Residential first mortgages	1,002		(679)		(111)		—		43		255
Residential rentals	2,175		(586)		—		—		71		1,660
Construction and land development	260		(82)		—		—		(12)		166
Home equity and second mortgages	274		(86)		—		1		(46)		143
Commercial loans	582		(290)		(50)		1		(5)		238
Consumer loans	58		2		(6)		—		78		132
Commercial equipment	971		483		—		61		462		1,977


	$	18,417	$	2,496	$	(447)	$	63	$	875	$	21,404

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

1922

Table of Contents


Six Months Ended	June 30, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provisions		Ending Balance
Commercial real estate	$	13,744	$	(1,248)	$	2	$	1,420	$	13,918
Residential first mortgages	1,305		(142)		—		(316)		847
Residential rentals	1,413		(46)		—		(181)		1,186
Construction and land development	401		—		—		(69)		332
Home equity and second mortgages	261		—		3		(22)		242
Commercial loans	1,222		(76)		10		(43)		1,113
Consumer loans	20		—		—		8		28
Commercial equipment	1,058		(34)		37		(263)		798
	$	19,424	$	(1,546)	$	52	$	534	$	18,464

Purchase Credit Impaired**	$	—	$	—	$	—	$	52	$	52

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

The following ~~tables detail loan receivable and allowance balances at September 30, 2021 and 2020 and December 31, 2020.~~table presents the amortized cost basis of collateral-dependent loans by class of loans.

September 30, 2021 December 31, 2020 September 30, 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 $ 3,136 $ 1,084,356 $ 1,144 $ 1,088,636 $ 17,714 $ 1,029,861 $ 1,572 $ 1,049,147 $ 18,148 $ 1,002,258 $ 1,581 $ 1,021,987
Residential first mortgages 872 95,963 — 96,835 1,989 131,790 — 133,779 1,739 146,017 — 147,756
Residential rentals 961 171,121 — 172,082 625 138,434 — 139,059 636 137,314 — 137,950
Construction and land development — 37,139 — 37,139 — 37,520 — 37,520 — 36,061 — 36,061
Home equity and second mortgages 580 25,938 — 26,518 555 28,168 406 29,129 540 30,483 404 31,427
Commercial loans — 48,327 — 48,327 — 52,921 — 52,921 1,807 57,087 — 58,894
Consumer loans — 2,168 — 2,168 — 1,027 — 1,027 — 1,081 — 1,081
Commercial equipment 487 60,859 — 61,346 512 61,181 — 61,693 518 60,858 — 61,376
$ 6,036 $ 1,525,871 $ 1,144 $ 1,533,051 $ 21,395 $ 1,480,902 $ 1,978 $ 1,504,275 $ 23,388 $ 1,471,159 $ 1,985 $ 1,496,532
Allowance for loan losses:
Commercial real estate $ 291 $ 13,128 $ 52 $ 13,471 $ 1,316 $ 12,428 $ — $ 13,744 $ 468 $ 12,652 $ — $ 13,120
Residential first mortgages — 912 — 912 — 1,305 — 1,305 — 1,110 — 1,110
Residential rentals — 1,800 — 1,800 — 1,413 — 1,413 — 1,479 — 1,479
Construction and land development — 368 — 368 — 401 — 401 — 454 — 454
Home equity and second mortgages — 249 — 249 — 261 — 261 — 312 — 312
Commercial loans — 909 — 909 — 1,222 — 1,222 — 1,079 — 1,079
Consumer loans — 42 — 42 — 20 — 20 — 20 — 20
Commercial equipment 32 796 — 828 40 1,018 — 1,058 42 1,213 — 1,255
$ 323 $ 18,204 $ 52 $ 18,579 $ 1,356 $ 18,068 $ — $ 19,424 $ 510 $ 18,319 $ — $ 18,829


	June 30, 2022
(dollars in thousands)	Business/Other Assets		Real Estate
Commercial real estate	$	—	$	4,702
Residential first mortgages	—		410
Residential rentals	—		981

Home equity and second mortgages	—		266
Commercial loans	25		—

Commercial equipment	699		—


Total	$	724	$	6,359

2023

Table of Contents

Credit Quality Indicators

Credit quality indicators as of ~~September~~June 30, ~~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) 9/30/2021 12/31/2020 9/30/2021 12/31/2020 9/30/2021 12/31/2020
Unrated $ — $ 162,434 $ — $ 1,036 $ — $ 47,605
Pass 1,084,372 866,648 37,139 36,484 171,121 90,633
Special mention 600 2,417 — — — 821
Substandard 3,664 17,648 — — 961 —
Doubtful — — — — — —
Loss — — — — — —
Total $ 1,088,636 $ 1,049,147 $ 37,139 $ 37,520 $ 172,082 $ 139,059

Commercial Loans Commercial Equipment Total Commercial Portfolios
(dollars in thousands) 9/30/2021 12/31/2020 9/30/2021 12/31/2020 9/30/2021 12/31/2020
Unrated $ — $ 12,962 $ — $ 26,585 $ — $ 250,622
Pass 48,327 39,959 61,134 31,091 1,402,093 1,064,815
Special mention — — 180 3,977 780 7,215
Substandard — — 32 40 4,657 17,688
Doubtful — — — — — —
Loss — — — — — —
Total $ 48,327 $ 52,921 $ 61,346 $ 61,693 $ 1,407,530 $ 1,340,340
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	$	352,690	$	75,430	$	107,948	$	189,510	$	282,681	$	149,006	$	—	$	1,157,265
Watch	—		4,239		—		5,566		—		6,986		—		16,791
Special Mention	—		—		—		—		—		—		—		—
Substandard	825		—		3,018		—		859		—		—		4,702
Total	$	353,515	$	79,669	$	110,966	$	195,076	$	283,540	$	155,992	$	—	$	1,178,758

Residential Rentals
Pass	$	46,786	$	4,555	$	23,050	$	43,010	$	66,964	$	24,770	$	—	$	209,135
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	981		—		—		—		—		—		—		981
Total	$	47,767	$	4,555	$	23,050	$	43,010	$	66,964	$	24,770	$	—	$	210,116

Construction and Land Development
Pass	$	7,069	$	12,082	$	7,294	$	1,515	$	2,762	$	346	$	—	$	31,068
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Total	$	7,069	$	12,082	$	7,294	$	1,515	$	2,762	$	346	$	—	$	31,068

Commercial Loans
Pass	$	25,598	$	2,942	$	3,278	$	1,746	$	7,623	$	2,260	$	—	$	43,447
Watch	—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		25		—		—		—		25
Total	$	25,598	$	2,942	$	3,278	$	1,771	$	7,623	$	2,260	$	—	$	43,472

Commercial Equipment
Pass	$	9,375	$	5,930	$	16,662	$	8,526	$	14,016	$	19,443	$	—	$	73,952
Watch	—		180		—		—		—		—		—		180
Special Mention	—		—		160		—		—		—		—		160
Substandard	29		—		231		—		—		—		—		260
Total	$	9,404	$	6,110	$	17,053	$	8,526	$	14,016	$	19,443	$	—	$	74,552








Total loans by risk category	$	443,353	$	105,358	$	161,641	$	249,898	$	374,905	$	202,811	$	—	$	1,537,966

Table of Contents

Non-Commercial Portfolios** U.S. SBA PPP Loans Total Loans Portfolios
(dollars in thousands) 9/30/2021 12/31/2020 6/30/2020 12/31/2019 9/30/2021 12/31/2020
Unrated $ 103,696 $ 136,792 $ 56,424 $ 110,320 $ 160,120 $ 497,734
Pass 21,355 25,125 — — 1,423,448 1,089,940
Special mention — 457 — — 780 7,672
Substandard 470 1,561 — — 5,127 19,249
Doubtful — — — — — —
Loss — — — — — —
Total $ 125,521 $ 163,935 $ 56,424 $ 110,320 $ 1,589,475 $ 1,614,595
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	$	41,010	$	3,932	$	19,673	$	8,904	$	5,332	$	5,931	$	—	$	84,782
Non-performing	—		—		—		—		—		—		—		—
Total	$	41,010	$	3,932	$	19,673	$	8,904	$	5,332	$	5,931	$	—	$	84,782

Home Equity and Second Mortgages
Performing	$	16,607	$	1,324	$	920	$	1,337	$	3,569	$	1,349	$	—	$	25,106
Non-performing	94		—		—		—		—		—		—		94
Total	$	16,701	$	1,324	$	920	$	1,337	$	3,569	$	1,349	$	—	$	25,200

Consumer Loans
Performing	$	53	$	3	$	126	$	161	$	733	$	464	$	2,971	$	4,511
Non-performing	—		0		—		0		0		0		—		—
Total	$	53	$	3	$	126	$	161	$	733	$	464	$	2,971	$	4,511

U.S. SBA PPP Loans
Performing	$	—	$	—	$	—	$	—	$	5,022	$	—	$	—	$	5,022
Non-performing	—		—		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	5,022	$	—	$	—	$	5,022

Total loans evaluated by performing status	$	57,764	$	5,259	$	20,719	$	10,402	$	14,656	$	7,744	$	2,971	$	119,515

Total Recorded Investment	$	501,117	$	110,617	$	182,360	$	260,300	$	389,561	$	210,555	$	2,971	$	1,657,481

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


	Commercial Loans		Commercial Equipment		Total Commercial Portfolios
(dollars in thousands)	12/31/2021		12/31/2021		12/31/2021
Unrated	$	—	$	—	$	—
Pass	50,574		62,326		1,454,440
Special mention	—		—		—
Substandard	—		173		4,743
Doubtful	—		—		—
Loss	—		—		—
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) 9/30/2021 12/31/2020 9/30/2021 12/31/2020 9/30/2021 12/31/2020
Performing $ 96,653 $ 133,444 $ 26,316 $ 28,927 $ 2,168 $ 1,027
Nonperforming 182 335 202 202 — —
Total $ 96,835 $ 133,779 $ 26,518 $ 29,129 $ 2,168 $ 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. ~~Commercial loan relationships~~Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a ~~minimum annually.~~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 ~~June 30,~~March 31, 2021, the Bank's policy was amended to risk rate all commercial loan relationships.

Home equity and second mortgages and consumer loans ~~and residential first mortgages~~ 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.~~rating due to a delinquency payment history.

~~Management regularly reviews~~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.~~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– ~~Loans rated pass display none~~

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 ~~characteristics~~industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Table of ~~classified loans.~~Contents

Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention ~~loans have potential weaknesses that deserve management’s close attention. If uncorrected these weaknesses may result in deterioration~~

These credits, while protected by the financial strength of the ~~repayment prospects~~borrowers, guarantors or collateral, ~~position~~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 ~~some future date. Special mention assets are not adversely classified.~~least quarterly.

Rating 8 - Substandard – ~~A substandard loan is~~

Substandard assets are assets that are inadequately protected by the ~~current net~~sound worth ~~and payment~~or paying capacity of the borrower or of the collateral pledged. ~~Loans~~Substandard loans are the first adversely classified ~~as substandard~~loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. ~~These loans~~They are characterized by the ~~distinct~~ possibility ofthat 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 – ~~A loan classified as doubtful~~

Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has ~~all~~determined that loss is not only possible but is probable and the ~~weaknesses inherent in~~risk is close to certain that loss will occur. When a loan ~~classified as substandard with~~is assigned to this category the ~~added characteristics that~~Bank will identify the ~~weaknesses make collection or liquidation~~probable loss and the loan will receive a specific reserve in ~~full improbable on~~ the ~~basis of currently existing facts, conditions, and values.~~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 June 30, 2022 and December 31, 2021 were as follows:


	June 30, 2022			December 31, 2021
(dollars in thousands)	Number of Loans	Recorded Investments		Number of Loans	Recorded Investments







Commercial equipment	1	$	438	1	$	447


Total TDRs	1	$	438	1	$	447
Less: TDRs included in non-accrual loans	—	—		—	—
Total accrual TDR loans	1	$	438	1	$	447

The Company had 0 specific reserves on TDRs at June 30, 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 June 30, 2022 and $19,000 for the year ended December 31, 2021. There were 0 TDRs added during the three months ended June 30, 2022 or the year ended December 31, 2021.

Table of Contents

~~PCI~~Prior to adoption of CECL

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Impaired loans, including TDRs at December 31, 2021 and June 30, 2021, were as follows:


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


	June 30, 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	$	12,007	$	6,478	$	5,294	$	11,772	$	743	$	11,782	$	114	$	11,802	$	224
Residential first mortgages	888		879		—		879		—		880		6		883		18
Residential rentals	999		984		—		984		—		990		12		994		25

Home equity and second mortgages	602		584		—		584		—		615		3		617		6


Commercial equipment	527		475		35		510		35		531		1		549		13
Total	$	15,023	$	9,400	$	5,329	$	14,729	$	778	$	14,798	$	136	$	14,845	$	286

Table of Contents

The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at June 30, 2021 and December 31, 2021.


	December 31, 2021								June 30, 2021
(dollars in thousands)	Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchased Credit Impaired		Total		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchased Credit Impaired		Total
Loan Receivables:
Commercial real estate	$	4,890	$	1,109,479	$	1,116	$	1,115,485	$	11,772	$	1,098,578	$	1,263	$	1,111,613
Residential first mortgages	866		90,254		—		91,120		879		104,603		—		105,482
Residential rentals	942		194,093		—		195,035		984		141,226		—		142,210
Construction and land development	—		35,590		—		35,590		—		36,918		—		36,918
Home equity and second mortgages	601		25,037		—		25,638		584		27,743		399		28,726
Commercial loans	—		50,574		—		50,574		—		47,567		—		47,567
Consumer loans	—		3,002		—		3,002		—		1,442		—		1,442
Commercial equipment	1,195		61,304		—		62,499		510		59,408		—		59,918
	$	8,494	$	1,569,333	$	1,116	$	1,578,943	$	14,729	$	1,517,485	$	1,662	$	1,533,876
Allowance for credit losses:
Commercial real estate	$	93	$	13,002	$	—	$	13,095	$	743	$	13,175	$	52	$	13,970
Residential first mortgages	—		1,002		—		1,002		—		847		—		847
Residential rentals	—		2,175		—		2,175		—		1,186		—		1,186
Construction and land development	—		260		—		260		—		332		—		332
Home equity and second mortgages	—		274		—		274		—		242		—		242
Commercial loans	—		582		—		582		—		1,113		—		1,113
Consumer loans	—		58		—		58		—		28		—		28
Commercial equipment	173		798		—		971		35		763		—		798
	$	266	$	18,151	$	—	$	18,417	$	778	$	17,686	$	52	$	18,516

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

~~PCI loans had an unpaid principal balance of $1.4 million and a carrying value of $1.1 million at September 30, 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 considering prepayment assumptions and to discount those cash flows at appropriate rates of ~~interest considering prepayment assumptions.~~interest. 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 upon the adoption of CECL, there was no carryover of a previously established allowance for credit losses from acquisition. A summary of changes in the accretable yield for PCI loans for the three and ~~nine~~six months ended ~~September~~June 30, 2021 ~~and 2020~~ and the year ended December 31, ~~2020~~2021 follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,		Six Months Ended June 30,		Year Ended
(dollars in thousands)	(dollars in thousands)	2021		2020		2021		2020		(dollars in thousands)	2021		2021		December 31, 2021
Accretable yield, beginning of period	Accretable yield, beginning of period	$	324	$	415	$	342	$	677	Accretable yield, beginning of period	$	311	$	342	$	342
Additions	Additions	—		—		—		—		Additions	—		—		—
Accretion	Accretion	(31)		(46)		(92)		(184)		Accretion	(29)		(60)		(117)
Reclassification from nonaccretable difference	Reclassification from nonaccretable difference	15		—		29		24		Reclassification from nonaccretable difference	15		15		43
Other changes, net	Other changes, net	(15)		—		14		(148)		Other changes, net	29		29		55
Accretable yield, end of period	Accretable yield, end of period	$	293	$	369	$	293	$	369	Accretable yield, end of period	$	326	$	326	$	323

~~Table of Contents~~

At September 30, 2021 performing acquired loans, which totaled $49.3 million, included a $0.5 million net acquisition accounting fair market value adjustment, representing a 1.09% discount; and PCI loans which totaled $1.1 million, included a $0.3 million adjustment, representing a 20.59% discount. At December 31, ~~2020~~2021 acquired performing loans, which totaled ~~$59.0~~$41.1 million, included ana $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 ~~September~~June 30, 2021 ~~and 2020~~ there was ~~$91,000 and~~ $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 ~~second~~fourth quarter of 2021 ~~and 2020~~ which resulted in a reclassification of ~~$37,000, net of PCI impairment, and $24,000, respectively,~~$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 ~~September 30, 2021 and~~ December 31, ~~2020:~~2021:


BY ACQUIRED AND NON-ACQUIRED	BY ACQUIRED AND NON-ACQUIRED	September 30, 2021		%		December 31, 2020		%		BY ACQUIRED AND NON-ACQUIRED	December 31, 2021		%
Acquired loans - performing	Acquired loans - performing	$	49,342	3.10	%	$	58,999	3.66	%	Acquired loans - performing	$	41,066	2.56	%
Acquired loans - PCI		1,144		0.07	%	1,978		0.12	%
Acquired loans - purchase credit impaired ("PCI")										Acquired loans - purchase credit impaired ("PCI")	1,116		0.07	%
Total acquired loans	Total acquired loans	50,486		3.17	%	60,977		3.78	%	Total acquired loans	42,182		2.63	%
U.S. SBA PPP loans	U.S. SBA PPP loans	56,424		3.55	%	110,320		6.83	%	U.S. SBA PPP loans	27,276		1.70	%
Non-acquired loans**	Non-acquired loans**	1,482,565		93.28	%	1,443,298		89.39	%	Non-acquired loans**	1,536,761		95.68	%
Gross loans	Gross loans	1,589,475				1,614,595				Gross loans	1,606,219
Net deferred fees	Net deferred fees	(1,252)		(0.08)	%	(1,096)		(0.07)	%	Net deferred fees	(1,011)		(0.06)	%
Total loans, net of deferred fees	Total loans, net of deferred fees	$	1,588,223			$	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.

~~Table of Contents~~

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 September 30, 2021		As of December 31, 2020		(dollars in thousands)	As of June 30, 2022		As of December 31, 2021

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


		As of September 30, 2021						As of December 31, 2020							As of June 30, 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		$	3,590	$	(2,443)	$	1,147	$	3,590	$	(2,063)	$	1,527
Core deposit intangible ("CDI")														Core deposit intangible ("CDI")	$	3,590	$	(2,769)	$	821	$	3,590	$	(2,558)	$	1,032

The estimated aggregate future amortization expense for intangible assets remaining as of ~~September~~June 30, ~~2021~~2022 is as follows:


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

Remainder of 2021		$	115
2022		398
Remainder of 2022				Remainder of 2022	$	187
2023	2023	302		2023	302
2024	2024	205		2024	205
2025	2025	109		2025	109
Thereafter		18
2026				2026	18
		$	1,147
					$	821

~~As of September~~At June 30, ~~2021,~~2022 the Company ~~did not have impairment to~~had goodwill of $10.8 million or ~~core deposit intangibles ("CDI").~~

~~In the third quarter~~5.86% 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 goodwillequity 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$0.8 million or 0.44% 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.equity.

Management performed its annual analysis of goodwill and CDI during the fourth quarter of ~~2020~~2021 and concluded that there was no impairment at December 31, ~~2020.~~2021. At ~~September~~June 30, ~~2021,~~2022, management's analysis concluded that there were no changes in the Company's financial statements or operations subsequent to the ~~measurement date and the~~ fourth quarter ~~2020~~2021 annual ~~analysis~~analyses that would indicate that it was more likely than not that goodwill or CDI was impaired.

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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.~~properties incorporating current appraised values, local real estate market conditions and related costs. An analysis of ~~OREO~~ activity follows.


		Nine Months Ended September 30,				Years Ended December 31,			Six Months Ended June 30,				Years Ended December 31,
(dollars in thousands)	(dollars in thousands)	2021		2020		2020		(dollars in thousands)	2022		2021		2021
Balance at beginning of year	Balance at beginning of year	$	3,109	$	7,773	$	7,773	Balance at beginning of year	$	—	$	3,109	$	3,109
Additions of underlying property	Additions of underlying property	—		1,240		1,240		Additions of underlying property	—		—		—
Disposals of underlying property	Disposals of underlying property	(932)		(2,838)		(2,882)		Disposals of underlying property	—		(932)		(1,722)
Valuation allowance	Valuation allowance	(641)		(2,177)		(3,022)		Valuation allowance	—		(641)		(1,387)
Balance at end of period	Balance at end of period	$	1,536	$	3,998	$	3,109	Balance at end of period	$	—	$	1,536	$	—

Expenses applicable to OREO assets included the following.


		Nine Months Ended September 30,					Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		(dollars in thousands)	2022		2021

Valuation allowance	Valuation allowance	$	641	$	2,177	Valuation allowance	$	—	$	641
Losses (gains) on dispositions	Losses (gains) on dispositions	(16)		7		Losses (gains) on dispositions	—		(16)
Operating expenses	Operating expenses	64		119		Operating expenses	6		44
		$	689	$	2,303		$	6	$	669

The Company had $0.1 million impaired loans secured by residential real estate for which formal foreclosure proceedings were in process as of June 30, 2022. There were no ~~impaired~~ loans secured by residential real estate for which formal foreclosure proceedings were in the process as of ~~September 30, 2021 and~~ December 31, ~~2020.~~2021.

NOTE 6 – DEPOSITS

Deposits consist of the following:


(dollars in thousands)		September 30, 2021				December 31, 2020
											June 30, 2022				December 31, 2021
(dollars in thousands)	(dollars in thousands)	Balance		%		Balance		%		(dollars in thousands)	Balance		%		Balance		%
		$	432,606	21.58	%	$	362,079	20.74	%	Noninterest-bearing demand	$	635,649	30.48	%	$	445,778	21.68	%
Interest-bearing:	Interest-bearing:									Interest-bearing:
Demand	Demand	764,482		38.14	%	590,159		33.81	%	Demand	635,344		30.47	%	790,481		38.45	%
Money market deposits	Money market deposits	355,582		17.74	%	340,725		19.52	%	Money market deposits	380,712		18.26	%	372,717		18.13	%
Savings	Savings	112,282		5.60	%	98,783		5.66	%	Savings	119,363		5.72	%	119,767		5.82	%
Certificates of deposit	Certificates of deposit	339,655		16.94	%	353,856		20.27	%	Certificates of deposit	314,308		15.07	%	327,421		15.92	%
Total interest-bearing	Total interest-bearing	1,572,001		78.42	%	1,383,523		79.26	%	Total interest-bearing	1,449,727		69.52	%	1,610,386		78.32	%

Total Deposits	Total Deposits	$	2,004,607	100.00	%	$	1,745,602	100.00	%	Total Deposits	$	2,085,376	100.00	%	$	2,056,164	100.00	%

The aggregate amount of certificates of deposit that exceed the FDIC insurance limit of $250,000 at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was ~~$63.2~~$56.7 million and ~~$64.3~~$57.6 million, respectively.

The Company monitors all customer deposit concentrations at or above 2% of total deposits. At ~~September~~June 30, ~~2021, the Bank had 3 customer deposit relationships that exceeded 2% of total deposits, totaling $383.4 million. At December 31, 2020,~~2022, the Bank had 2 customer deposit relationships that exceeded 2% of total deposits, totaling ~~$238.8 million.~~$310.7 million which represented 14.9% of total deposits. At December 31, 2021, 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. Topic 842 requires operating lease agreements 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)

September 30, 2021

December 31, 2020

(dollars in thousands)

June 30, 2022

December 31, 2021

Operating Leases

Operating lease right of use asset, net

6,215

7,831

Operating lease right of use asset, net

6,123

6,124

Operating lease liability

6,418

8,088

Operating lease liability

6,372

6,343

Weighted average remaining lease term

17.18 years

18.21 years

Weighted average remaining lease term

16.06 years

17.21 years

Weighted average discount rate

3.51

3.52

Weighted average discount rate

3.50

3.51

Remaining lease term - min

6.0 years

0.7 years

Remaining lease term - min

5.0 years

6.3 years

Remaining lease term - max

23.0 years

24.0 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.~~expense in the Unaudited Consolidated Statements of Income.


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		2021		2020		(dollars in thousands)	2022		2021		2022		2021

Operating lease cost	Operating lease cost	$	146	$	198	$	489	$	594	Operating lease cost	$	150	$	146	$	297	$	343

Cash paid for lease liability	Cash paid for lease liability	$	150	$	175	$	485	$	521	Cash paid for lease liability	$	135	$	159	$	266	$	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 ~~September~~June 30, ~~2021~~2022

Lease payments due:
Within one year	$	~~527~~564
After one but within two years	~~536~~582
After two but within three years	~~542~~600
After three but within four years	~~568~~635
After four but within five years	~~593~~638
After five years	~~5,974~~5,526
Total undiscounted cash flows	~~8,740~~$	8,545
Discount on cash flows	~~2,322~~2,173
Total lease liability	$	~~6,418~~6,372

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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.

NOTE 9 – SUBORDINATED NOTES

On October 14, 2020, 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 the ~~three month~~three-month Secured Overnight Financing Rate ("SOFR") 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 $28,000 and $28,000 for the six months ended June 30, 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.

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. The rules revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.

As of ~~September~~June 30, ~~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 ~~Rule~~Rules. Management believes, as of June 30, 2022 and ~~Management believes~~December 31, 2021, that the Company and the Bank met all capital adequacy ~~requirements.~~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.


Regulatory Capital and Ratios	Regulatory Capital and Ratios			The Company						The Bank						Regulatory Capital and Ratios	Regulatory Minimum Ratio + CCB(1)		The Company										The Bank
(dollars in thousands)	(dollars in thousands)			September 30, 2021			December 31, 2020			September 30, 2021			December 31, 2020			(dollars in thousands)		June 30, 2022				December 31, 2021					June 30, 2022					December 31, 2021
Common equity	Common equity			$	204,128		$	198,013		$	231,839		$	217,142		Common equity						$	184,871				$	208,133				$	212,697				$	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)			(851)			(1,129)			(851)			(1,129)			Core deposit intangible (net of deferred tax liability)			(609)					(766)					(609)					(766)
AOCI (gains) losses				9			(4,504)			9			(4,504)
AOCI losses																AOCI losses			31,847					1,952					31,847					1,952
Common Equity Tier 1 Capital	Common Equity Tier 1 Capital			192,451			181,545			220,162			200,674			Common Equity Tier 1 Capital			205,274					198,484					233,100					226,912
TRUPs	TRUPs			12,000			12,000			—			—			TRUPs			12,000					12,000					—					—
Tier 1 Capital	Tier 1 Capital			204,451			193,545			220,162			200,674			Tier 1 Capital			217,274					210,484					233,100					226,912
Allowable reserve for credit losses and other Tier 2 adjustments	Allowable reserve for credit losses and other Tier 2 adjustments			18,630			19,475			18,630			19,475			Allowable reserve for credit losses and other Tier 2 adjustments			21,666					18,468					21,666					18,468
Subordinated notes	Subordinated notes			19,496			19,526			—			—			Subordinated notes			19,538					19,510					—					—
Tier 2 Capital	Tier 2 Capital			$	242,577		$	232,546		$	238,792		$	220,149		Tier 2 Capital			$	258,478				$	248,462				$	254,766				$	245,380

Risk-Weighted Assets ("RWA")	Risk-Weighted Assets ("RWA")			$	1,618,114		$	1,582,581		$	1,616,802		$	1,580,786		Risk-Weighted Assets ("RWA")			$	1,760,591				$	1,665,296				$	1,758,662				$	1,663,831
Average Assets ("AA")	Average Assets ("AA")			$	2,172,192		$	2,025,061		$	2,170,563		$	2,023,325		Average Assets ("AA")			$	2,306,077				$	2,281,210				$	2,304,266				$	2,279,835
Regulatory Min. Ratio + CCB (1)

Common Tier 1 Capital to RWA	Common Tier 1 Capital to RWA	7.00	%	11.89		%	11.47		%	13.62		%	12.69		%	Common Tier 1 Capital to RWA	7.00%		11.66		%			11.92		%			13.25		%			13.64		%
Tier 1 Capital to RWA	Tier 1 Capital to RWA	8.50		12.64			12.23			13.62			12.69			Tier 1 Capital to RWA	8.50%		12.34					12.64					13.25					13.64
Tier 2 Capital to RWA	Tier 2 Capital to RWA	10.50		14.99			14.69			14.77			13.93			Tier 2 Capital to RWA	10.50%		14.68					14.92					14.49					14.75
Tier 1 Capital to AA (Leverage) (2)	Tier 1 Capital to AA (Leverage) (2)	n/a		9.41			9.56			10.14			9.92			Tier 1 Capital to AA (Leverage) (2)	n/a		9.42					9.23					10.12					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. ~~Some of the~~These restrictions generally require ~~advance~~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 ~~three and six months~~quarter ended ~~September~~June 30, ~~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 ~~GSEs,~~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 ~~GSEs~~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~~individually evaluated and an ~~allowance for loan loss~~ACL 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.~~segregated individually. Management estimates the fair value of ~~impaired~~individually evaluated loans using one of several methods, including the collateral value, market value of similar debt, or discounted cash flows. ~~Impaired~~Individually evaluated loans not requiring ~~a specific~~an allowance are those for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, substantially all of the ~~impaired~~individually evaluated loans were ~~evaluated~~ based onupon 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.

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 measured at fair value on a recurring basis.

(dollars in thousands) September 30, 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 $ 102,684 $ — $ 102,684 $ —
CMOs 204,888 — 204,888 —
U.S. Agency 11,800 — 11,800 —
Asset-backed securities issued by Others:
Residential CMOs 243 — 243 —
Student Loan Trust ABSs 57,712 — 57,712 —
Municipal bonds 62,873 — 62,873 —
U.S. government obligations 16,464 — 16,464 —
Total AFS securities $ 456,664 $ — $ 456,664 $ —
Equity securities carried at fair value through income
CRA investment fund $ 4,805 $ — $ 4,805 $ —
Non-marketable equity securities
Other equity securities $ 207 $ — $ 207 $ —

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(dollars in thousands)	(dollars in thousands)	December 31, 2020								(dollars in thousands)	June 30, 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
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	$	120,196	$	—	$	120,196	$	—
CMOs	CMOs	127,447		—		127,447		—		CMOs	180,970		—		180,970		—

Asset-backed securities issued by others:
U.S. Agency										U.S. Agency	12,876		—		12,876		—
Asset-backed securities issued by Others:										Asset-backed securities issued by Others:
Residential CMOs	Residential CMOs	288		—		288		—		Residential CMOs	164		—		164		—
Student Loan Trust ABSs	Student Loan Trust ABSs	37,439		—		37,439		—		Student Loan Trust ABSs	50,273		—		50,273		—

Municipal bonds	Municipal bonds	44,478		—		44,478		—		Municipal bonds	83,452		—		83,452		—

Corporate bonds										Corporate bonds	2,857		—		2,857		—
U.S. government obligations	U.S. government obligations	1,500		—		1,500		—		U.S. government obligations	34,668		—		34,668		—
Total AFS securities	Total AFS securities	$	246,105	$	—	$	246,105	$	—	Total AFS securities	$	485,456	$	—	$	485,456	$	—

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	$	4,423	$	—	$	4,423	$	—

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	$	—

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

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


(dollars in thousands)	December 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	$	119,916	$	—	$	119,916	$	—
CMOs	197,123		—		197,123		—
U.S. Agency	14,304		—		14,304		—
Asset-backed securities issued by others:
Residential CMOs	221		—		221		—
Student Loan Trust ABSs	56,574		—		56,574		—

Municipal bonds	92,841		—		92,841		—

U.S. government obligations	16,860		—		16,860		—
Total AFS securities	$	497,839	$	—	$	497,839	$	—

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

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

Mortgage banking derivative
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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were included in the tables below.

(dollars in thousands) September 30, 2021
Description of Asset Fair Value Level 1 Level 2 Level 3
Loans with impairment
Commercial real estate $ 468 $ — $ — $ 468
Total loans with impairment 468 — — 468
Other real estate owned $ 1,536 $ — $ — $ 1,536

(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
Other real estate owned $ 3,109 $ — $ — $ 3,109

~~Loans with impairment had unpaid principal balances of $0.8 million and $5.8 million at September 30, 2021 and December 31, 2020, respectively.~~

~~The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at September 30, 2021 and December 31, 2020.~~


(dollars in thousands)	June 30, 2022
Description of Asset	Fair Value		Level 1		Level 2		Level 3
Individually assessed loans
Commercial real estate	$	—	$	—	$	—	$	—
Commercial loans	—		—		—		—
Commercial equipment	64		—		—		64
Total individually assessed loans with an ACL	$	64	$	—	$	—	$	64
Premises and equipment held for sale	$	—	$	—	$	—	$	—
Other real estate owned	$	—	$	—	$	—	$	—

~~September~~(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 an allowance had unpaid principal balances of $0.4 million and $0.3 million at June 30, 2022 and December 31, 2021, respectively.

The following tables provide information describing the unobservable inputs used in Level 3 fair value measurements at June 30, 2022 and December 31, 2021.

June 30, ~~2021~~2022

Fair Value

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

(dollars in thousands)

Description of Asset

Loans with ~~impairment~~individually assessed loans

~~468~~64

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

Management discount for ~~property~~equipment type ~~selling costs~~ and current market conditions

0% - 50% ~~(41%)~~- 100%

~~Other real estate owned~~

~~1,536~~

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

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

~~0% - 50% (54%)~~

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% (23%)~~100% - 75%

~~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.


September 30, 2021		Carrying Amount			Fair Value				Fair Value Measurements
June 30, 2022															June 30, 2022				Carrying Amount				Fair Value				Fair Value Measurements
Description of Asset (dollars in thousands)	Description of Asset (dollars in thousands)			Carrying Amount					Fair Value				Level 1				Level 2								Level 3		Description of Asset (dollars in thousands)								Level 1					Level 2					Level 3
Assets	Assets																Assets
Investment securities - AFS	Investment securities - AFS	$	456,664				$	456,664			$	—			$	456,664				$	—	Investment securities - AFS			$	485,456			$	485,456			$	—				$	485,456				$	—

Equity securities carried at fair value through income	Equity securities carried at fair value through income	4,805			4,805				—				4,805				—			Equity securities carried at fair value through income			4,423				4,423				—					4,423					—
Non-marketable equity securities in other financial institutions	Non-marketable equity securities in other financial institutions	207			207				—				207				—			Non-marketable equity securities in other financial institutions			207				207				—					207					—
FHLB Stock	FHLB Stock	1,472			1,472				—				1,472				—			FHLB Stock			1,234				1,234				—					1,234					—

Net loans receivable	Net loans receivable	1,569,644			1,560,392				—				—				1,560,392			Net loans receivable			1,636,077				1,573,581				—					—					1,573,581
Accrued Interest Receivable		6,045			6,045				—				6,045				—
Accrued interest receivable																				Accrued interest receivable			6,099				6,099				—					6,099					—
Investment in BOLI	Investment in BOLI	38,713			38,713				—				38,713				—			Investment in BOLI			39,363				39,363				—					39,363					—

Liabilities	Liabilities																			Liabilities
Savings, NOW and money market accounts	Savings, NOW and money market accounts	$	1,664,952		$	1,664,952			$	—			$	1,664,952			$	—		Savings, NOW and money market accounts			$	1,771,068			$	1,771,068			$	—				$	1,771,068				$	—
Time deposits	Time deposits	339,655			340,463				—				340,463				—			Time deposits			314,308				314,330				—					314,330					—

Long-term debt		12,249			12,461				—				12,461				—

TRUPs	TRUPs	12,000			11,355				—				11,355				—			TRUPs			12,000				11,048				—					11,048					—
Subordinated notes	Subordinated notes	19,496			21,102				—				21,102				—			Subordinated notes			19,538				19,463				—					19,463					—

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:

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December 31, 2020		Carrying Amount			Fair Value				Fair Value Measurements
December 31, 2021															December 31, 2021				Carrying Amount				Fair Value				Fair Value Measurements
Description of Asset (dollars in thousands)	Description of Asset (dollars in thousands)			Carrying Amount					Fair Value				Level 1				Level 2								Level 3		Description of Asset (dollars in thousands)								Level 1					Level 2					Level 3
Assets	Assets																Assets
Investment securities - AFS	Investment securities - AFS	$	246,105				$	246,105			$	—			$	246,105				$	—	Investment securities - AFS			$	497,839			$	497,839			$	—				$	497,839				$	—

Equity securities carried at fair value through income	Equity securities carried at fair value through income	4,855			4,855				—				4,855				—			Equity securities carried at fair value through income			4,772				4,772				—					4,772					—
Non-marketable equity securities in other financial institutions	Non-marketable equity securities in other financial institutions	207			207				—				207				—			Non-marketable equity securities in other financial institutions			207				207				—					207					—
FHLB Stock	FHLB Stock	2,777			2,777				—				2,777				—			FHLB Stock			1,472				1,472				—					1,472					—

Net loans receivable	Net loans receivable	1,594,075			1,581,922				—				—				1,581,922			Net loans receivable			1,586,791				1,578,032				—					—					1,578,032
Accrued Interest Receivable		8,717			8,717				—				8,717				—
Accrued interest receivable																				Accrued interest receivable			5,588				5,588				—					5,588					—
Investment in BOLI	Investment in BOLI	38,061			38,061				—				38,061				—			Investment in BOLI			38,932				38,932				—					38,932					—
Mortgage ranking derivatives																				Mortgage ranking derivatives			28				28				—					—					28

Liabilities	Liabilities																			Liabilities
Savings, NOW and money market accounts	Savings, NOW and money market accounts	$	1,391,746		$	1,391,746			$	—			$	1,391,746			$	—		Savings, NOW and money market accounts			$	1,728,743			$	1,728,743			$	—				$	1,728,743				$	—
Time deposits	Time deposits	353,856			355,478				—				355,478				—			Time deposits			327,421				328,083				—					328,083					—

Long-term debt	Long-term debt	27,302			27,805				—				27,805				—			Long-term debt			12,231				12,391				—					12,391					—
TRUPs	TRUPs	12,000			9,444				—				9,444				—			TRUPs			12,000				11,589				—					11,589					—
Subordinated notes	Subordinated notes	19,526			20,106				—				20,106				—			Subordinated notes			19,510				20,979				—					20,979					—

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had outstanding loan commitments and standby letters of credit with customers of ~~$80.2~~$90.1 million and ~~$66.5~~$64.4 million, respectively, and ~~$22.3~~$19.9 million and ~~$20.0~~$22.0 million, respectively. Additionally, at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, customers had ~~$237.1~~$240.2 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 ~~values~~value of these instruments ~~differ~~differs significantly from their carrying values.

The fair value estimates presented herein are based on pertinent information available to management as of ~~September~~June 30, ~~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~~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 ~~income (loss),~~gain, net of tax, for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021.


	Three Months Ended June 30, 2022		Three Months Ended June 30, 2021		Six Months Ended June 30, 2022		Six Months Ended June 30, 2021
(dollars in thousands)	Net Unrealized Gains And Losses		Net Unrealized Gains And Losses		Net Unrealized Gains And Losses		Net Unrealized Gains And Losses
Beginning of period	$	(18,969)	$	1,684	$	(1,952)	$	4,504
Other comprehensive (losses) gains, net of tax before reclassifications	(12,878)		1,379		(29,895)		(1,874)
Amounts reclassified from accumulated other comprehensive gain	—		—		—		433
Net other comprehensive (losses) gains	(12,878)		1,379		(29,895)		(1,441)

End of period	$	(31,847)	$	3,063	$	(31,847)	$	3,063

As of the six months ended June 30, 2021, ~~and 2020.~~reclassification adjustment was due to the gain on sale of AFS investment securities of $0.6 million.

Three Months Ended September 30, 2021 Three Months Ended September 30, 2020 Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
(dollars in thousands) Net Unrealized Gains And Losses Net Unrealized Gains And Losses Net Unrealized Gains And Losses Net Unrealized Gains And Losses
Beginning of period $ 3,063 $ 4,517 $ 4,504 $ 1,504
Other comprehensive (loss) gain, net of tax before reclassifications (3,072) 94 (4,946) 2,781
Amounts reclassified from accumulated other comprehensive gain — 169 433 495
Net other comprehensive (loss) income (3,072) 263 (4,513) 3,276
End of period $ (9) $ 4,780 $ (9) $ 4,780

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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

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outstanding if dilutive potential common shares had been issued. ~~Common~~Potential common shares that may behave been issued by the Company related to outstanding unvested restricted stock ~~units~~unit and performance stock unit awards were determined using the treasury stock method and ~~are~~ 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 three and six months ended June 30, 2022, there were 564 and 426, respectively of no unvested restricted stock and performance stock unit awards which were excluded from the calculation as their effect would be anti-dilutive. There we no antidilutive awards that were excluded from the calculation for the three and six months ended June 30, 2021. 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)	(dollars in thousands, except per share amounts)	Three Months Ended September 30,				Nine Months Ended September 30,				(dollars in thousands, except per share amounts)	Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021

Net Income	Net Income	$	6,404	$	3,799	$	19,135	$	9,997	Net Income	$	6,834	$	6,432	$	13,122	$	12,731

Average number of common shares outstanding	Average number of common shares outstanding	5,709,814		5,895,074		5,813,704		5,892,107		Average number of common shares outstanding	5,647,821		5,845,009		5,667,909		5,866,510
Dilutive effect of common stock equivalents	Dilutive effect of common stock equivalents	10,187		—		9,514		—		Dilutive effect of common stock equivalents	9,912		11,945		10,256		11,188
Average number of shares used to calculate diluted EPS	Average number of shares used to calculate diluted EPS	5,720,001		5,895,074		5,823,218		5,892,107		Average number of shares used to calculate diluted EPS	5,657,733		5,856,954		5,678,165		5,877,698

Anti-dilutive shares	Anti-dilutive shares	40		—		3,355		—		Anti-dilutive shares	564		—		426		—

Earnings Per Common Share	Earnings Per Common Share									Earnings Per Common Share
Basic	Basic	$	1.12	$	0.64	$	3.29	$	1.70	Basic	$	1.21	$	1.10	$	2.32	$	2.17
Diluted	Diluted	$	1.12	$	0.64	$	3.29	$	1.70	Diluted	$	1.21	$	1.10	$	2.31	$	2.17

NOTE 15 – INCOME TAXES

The Company files a consolidated federal income tax ~~return.~~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 September 30,						Nine Months Ended September 30,						(dollars in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
		2021			2020			2021			2020				2022			2021			2022			2021
Current income tax expense	Current income tax expense	$	1,448		$	2,119		$	6,048		$	4,616		Current income tax expense	$	2,620		$	2,144		$	4,547		$	4,039
Deferred income tax expense (benefit)		710			(835)			427			(2,253)
Deferred income tax expense														Deferred income tax expense	(251)			46			(45)			278
Income tax expense as reported	Income tax expense as reported	$	2,158		$	1,284		$	6,475		$	2,363		Income tax expense as reported	$	2,369		$	2,190		$	4,502		$	4,317

Effective tax rate	Effective tax rate	25.2		%	25.3		%	25.3		%	19.1		%	Effective tax rate	25.7		%	25.4		%	25.5		%	25.3		%

Net deferred tax assets totaled ~~$8.8~~$20.2 million at ~~September~~June 30, ~~2021~~2022 and ~~$7.9~~$9.0 million at December 31, ~~2020. No~~2021. $0.0 million valuation allowance for deferred tax assets was recorded at ~~September~~June 30, ~~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 and nine months ended September 30, 2021 was primarily due to a higher pretax income and 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.

~~Table of Contents~~

~~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 and nine months ended September 30, 2021 and 2020:~~

Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands) 2021 2020 2021 2020
Deposit account expenses $ 130 $ 108 $ 372 $ 320
Insurance 111 46 319 143
ATM expenses 93 79 236 247
Fraud losses 132 32 1,243 64
Other expenses 541 626 1,795 1,690
$ 1,007 $ 891 $ 3,965 $ 2,464

For the nine months ended September 30, 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 submitted an insurance claim that could result in a recovery of a portion of the expense. As of the nine months ended September 30, 2021, the Company recovered approximately $0.2 million from other financial institutions related to the wire transfer incident.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~~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 ~~following table shows selected historical consolidated~~Company considers its determination of the allowance for credit losses ("ACL"), goodwill impairment, 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 ~~data~~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 ~~Company for the three and nine months~~fiscal year ended ~~September 30, 2021 and 2020 and as of September 30, 2021 and~~ December 31, ~~2020. This table should be read together~~2021, as filed with the ~~Company's consolidated financial statements~~SEC.

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

(Unaudited) (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
KEY OPERATING RATIOS
Return on average assets ("ROAA") 1.17 % 0.73 % 1.20 % 0.68 %
Return on average common equity ("ROACE") 12.45 7.86 12.53 7.06
Return on Average Tangible Common Equity ("ROATCE")** 13.41 8.65 13.53 7.85
Average total equity to average total assets 9.40 9.33 9.58 9.66
Interest rate spread 3.22 3.15 3.31 3.19
Net interest margin 3.28 3.27 3.38 3.34
Cost of funds 0.21 0.46 0.23 0.63
Cost of deposits 0.12 0.37 0.15 0.55
Cost of debt 3.19 1.16 2.73 1.42
Efficiency ratio(1)
52.46 55.48 52.52 55.95
Non-interest expense to average assets 1.73 1.82 1.82 1.95
Net operating expense to average assets(2)
1.47 1.50 1.47 1.53
Average interest-earning assets to average interest-bearing liabilities 132.54 125.40 130.95 125.14
Net charge-offs to average portfolio loans (0.02) — 0.13 0.20
COMMON SHARE DATA
Basic net income per common share $ 1.12 $ 0.64 $ 3.29 $ 1.70
Diluted net income per common share 1.12 0.64 3.29 1.70
Cash dividends paid per common share 0.150 0.125 0.425 0.375
Weighted average common shares outstanding:
Basic 5,709,814 5,895,074 5,813,704 5,892,107
Diluted 5,720,001 5,895,074 5,823,218 5,892,107
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.

OVERVIEW

Community Bank of the Chesapeake (the “Bank”) is headquartered in Southern Maryland with 12 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.

~~_______________________________________~~

**~~Non-GAAP financial measure. See reconciliation~~The Company’s income is primarily earned from interest received on its loans and investments. The Company's primary source of ~~GAAP~~funds for making these loans and ~~non-GAAP measures.~~

~~(1)Efficiency ratio~~investments is ~~defined as noninterest expense divided by~~its deposits. One of the ~~sum~~key measures of the Company's success is its net interest income, ~~plus noninterest income.~~or the difference between the income on loans and investments, and the expense on 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 growth and operating efficiency to deliver strong results during 2022. During the first six months of 2022, we had robust portfolio loan growth, strong non-interest bearing and transaction deposit growth, and continued to optimize our branch and virtual banking operations.

•The Company reported record net income for the three months ended June 30, 2022 of $6.8 million, or $1.21 per diluted common share compared to net income of $6.4 million or $1.10 per diluted common share for the quarter ended June 30, 2021. The Company reported record net income for the six months ended June 30, 2022 of $13.1 million or diluted earnings per share of $2.31 compared to net income for the comparable 2021 period of $12.7 million or diluted earnings per share of $2.17.

~~(2)~~•Portfolio loan end of period contractual rates increased by 21 basis points to 4.05% at June 30, 2022 compared to December 31, 2021. The ~~net operating expense ratio~~loan portfolio is ~~defined~~positioned for rising rates with $482.1 million or 29% of loans, excluding the allowance for credit losses, scheduled to reprice monthly or in the next three months and an additional $53.1 million or 3% repricing the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years at June 30, 2022. In addition, increased non-interest bearing accounts as ~~noninterest expense less noninterest income divided by average assets.~~a percentage of deposits also better positions the Company for a rising rate environment.

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(Unaudited)
(dollars in thousands, except per share amounts) September 30, 2021 December 31, 2020
COMMON SHARE DATA
Book value per common share $ 35.66 $ 33.54
Tangible book value per common share** 33.57 31.45
Common shares outstanding at end of period 5,724,011 5,903,613
OTHER DATA
Full-time equivalent employees 196 189
Branches 11 12
Loan Production Offices 4 4
CAPITAL RATIOS
Tier 1 capital to average assets 9.41 % 9.56 %
Tier 1 common capital to risk-weighted assets 11.89 11.47
Tier 1 capital to risk-weighted assets 12.64 12.23
Total risk-based capital to risk-weighted assets 14.99 14.69
Common equity to assets 8.96 9.77
Tangible common equity to tangible assets ** 8.48 9.22
~~_______________________________________~~•Total portfolio loans increased $73.6 million or 9.3% annualized to $1,652.5 million from December 31, 2021, as the Company maintained its market dominance in Southern Maryland and continued to gain market share in Virginia. The loan pipeline at June 2022 was $166.0 million, which is expected to provide solid loan growth in the third quarter.

**•Non-interest-bearing accounts increased $189.9 million to $635.6 million or 30.48% of deposits at June 30, 2022, from 21.68% of deposits at December 31, 2021. Transaction deposits increased $42.3 million, or 4.90% annualized, to $1,771.1 million in the first six months of 2022. The Company's change in funding mix has well positioned the balance sheet for a rising rate environment.

•As of June 30, 2022, the FOMC had increased the federal funds target rate range to between 1.50%-1.75%. As a result of the Company's balance sheet being asset sensitive, net interest margin increased 13 basis points to 3.25% for the three months ended June 30, 2022 compared to the first quarter of 2022.

•Total stockholders’ equity decreased $23.3 million during the six months ended June 30, 2022. The decrease in equity was primarily due to an increase of $29.9 million in accumulated other comprehensive loss ("AOCL") in the Bank's AFS securities portfolio due to changes in market interest rates, partially offset by net income of $13.1 million. Management intends and has the ability to hold its AFS securities until maturity. See discussion in Liquidity and Capital Resources section of this MD&A.

•The Company's common equity to assets ratio decreased to 7.96% at June 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 7.49% at June 30, 2022 from 8.48% at December 31, 2021 (see Non-GAAP ~~financial measure. See~~ reconciliation schedules) due primarily to increases in AOCL. Regulatory capital was not impacted by the increase in AOCL and Tier 1 capital to average asset ratios at the Bank and the Company remained strong.

•Asset quality continues to improve as non-accrual loans, OREO and TDRs were $6.7 million or 0.29% of ~~GAAP~~total assets at June 2022 compared to $8.1 million or 0.35% of total assets at December 31, 2021.

•The Bankopened its second Virginia branch in May 2022 in Fredericksburg. Additionally, with our Virginia lending team managing approximately 50% of the Bank's loans, the Bank intends to open a loan production office in Charlottesville in the fourth quarter of 2022 to support our existing efforts there. Management believes the greater Fredericksburg area provides significant opportunities for continued organic growth supported by our efficient operating model and ~~non-GAAP measures.~~ability to leverage technology.

Subsequent events

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.

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~~USE OF NON-GAAP FINANCIAL MEASURES~~OVERVIEW

~~Statements included~~Community Bank of the Chesapeake (the “Bank”) is headquartered in ~~management’s discussion~~Southern Maryland with 12 branches located in Maryland and ~~analysis include non-GAAP~~Virginia. The Bank is a wholly-owned subsidiary of The Community Financial Corporation (the “Company”). The Company provides financial ~~measures~~services to individuals and ~~should be read along~~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 ~~accompanying tables, which provide a reconciliation~~Bank’s dependence on higher-cost funding, such as certificates of ~~non-GAAP financial measures to GAAP financial measures.~~ deposit and borrowings.

The Company’s ~~management uses~~income is primarily earned from interest received on its loans and investments. The Company's primary source of funds for making these ~~non-GAAP financial measures~~loans and ~~believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance~~investments is its deposits. One of the ~~Company. Non-GAAP financial~~key 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,~~Company's success is its net interest income, or the difference between the income on loans and ~~investors should not consider them~~investments, and the expense on 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.

•Portfolio loan end of period contractual rates increased by 21 basis points to 4.05% at June 30, 2022 compared to December 31, 2021. The loan portfolio is positioned for rising rates with $482.1 million or 29% of loans, excluding the allowance for credit losses, scheduled to reprice monthly or in ~~isolation~~the next three months and an additional $53.1 million or 3% repricing the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years at June 30, 2022. In addition, increased non-interest bearing accounts as a ~~substitute for analysis~~percentage 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 becausedeposits also better positions 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) September 30, 2021 December 31, 2020 September 30, 2020
Total assets $ 2,278,692 $ 2,026,439 $ 2,137,437
Less: intangible assets
Goodwill 10,835 10,835 10,835
Core deposit intangible 1,147 1,527 1,666
Total intangible assets 11,982 12,362 12,501
Tangible assets $ 2,266,710 $ 2,014,077 $ 2,124,936
Total common equity $ 204,128 $ 198,013 $ 192,850
Less: intangible assets 11,982 12,362 12,501
Tangible common equity $ 192,146 $ 185,651 $ 180,349
Common shares outstanding at end of period 5,724,011 5,903,613 5,911,940
Common equity to assets 8.96 % 9.77 % 9.02 %
Tangible common equity to tangible assets 8.48 % 9.22 % 8.49 %
Common book value per share $ 35.66 $ 33.54 $ 32.62
Tangible common book value per share $ 33.57 $ 31.45 $ 30.51
a rising rate environment.

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~~RECONCILIATION OF NON-GAAP MEASURES (UNAUDITED) - THREE AND NINE MONTHS ENDED SEPTEMBER~~•Total portfolio loans increased $73.6 million or 9.3% annualized to $1,652.5 million from December 31, 2021, as the Company maintained its market dominance in Southern Maryland and continued to gain market share in Virginia. The loan pipeline at June 2022 was $166.0 million, which is expected to provide solid loan growth in the third quarter.

•Non-interest-bearing accounts increased $189.9 million to $635.6 million or 30.48% of deposits at June 30, 2022, from 21.68% of deposits at December 31, 2021. Transaction deposits increased $42.3 million, or 4.90% annualized, to $1,771.1 million in the first six months of 2022. The Company's change in funding mix has well positioned the balance sheet for a rising rate environment.

•The Company's common equity to assets ratio decreased to 7.96% at June 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 7.49% at June 30, 2022 from 8.48% at December 31, 2021 ~~AND 2020~~(see Non-GAAP reconciliation schedules) due primarily to increases in AOCL. Regulatory capital was not impacted by the increase in AOCL and Tier 1 capital to average asset ratios at the Bank and the Company remained strong.

~~Return on Average Common Equity ("ROACE")~~•Asset quality continues to improve as non-accrual loans, OREO and TDRs were $6.7 million or 0.29% of total assets at June 2022 compared to $8.1 million or 0.35% of total assets at December 31, 2021.

Subsequent events

The ~~ROACE is a financial ratio that measures~~Company has evaluated subsequent events for potential recognition and/or disclosure through the ~~profitability of a company~~date the unaudited Consolidated Financial Statements included 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 September 30, Nine Months Ended September 30,
(dollars in thousands) 2021 2020 2021 2020
Net income (as reported) $ 6,404 $ 3,799 $ 19,135 $ 9,997
ROACE 12.45 % 7.86 % 12.53 % 7.06 %
Average common equity $ 205,723 $ 193,351 $ 203,597 $ 188,853

~~Return~~this Quarterly Report 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 September 30, Nine Months Ended September 30,
(dollars in thousands) 2021 2020 2021 2020
Net income (as reported) $ 6,404 $ 3,799 $ 19,135 $ 9,997
Core deposit intangible amortization (net of tax) 91 108 284 366
Net earnings applicable to common shareholders $ 6,495 $ 3,907 $ 19,419 $ 10,363
ROATCE 13.41 % 8.65 % 13.53 % 7.85 %
Average tangible common equity $ 193,662 $ 180,755 $ 191,411 $ 176,108
Form 10-Q were issued.

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~~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 losses ("ALLL"), 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, as filed with the SEC.

For additional information regarding the ALLL, 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.

OVERVIEW

Community Bank of the Chesapeake (the “Bank”) is headquartered in Southern Maryland with 1112 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. ~~We believe our~~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 ~~continues~~will continue to ~~drive profitability,~~focus on growth and operating efficiency ~~and shareholder value.~~to deliver strong results during 2022. During the first ~~nine~~six months of ~~2021,~~2022, we ~~repurchased common shares, 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.

•~~During~~The Company reported record net income for the ~~nine~~three months ended ~~September~~June 30, ~~2021,~~2022 of $6.8 million, or $1.21 per diluted common share compared to net income of $6.4 million or $1.10 per diluted common share for the quarter ended June 30, 2021. The Company ~~repurchased 190,587 shares~~reported record net income for the six months ended June 30, 2022 of ~~common stock at an average price of $35.21 per share. Third quarter 2021~~$13.1 million or diluted earnings per share of ~~$1.12 was positively impacted $0.03~~$2.31 compared to net income for the comparable 2021 period of $12.7 million or diluted earnings per share ~~from second quarter and third quarter 2021 repurchases.~~of $2.17.

•~~The Company~~Portfolio loan end of period contractual rates increased ~~its dividends paid to shareholders~~ by ~~20% from $0.125 in the first quarter of 2021 to $0.150 in the second quarter of 2021.~~

•During the nine months ended September 30, 2021, we improved asset quality with the sale of impaired non-accrual and classified commercial real estate and residential mortgage loans with an aggregate amortized cost of $16.3 million. The Company's sale of these impaired loans decreased the specific ALLL reserve, improved asset quality and improved several ALLL qualitative factors. Non-accrual loans, OREO and TDRs to total assets decreased 7721 basis points to ~~0.31%~~4.05% at ~~September~~June 30, ~~2021 from 1.08% at~~2022 compared to December 31, ~~2020. Classified assets decreased $15.7~~2021. The loan portfolio is positioned for rising rates with $482.1 million or 29% of loans, excluding the allowance for credit losses, scheduled to ~~$6.7~~reprice monthly or in the next three months and an additional $53.1 million or 3% repricing the following nine months. The Bank's effective duration on the loan portfolio was 2.1 years at ~~September~~June 30, ~~2021 from $22.4 million at December 31, 2020.~~2022. In addition, increased non-interest bearing accounts as a percentage of deposits also better positions the Company for a rising rate environment.

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•~~In September~~Total portfolio loans increased $73.6 million or 9.3% annualized to $1,652.5 million from December 31, 2021, as the Company maintained its market dominance in Southern Maryland and continued to gain market share in Virginia. The loan pipeline at June 2022 was ~~named one~~$166.0 million, which is expected to provide solid loan growth in the third quarter.

•As of June 30, 2022, the FOMC had increased the federal funds target rate range to between 1.50%-1.75%. As a result of the ~~top-performing publicly traded small-cap banks and thrifts~~Company's balance sheet being asset sensitive, net interest margin increased 13 basis points to 3.25% for the three months ended June 30, 2022 compared to the first quarter of 2022.

•Total stockholders’ equity decreased $23.3 million during the six months ended June 30, 2022. The decrease in equity was primarily due to an increase of $29.9 million in accumulated other comprehensive loss ("AOCL") in the ~~country~~Bank's AFS securities portfolio due to changes in market interest rates, partially offset by net income of $13.1 million. Management intends and has the ~~Piper Sandler Bank & Thrift SM-ALL Stars Class~~ability to hold its AFS securities until maturity. See discussion in Liquidity and Capital Resources section of this MD&A.

•The Company's common equity to assets ratio decreased to 7.96% at June 30, 2022 from 8.94% at December 31, 2021. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 7.49% at June 30, 2022 from 8.48% at December 31, 2021 (see Non-GAAP reconciliation schedules) due primarily to increases in AOCL. Regulatory capital was not impacted by the increase in AOCL and Tier 1 capital to average asset ratios at the Bank and the Company ~~is one~~remained strong.

•Asset quality continues to improve as non-accrual loans, OREO and TDRs were $6.7 million or 0.29% of ~~two named institutions from Maryland~~total assets at June 2022 compared to $8.1 million or 0.35% of ~~the 35~~ total ~~institutions named to the Class of~~assets at December 31, 2021. ~~Piper Sandler is an investment banking firm and broker-dealer focused on the financial services sector.~~

•The Bank ~~has increased non-interest bearing deposits~~opened its second Virginia branch in 2021, which has moderated net interest margin compression. Noninterest-bearing accounts increased by $70.5 million to $432.6 million or 21.58% of deposits at September 30, 2021 from 20.74% of deposits at December 31, 2020.

•In March 2021, the Bank introduced a new residential mortgage program and a retail and commercial credit card program. These new product lines merge the technology and expertise of two proven FinTech firmsMay 2022 in Fredericksburg. Additionally, with our business development team's demonstrated capabilities. The Company expects these programs to improve non-interest income and interest income beginning in 2022. The Bank's credit card program balances increased fromVirginia lending team managing approximately ~~$50,000 at June 30, 2021 to just under $800,000 at September 30, 2021.~~

•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 or early 2022 and will provide banking, lending and wealth management services with a focus on digital banking. At September 30, 2021, loans in the greater Fredericksburg, Virginia area accounted for approximately 45%50% of the Bank's ~~outstanding portfolio~~ loans, ~~and Fredericksburg branch deposits were $89.0 million with an average cost~~the Bank intends to open a loan production office in Charlottesville in the fourth quarter of ~~deposits of six basis points. The~~2022 to support our existing efforts there. Management believes the greater Fredericksburg area provides significant opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology.

•~~On March 31, 2021, the Bank consolidated its St. Patrick's Drive branch in Waldorf, Maryland into the Bank's nearby main office branch.~~

~~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 economic and operational challenges as well as opportunities in 2021 and 2020. The Company has addressed COVID-19 credit concerns by maintaining an adequate allowance for loan losses, resolving multiple OREO assets, and strengthening regulatory capital in October 2020 through the issuance of subordinated debt. In 2021 and 2020, w~~e have continued to help our community and customers navigate economic uncertainty by originating U.S.~~ ~~SBA PPP loans and offering loan payment deferral programs.~~

Despite the challenges of navigating our business during a pandemic, the Company's balance sheet and operating results have remained strong. We believe current market disruptions in the banking industry caused by both the COVID-19 pandemic as well as industry consolidation has provided opportunities for continued organic growth in 2021. ~~The addition of new customers during the past 18 months continued our success in increasing lower-cost transaction deposits in each of the last five years. O~~ur 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.

~~Throughout the COVID-19 pandemic, the Company has remained focused on the financial and personal well-being of our customers and employees.~~

•The Company offered payment deferral programs for its business and individual customers. Depending on the need of the client, the Company deferred either the full or partial loan payment between 90 and 180 days. As of September 30, 2021, the Bank's loan deferrals had decreased to $3.4 million, which represented 0.2% of gross portfolio loans from $35.4 million or 2.4% of gross portfolio loans as of December 31, 2020.

•The Company actively assisted customers and community businesses with applications for resources through the U.S. SBA PPP program. As of September 30, 2021, the Company had 345 U.S. SBA PPP loans with balances of $56.4 million.

•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.

~~Table of Contents~~

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, 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.

Subsequent events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited ~~consolidated financial statements~~Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.

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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)

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)	June 30, 2022			December 31, 2021			June 30, 2021
Total assets	$	2,323,514		$	2,327,306		$	2,195,059
Less: intangible assets
Goodwill	10,835			10,835			10,835
Core deposit intangible	821			1,032			1,267
Total intangible assets	11,656			11,867			12,102
Tangible assets	$	2,311,858		$	2,315,439		$	2,182,957

Total common equity	$	184,871		$	208,133		$	203,962
Less: intangible assets	11,656			11,867			12,102
Tangible common equity	$	173,215		$	196,266		$	191,860

Common shares outstanding at end of period	5,649,729			5,718,528			5,786,928

GAAP common equity to assets	7.96		%	8.94		%	9.29		%
Non-GAAP tangible common equity to tangible assets	7.49		%	8.48		%	8.79		%

GAAP common book value per share	$	32.72		$	36.40		$	35.25
Non-GAAP tangible common book value per share	$	30.66		$	34.32		$	33.15

Table of Contents

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 June 30,						Six Months Ended June 30,
(dollars in thousands)	2022			2021			2022			2021

Net income (as reported)	$	6,834		$	6,432		$	13,122		$	12,731

ROACE	14.39		%	12.62		%	13.31		%	12.57		%

Average equity	$	189,992		$	203,893		$	197,233		$	202,516

Return on Average Tangible Common Equity ("ROATCE")


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2022			2021			2022			2021

Net income (as reported)	$	6,834		$	6,432		$	13,122		$	12,731
Core deposit intangible amortization (net of tax)	76			94			157			193
Net earnings applicable to common shareholders	$	6,910		$	6,526		$	13,279		$	12,924

ROATCE	15.50		%	13.62		%	14.32		%	13.59		%

Average tangible common equity	$	178,269		$	191,708		$	185,457		$	190,266

Table of Contents

SUMMARY OF OPERATING RESULTS

A comparison of the results of operations for the three and six months ended June 30, 2022 and June 30, 2021 is presented below.


	(Unaudited)				(Unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands, except per share amounts)	2022		2021		2022		2021
OPERATING DATA
Interest and dividend income	$	18,774	$	17,444	$	36,110	$	35,122
Interest expenses	1,206		1,009		2,073		2,178
Net interest income ("NII")	17,568		16,435		34,037		32,944
Provision for credit losses	425		291		875		586
Provision (recovery) for unfunded commitments	26		—		(5)		—
NII after provision for credit losses and unfunded commitments	17,117		16,144		33,167		32,358
Noninterest income	1,424		1,856		2,875		4,216
Noninterest expenses	9,338		9,378		18,418		19,526
Income before income taxes	9,203		8,622		17,624		17,048
Income taxes	2,369		2,190		4,502		4,317
Net income	6,834		6,432		13,122		12,731

Income available to common shares	$	6,834	$	6,432	$	13,122	$	12,731


	(Unaudited)						(Unaudited)
	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
KEY OPERATING RATIOS
Return on average assets ("ROAA")	1.19		%	1.22		%	1.14		%	1.22		%
Return on average common equity ("ROACE")	14.39			12.62			13.31			12.57
Return on Average Tangible Common Equity ("ROATCE")	15.50			13.62			14.32			13.59
Average total equity to average total assets	8.28			9.63			8.54			9.67
Interest rate spread	3.14			3.30			3.10			3.36
Net interest margin	3.25			3.37			3.19			3.43
Efficiency ratio(1)	49.17			51.27			49.90			52.55
Non-interest income to average assets	0.25			0.35			0.25			0.40
Non-interest expense to average assets	1.63			1.77			1.59			1.87
Net operating expense to average assets(2)	1.38			1.42			1.35			1.46

COMMON SHARE DATA
Basic net income per common share	$	1.21		$	1.10		$	2.32		$	2.17
Diluted net income per common share	$	1.21		$	1.10		$	2.31		$	2.17
Cash dividends paid per common share	$	0.175		$	0.150		$	0.350		$	0.275
Common dividend payout ratio	14.46		%	13.63		%	15.12		%	12.67		%

_______________________________________

(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.

Table of Contents

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 AND ~~2020~~2021

Summary of Financial Results

The Company reported net income for the three months ended ~~September~~June 30, ~~2021~~2022 of ~~$6.4~~$6.8 million or diluted earnings per share of ~~$1.12~~$1.21 compared to net income of ~~$3.8~~$6.4 million or ~~$0.64~~$1.10 per diluted earnings per share for the three months ended ~~September~~June 30, ~~2020.~~2021. The Company’s ROAA and ROACE were ~~1.17%~~1.19% and ~~12.45%~~14.39% for the three months ended ~~September~~June 30, ~~2021~~2022 compared to ~~0.73%~~1.22% and ~~7.86%~~12.62% in ~~September~~June 30, ~~2020.~~2021.

~~The increase to net~~Net income in the ~~third~~second quarter of ~~2021~~2022 increased 6.3% compared to the same quarter in ~~2020 was~~2021, primarily due to ~~a lower provision for loan losses and lower~~increased net interest ~~expense,~~income partially offset by lower in noninterest income.


		Three Months Ended September 30,									Three Months Ended June 30,
(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	$	17,659	$	17,483	$	176	1.0	%	Interest and dividend income	$	18,774	$	17,444	$	1,330	7.6	%
Interest expense	Interest expense	1,050		2,115		(1,065)		(50.4)	%	Interest expense	1,206		1,009		197		19.5	%
Net interest income	Net interest income	16,609		15,368		1,241		8.1	%	Net interest income	17,568		16,435		1,133		6.9	%
Provision for loan losses		—		2,500		(2,500)		(100.0)	%
Provision for credit losses										Provision for credit losses	425		291		134		46.0	%
Provision (recovery) for unfunded commitments										Provision (recovery) for unfunded commitments	26		—		26		—	%
Noninterest income	Noninterest income	1,400		1,666		(266)		(16.0)	%	Noninterest income	1,424		1,856		(432)		(23.3)	%
Noninterest expense	Noninterest expense	9,447		9,451		(4)		—	%	Noninterest expense	9,338		9,378		(40)		(0.4)	%
Income before income taxes	Income before income taxes	8,562		5,083		3,479		68.4	%	Income before income taxes	9,203		8,622		581		6.7	%
Income tax expense		2,158		1,284		874		68.1	%
Income tax (income) expense										Income tax (income) expense	2,369		2,190		179		8.2	%
Net income	Net income	$	6,404	$	3,799	$	2,605	68.6	%	Net income	$	6,834	$	6,432	$	402	6.3	%

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 September 30,									Three Months Ended June 30,
(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	$	16,342	$	16,176	$	166	1.0	%	Loans, including fees	$	16,772	$	16,320	$	452	2.8	%
Taxable interest and dividends on investment securities	Taxable interest and dividends on investment securities	1,296		1,269		27		2.1	%	Taxable interest and dividends on investment securities	1,924		1,101		823		74.8	%
Interest on deposits with banks	Interest on deposits with banks	21		38		(17)		(44.7)	%	Interest on deposits with banks	78		23		55		239.1	%
Total Interest and Dividend Income	Total Interest and Dividend Income	17,659		17,483		176		1.0	%	Total Interest and Dividend Income	18,774		17,444		1,330		7.6	%

Interest Expenses	Interest Expenses									Interest Expenses
Deposits	Deposits	594		1,534		(940)		(61.3)	%	Deposits	819		640		179		28.0	%
Short-term borrowings	Short-term borrowings	—		14		(14)		(100.0)	%	Short-term borrowings	16		—		16		—	%
Long-term debt	Long-term debt	456		567		(111)		(19.6)	%	Long-term debt	371		369		2		0.5	%
Total Interest Expenses	Total Interest Expenses	1,050		2,115		(1,065)		(50.4)	%	Total Interest Expenses	1,206		1,009		197		19.5	%

Net Interest Income		$	16,609	$	15,368	$	1,241	8.1	%
Net Interest Income (NII)										Net Interest Income (NII)	$	17,568	$	16,435	$	1,133	6.9	%

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Average Balances and Yields


		Three Months Ended September 30,													Three Months Ended June 30,
		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	$	1,094,089	$	10,977	4.01	%	$	1,006,436	$	10,627	4.22	%	Commercial real estate	$	1,181,885	$	11,842	4.01	%	$	1,089,781	$	10,953	4.02	%
Residential first mortgages	Residential first mortgages	100,195		742		2.96	%	157,039		1,188		3.03	%	Residential first mortgages	85,030		730		3.43	%	109,296		838		3.07	%
Residential rentals	Residential rentals	154,481		1,565		4.05	%	132,572		1,499		4.52	%	Residential rentals	194,972		1,999		4.10	%	139,080		1,410		4.06	%
Construction and land development	Construction and land development	34,810		399		4.58	%	38,861		448		4.61	%	Construction and land development	30,302		361		4.77	%	38,315		425		4.44	%
Home equity and second mortgages	Home equity and second mortgages	27,751		246		3.55	%	32,670		295		3.61	%	Home equity and second mortgages	26,101		274		4.20	%	29,061		251		3.45	%
Commercial and equipment loans		104,845		1,161		4.43	%	116,472		1,205		4.14	%
Commercial loans														Commercial loans	42,744		517		4.84	%	43,100		516		4.79	%
Commercial equipment loans														Commercial equipment loans	68,349		699		4.09	%	61,017		592		3.88	%
U.S. SBA PPP loans	U.S. SBA PPP loans	71,751		1,236		6.89	%	127,092		902		2.84	%	U.S. SBA PPP loans	11,847		315		10.64	%	104,426		1,318		5.05	%
Consumer loans	Consumer loans	1,742		16		3.67	%	1,102		12		4.36	%	Consumer loans	4,040		35		3.47	%	1,425		17		4.77	%
Allowance for loan losses		(18,852)		—		—		(16,738)		—		—	%
Allowance for credit losses														Allowance for credit losses	(21,375)		—		—		(18,265)		—		0.00	%
Loan portfolio (1)	Loan portfolio (1)	1,570,812		16,342		4.16	%	1,595,506		16,176		4.06	%	Loan portfolio (1)	1,623,895		16,772		4.13	%	1,597,236		16,320		4.09	%
Taxable investment securities	Taxable investment securities	370,498		1,212		1.31	%	218,305		1,143		2.09	%	Taxable investment securities	484,079		1,808		1.49	%	276,019		1,020		1.48	%
Nontaxable investment securities	Nontaxable investment securities	16,204		84		2.07	%	23,633		126		2.13	%	Nontaxable investment securities	21,304		117		2.20	%	15,559		81		2.08	%
Interest-bearing deposits in other banks	Interest-bearing deposits in other banks	36,516		16		0.18	%	24,713		25		0.40	%	Interest-bearing deposits in other banks	23,958		63		1.05	%	28,844		13		0.18	%
Federal funds sold	Federal funds sold	30,266		5		0.07	%	20,561		13		0.25	%	Federal funds sold	6,178		14		0.91	%	34,778		10		0.12	%
Interest-Earning Assets ("IEAs")	Interest-Earning Assets ("IEAs")	2,024,296		17,659		3.49	%	1,882,718		17,483		3.71	%	Interest-Earning Assets ("IEAs")	2,159,414		18,774		3.48	%	1,952,436		17,444		3.57	%
Cash and cash equivalents	Cash and cash equivalents	66,292						87,895						Cash and cash equivalents	28,645						65,897
Goodwill	Goodwill	10,835						10,835						Goodwill	10,835						10,835
Core deposit intangible	Core deposit intangible	1,226						1,761						Core deposit intangible	888						1,350
Other assets	Other assets	85,340						88,278						Other assets	93,754						86,421
Total Assets	Total Assets	$	2,187,989					$	2,071,487					Total Assets	$	2,293,536					$	2,116,939

Liabilities and Stockholders’ Equity	Liabilities and Stockholders’ Equity													Liabilities and Stockholders’ Equity
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	434,316	$	—	—	%	$	351,951	$	—	—	%	Noninterest-bearing demand deposits	$	650,249	$	—	—	%	$	406,166	$	—	—	%
Interest-bearing demand deposits	Interest-bearing demand deposits													Interest-bearing demand deposits
Savings	Savings	110,873		14		0.05	%	89,036		20		0.09	%	Savings	120,645		15		0.05	%	105,814		13		0.05	%
Interest-bearing demand and money market accounts		1,017,642		175		0.07	%	848,981		313		0.15	%
Demand deposits														Demand deposits	571,475		431		0.30	%	622,544		86		0.06	%
Money market deposits														Money market deposits	385,594		103		0.11	%	354,657		99		0.11	%
Certificates of deposit	Certificates of deposit	341,672		405		0.47	%	363,296		1,201		1.32	%	Certificates of deposit	317,930		270		0.34	%	344,533		442		0.51	%
Total interest-bearing deposits	Total interest-bearing deposits	1,470,187		594		0.16	%	1,301,313		1,534		0.47	%	Total interest-bearing deposits	1,395,644		819		0.23	%	1,427,548		640		0.18	%
Total Deposits	Total Deposits	1,904,503		594		0.12	%	1,653,264		1,534		0.37	%	Total Deposits	2,045,893		819		0.16	%	1,833,714		640		0.14	%
Long-term debt	Long-term debt	25,625		131		2.04	%	63,847		380		2.38	%	Long-term debt	3,350		22		2.63	%	27,273		43		0.63	%
Short-term borrowings	Short-term borrowings	—		—		—	%	3,159		14		1.77	%	Short-term borrowings	5,791		16		1.11	%	—		—		—	%
Paycheck Protection Program Liquidity Facility ("PPPLF") Advance		—		—		—	%	121,070		107		0.35	%

Subordinated Notes	Subordinated Notes	19,487		251		5.15	%	—		—		—	%	Subordinated Notes	19,529		252		5.16	%	19,473		251		5.16	%
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		74		2.47	%	12,000		80		2.67	%	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		97		3.23	%	12,000		75		2.50	%
Total Debt	Total Debt	57,112		456		3.19	%	200,076		581		1.16	%	Total Debt	40,670		387		3.81	%	58,746		369		2.51	%
Interest-Bearing Liabilities ("IBLs")		1,527,299		1,050		0.27	%	1,501,389		2,115		0.56	%
Total Funds		1,961,615		1,050		0.21	%	1,853,340		2,115		0.46	%

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Table of Contents


		Three Months Ended September 30,													Three Months Ended June 30,
		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")	1,436,314		1,206		0.34	%	1,486,294		1,009		0.27	%
Total Funds														Total Funds	2,086,563		1,206		0.23	%	1,892,460		1,009		0.21	%
Other liabilities	Other liabilities	20,648						24,796						Other liabilities	16,981						20,586
Stockholders’ equity	Stockholders’ equity	205,723						193,351						Stockholders’ equity	189,992						203,893
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	2,187,986					$	2,071,487					Total Liabilities and Stockholders’ Equity	$	2,293,536					$	2,116,939

Net interest income	Net interest income			$	16,609					$	15,368			Net interest income			$	17,568					$	16,435

Interest rate spread	Interest rate spread					3.22	%					3.15	%	Interest rate spread					3.14	%					3.30	%
Net yield on interest-earning assets	Net yield on interest-earning assets					3.28	%					3.27	%	Net yield on interest-earning assets					3.25	%					3.37	%
Average loans to average deposits	Average loans to average deposits					82.48	%					96.51	%	Average loans to average deposits					79.37	%					87.10	%
Average transaction deposits to total average deposits**						82.06	%					78.03	%
Average transaction deposits to total average deposits **														Average transaction deposits to total average deposits **					84.46	%					81.21	%
Ratio of average IEAs to average IBLs	Ratio of average IEAs to average IBLs					132.54	%					125.40	%	Ratio of average IEAs to average IBLs					150.34	%					131.36	%

__________________________

(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was ~~$91,000~~$55,000 and ~~$0.1 million~~$75,000 of accretion interest during the three months ended ~~September~~June 30, ~~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 September 30, 2021 compared to the Three Months Ended September 30, 2020
For the Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021								For the Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 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)	$	(257)	$	423	$	166	Loan portfolio(1)
Investment securities, federal funds sold and interest-bearing deposits		482		(472)		10
Commercial real estate								Commercial real estate	$	923	$	(34)	$	889
Residential first mortgages								Residential first mortgages	(208)		100		(108)
Residential rentals								Residential rentals	573		16		589
Construction and land development								Construction and land development	(95)		31		(64)
Home equity and second mortgages								Home equity and second mortgages	(31)		54		23
Commercial loans								Commercial loans	(4)		5		1
Commercial equipment loans								Commercial equipment loans	75		32		107
SBA PPP loans								SBA PPP loans	(2,462)		1,459		(1,003)
Consumer loans								Consumer loans	23		(5)		18
Taxable investment securities								Taxable investment securities	777		11		788
Nontaxable investment securities								Nontaxable investment securities	32		4		36
Interest-bearing deposits in other banks								Interest-bearing deposits in other banks	(13)		63		50
Federal funds sold								Federal funds sold	(65)		69		4
Total interest-earning assets	Total interest-earning assets	225		(49)		176		Total interest-earning assets	$	(475)	$	1,805	$	1,330

Interest-bearing liabilities:	Interest-bearing liabilities:							Interest-bearing liabilities:
Savings	Savings	3		(9)		(6)		Savings	$	2	$	—	$	2
Interest-bearing demand and money market accounts		29		(167)		(138)
Demand deposits								Demand deposits	(39)		384		345
Money market deposits								Money market deposits	8		(4)		4
Certificates of deposit	Certificates of deposit	(26)		(770)		(796)		Certificates of deposit	(23)		(149)		(172)
Long-term debt	Long-term debt	(195)		(54)		(249)		Long-term debt	(157)		136		(21)
Short-term borrowings		—		(14)		(14)
Paycheck Protection Program Liquidity Facility ("PPPLF") Advance		—		(107)		(107)
Subordinated Notes		251		—		251

Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	—		(6)		(6)		Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	—		22		22
Total interest-bearing liabilities	Total interest-bearing liabilities	62		(1,127)		(1,065)		Total interest-bearing liabilities	$	(191)	$	388	$	197
Net change in net interest income	Net change in net interest income	$	164	$	1,078	$	1,241	Net change in net interest income	$	(284)	$	1,417	$	1,133

(1)

~~Table~~Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $55,000 and $0.1 million of ~~Contents~~accretion interest during the three months ended June 30, 2022 and 2021, respectively.

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 inflation effects on the economy, the Federal Reserve Open Market Committee ("FOMC") has increased the federal funds interest rate by 150 basis points from a target range of 0.00% to 0.25% in January 2022 to a target range of 1.50% to 1.75% at June 30, 2022. On July 27, 2022, the FOMC further increased the target range to 2.25% to 2.50% with Federal Reserve Bank commentary indicating that it was probable that the next scheduled meeting would result in additional rate hikes of at least 50 basis points.

Net interest income for the comparable quarters increased primarily from larger average balances in interest-earning assets and higher loan yields partially offset by increased interest expense from slightly higher funding rates and volume. Interest income increased as portfolio loan interest income more than replaced U.S. SBA PPP income and as overall loan yields, excluding U.S. SBA PPP loans, increased for the comparable quarters. Loan interest income increased $0.5 million for the comparable periods. If U.S. SBA PPP loan interest was excluded, loan interest income increased $1.5 million from $15.0 million for the three months ended ~~September~~June 30, 2021 ~~compared~~ to $16.5 million for the three months ended ~~September~~June 30, ~~2020.~~2022. Average investment and interest-earning cash balances increased $180.3 million for the comparable periods and contributed $0.9 million in additional interest income. Net interest income decreased $0.2 million from increased interest expense from slightly higher cost of funds and average funding balances.

Table of Contents

Net interest margin of 3.25% for the three months ended June 30, 2022 decreased 12 basis points from 3.37% for the three months ended June 30, 2021. The ~~increase~~decrease in net interest ~~income~~margin from the second quarter of 2021 resulted primarily from ~~significant decreases~~the Company’s increased average investment and interest-earning cash balances. Average yields on loans increased to 4.13% in the second quarter of 2022 compared to 4.09% for the three months ended June 30, 2021, while overall interest expense from lower funding costs as well as volume increases in interest-earning assets. Interest income increased from larger average balances and accelerated loan fee recognition following the forgiveness of U.S. SBA PPP loans, partially offset by lowerearning asset yields decreased to 3.48% for the three months ended June 30, 2022 from ~~virtually all interest-earnings assets.~~3.57% for the three months ended June 30, 2021. Interest income from the Company's participation in the U.S. SBA PPP program was ~~$1.2~~$0.3 million and $1.3 million for the three months ended ~~September~~June 30, 2022 and June 30, 2021, ~~as compared to $0.9 million for the comparable quarter in 2020.~~

~~Net~~respectively. U.S. SBA PPP loan interest ~~margin of 3.28%~~positively impacted margins by four basis points for the three months ended ~~September~~June 30, ~~2021 increased one~~2022 and 10 basis points from 3.27% for the comparable period. The sharp decline in interest rates in 2020 and 2021 not only reduced interest income on floating-rate commercial loans and liquid interest-earning assets and investments, but it also reduced competitive pressures and depositor expectations concerning deposit interest rates. The flat net interest margin for the comparable periods was due to similar rate declines for asset yields and funding costs.

~~Cost of funds decreased from 0.46%~~ for the three months ended ~~September~~June 30, ~~2020 to~~2021.

The Company’s cost of funds was 0.23% during the second quarter of 2022 increased from 0.21% for the three months ended ~~September~~June 30, 2021. The Bank's ~~cost~~interest rate asset sensitivity improved as average non-interest bearing deposit accounts increased to 31.8% of ~~funds~~total average deposits for the second quarter of 2022 compared to 22.1% for the comparable period in ~~2021 decreased due to the prepayments of $30.0 million of FHLB advances with a 2.2% average rate~~2021. Management is optimistic that improvements in the ~~last six months of 2020, the repricing of time deposits, the~~Bank's funding composition will benefit margins and profitability in an increasing interest-rate environment.

Net interest margins began to increase in ~~non-interest bearing accounts~~the second quarter of 2022 as ~~a percentage of total deposits~~FOMC rate increases began to impact the Bank's asset sensitive balance sheet. Average yields on loans and ~~lower costs~~investments increased to 4.13% and 1.52% for transaction deposit accounts. These decreases in the cost of funds were partially offset by interest related to the prepayment of $15.0 million of FHLB advances in late September 2021 and the issuance of $20.0 million in subordinated notes in October 2020.

~~For~~ the three months ended ~~September~~June 30, ~~2021, net~~2022 from 3.99% and 1.33% for the three months ended March 31, 2022. Net interest margin increased 13 basis points ~~as a result of net U.S. SBA PPP loan interest income and accelerated loan fee recognition. Loan yields increased~~ from ~~4.06%~~3.12% for the three months ended ~~September 30, 2020~~March 31, 2022 to ~~4.16%~~3.25% for the three months ended ~~September~~June 30, ~~2021. Loan yields, excluding U.S. SBA PPP loan interest income, were 4.02% and 4.16% for the three months ended September 30, 2021 and September 30, 2020, respectively.~~2022.

~~Excluding the acceleration of deferred fees into interest income with U.S. SBA PPP loan forgiveness, compression of our~~Management is optimistic that a stable to increasing net interest margin is ~~likely in~~possible during the ~~fourth quarter~~balance of ~~2021 as~~2022 assuming interest-earning assets continue to reprice ~~lower~~faster than interest-bearing liabilities and the Bank continues to invest excess liquidity into securities. Average investments and interest-bearing cash accounts have increased $196.8 million from $256.7 million for the three months ended December 31, 2020 to $453.5 million for the three months ended September 30, 2021. We expect U.S. SBA PPP loan forgiveness to positively impact margins and net interest income in the fourth quarter of 2021 with the recognition of remaining net deferred fees.maintains its current favorable funding mix.

Provision for ~~Loan~~Credit Losses

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


	Three Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change

Provision for credit losses	$	425	$	291	$	134	46.05	%

The provision for ~~loan~~credit losses is a function of the calculation of the allowance for ~~loan loss~~credit losses 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.

4750

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 September 30,									Three Months Ended June 30,
(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	$	29	$	49	$	(20)	(40.8)	%	Loan appraisal, credit, and miscellaneous charges	$	44	$	44	$	—	—	%
Gain on sale or disposition of assets		—		6		(6)		(100.0)	%
Net gains on sale of investment securities		—		229		(229)		(100.0)	%
Unrealized gain (losses) on equity securities		(22)		—		(22)		—	%
Provision for loss on premises and equipment held for sale		(20)		—		(20)		—	%
Gain on sale of assets										Gain on sale of assets	—		68		(68)		(100.0)	%

Unrealized (losses) gain on equity securities										Unrealized (losses) gain on equity securities	(155)		13		(168)		(1,292)	%

Income from bank owned life insurance	Income from bank owned life insurance	220		222		(2)		(0.9)	%	Income from bank owned life insurance	217		218		(1)		(0.5)	%
Service charges	Service charges	987		839		148		17.6	%	Service charges	1,108		892		216		24.2	%
Referral fee income	Referral fee income	176		321		(145)		(45.2)	%	Referral fee income	—		621		(621)		(100.0)	%
Net gain on sale of loans held for sale		30		—		30		—	%

Net gains (losses) on sale of loans originated for sale										Net gains (losses) on sale of loans originated for sale	1		—		1		—	%
Gains on sale of loans										Gains on sale of loans	209		—		209		—	%
Total Noninterest Income	Total Noninterest Income	$	1,400	$	1,666	$	(266)	(16.0)	%	Total Noninterest Income	$	1,424	$	1,856	$	(432)	(23.3)	%

Noninterest income for the three months ended ~~September~~June 30, ~~2021~~2022 decreased from the three months ended ~~September~~June 30, ~~2020.~~2021. The $0.4 million decrease in noninterest income in the current quarter was principally due to no interest rate protection referral fee income for the three months ended June 30, 2022. In addition, changes in interest rates resulted in unrealized losses on securities invested in a Community Reinvestment Act mutual fund. These reductions in noninterest income for the comparable ~~periods was primarily~~quarters were partially offset by increases in service charges due to ~~decreased referral fee income~~increased interchange fees and ~~decreased~~ gains onof $0.2 million from the sale of ~~investment securities partially offset by increased service charge income.~~two impaired loans. Noninterest income as a percentage of average assets was ~~0.26%~~0.25% and ~~0.32%~~0.35%, respectively, for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~

~~Noninterest Expense~~

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

Three Months Ended September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Noninterest Expense
Compensation and benefits $ 5,650 $ 5,099 $ 551 10.8 %
OREO valuation allowance and expenses 20 421 (401) (95.2) %
Sub-total 5,670 5,520 150 2.7 %
Operating Expenses
Occupancy expense 731 734 (3) (0.4) %
Advertising 145 129 16 12.4 %
Data processing expense 840 990 (150) (15.2) %
Professional fees 676 652 24 3.7 %
Depreciation of premises and equipment 137 142 (5) (3.5) %
FDIC Insurance 120 249 (129) (51.8) %
Core deposit intangible amortization 121 144 (23) (16.0) %
Other expenses 1,007 891 116 13.0 %
Total Operating Expenses 3,777 3,931 (154) (3.9) %
Total Noninterest Expense $ 9,447 $ 9,451 $ (4) — %

~~Table of Contents~~

Noninterest expense was flat for the comparable periods as increased compensation and benefits and other expenses were offset by decreased OREO expenses, FDIC insurance and data processing. Compensation and benefits increased for the comparable periods primarily due to increased health insurance claims as well as larger incentive compensation accruals resulting from improvements in profitability and asset quality. In addition, no costs were deferred for the origination of U.S. SBA PPP loans in third quarter of 2021 compared with the deferral of $0.1 million in the third quarter of 2020. The FDIC insurance decreased due to improved balance sheet credit trends. Decreased OREO expenses reflect management's actions in 2021 and 2020 to reduce non-performing assets. Data processing costs decreased for the comparable periods due to the timing of scheduled projects as well as a reduction related to PPP loan processing costs incurred during 2020 that were not incurred in 2021.

The Company’s efficiency ratio was 52.46% for the three months ended September 30, 2021 compared to 55.48% for the three months ended September 30, 2020. The Company’s net operating expense ratio was 1.47% for the three months ended September 30, 2021 compared to 1.50% for the three months ended September 30, 2020. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to generate more noninterest income while controlling expense growth.

~~Income Tax Expense~~

Income tax expense increased $0.9 million for the three months ended September 30, 2021 compared to the same quarter in the prior year. For the three months ended September 30, 2021 the effective tax rate was 25.2%. The Company’s consolidated effective tax rate was a 25.3% in the third quarter of 2020.

~~Table of Contents~~

~~COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020~~

~~Earnings Summary~~

The Company reported net income for the nine months ended September 30, 2021 of $19.1 million or diluted earnings per share of $3.29 compared to net income of $10.0 million or $1.70 per diluted share for the nine months ended September 30, 2020. The Company’s ROAA and ROACE were 1.20% and 12.53% for the nine months ended September 30, 2021 compared to 0.68% and 7.06% for the nine months ended September 30, 2020.

The increase to net income in the first nine months of 2021 compared to the same period in 2020 was due to a lower provision for loan losses and increased net interest income partially offset by a decrease in non-interest income and increases in non-interest expense and income tax expense. The increase in income tax expense was due to higher pre-tax income and a change in the Company's state tax apportionment approach implemented in the first quarter of 2020. The Company's higher effective tax rate is explained in the income tax expense section included in the discussion of results for the nine months ended September 30, 2021 in this MD&A.

Nine Months Ended September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Interest and dividend income $ 52,781 $ 53,160 $ (379) (0.7) %
Interest expense 3,228 8,215 (4,987) (60.7) %
Net interest income 49,553 44,945 4,608 10.3 %
Provision for loan losses 586 10,100 (9,514) (94.2) %
Noninterest income 5,616 6,046 (430) (7.1) %
Noninterest expense 28,973 28,531 442 1.5 %
Income before income taxes 25,610 12,360 13,250 107.2 %
Income tax expense 6,475 2,363 4,112 174.0 %
Net income $ 19,135 $ 9,997 $ 9,138 91.4 %

~~Net Interest Income~~

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

Nine Months Ended September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Interest and Dividend Income
Loans, including fees $ 49,254 $ 48,955 $ 299 0.6 %
Taxable interest and dividends on investment securities 3,461 4,079 (618) (15.2) %
Interest on deposits with banks 66 126 (60) (47.6) %
Total Interest and Dividend Income 52,781 53,160 (379) (0.7) %
Interest Expenses
Deposits 2,036 6,515 (4,479) (68.7) %
Short-term borrowings — 111 (111) (100.0) %
Long-term debt 1,192 1,589 (397) (25.0) %
Total Interest Expenses 3,228 8,215 (4,987) (60.7) %
Net Interest Income $ 49,553 $ 44,945 $ 4,608 10.3 %

~~Table of Contents~~

~~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. The following table presents information on the average balances of the Company’s interest-earning assets and interest-bearing liabilities and interest earned or paid for the nine months ended September 30, 2021 and 2020, respectively.

Nine Months Ended September 30,
2021 2020
(dollars in thousands) Average Balance Interest Avg. Yield/Cost Average Balance Interest Avg. Yield/Cost
Assets
Commercial real estate $ 1,081,350 $ 32,625 4.02 % $ 981,944 $ 32,406 4.40 %
Residential first mortgages 111,401 2,494 2.99 % 165,632 4,098 3.30 %
Residential rentals 144,316 4,421 4.08 % 131,839 4,373 4.42 %
Construction and land development 36,401 1,226 4.49 % 38,608 1,360 4.70 %
Home equity and second mortgages 28,689 745 3.46 % 34,604 1,066 4.11 %
Commercial and equipment loans 104,747 3,339 4.25 % 119,927 4,219 4.69 %
U.S. SBA PPP loans 97,231 4,356 5.97 % 76,418 1,395 2.43 %
Consumer loans 1,497 48 4.28 % 1,113 38 4.55 %
Allowance for loan losses (18,908) — — (14,521) — — %
Loan portfolio (1)
1,586,724 49,254 4.14 % 1,535,564 48,955 4.25 %
Taxable investment securities 292,625 3,182 1.45 % 215,223 3,854 2.39 %
Non-taxable investment securities 17,517 279 2.12 % 12,144 225 2.47 %
Interest bearing deposits in other banks 30,183 44 0.19 % 16,246 87 0.71 %
Federal funds sold 27,964 22 0.10 % 13,520 39 0.38 %
Interest-Earning Assets ("IEAs") 1,955,013 52,781 3.60 % 1,792,697 53,160 3.95 %
Cash and cash equivalents 71,559 61,832
Goodwill 10,835 10,835
Core deposit intangible 1,351 1,910
Other assets 86,838 87,973
Total Assets $ 2,125,596 $ 1,955,247
Liabilities and Stockholders’ Equity
Noninterest-bearing demand deposits $ 407,375 $ — — % $ 310,451 $ — — %
Interest-bearing liabilities:
Savings 106,190 40 0.05 % 80,412 68 0.11 %
Interest-bearing demand and money market accounts 982,704 555 0.08 % 816,975 2,118 0.35 %
Certificates of deposit 345,821 1,441 0.56 % 375,606 4,329 1.54 %
Total Interest-bearing deposits 1,434,715 2,036 0.19 % 1,272,993 6,515 0.68 %
Total Deposits 1,842,090 2,036 0.15 % 1,583,444 6,515 0.55 %
Long-term debt 26,723 213 1.06 % 62,101 916 1.97 %
Short-term borrowings — — — % 10,895 111 1.36 %
Paycheck Protection Program Liquidity Facility ("PPPLF") Advance — — — % 69,656 182 0.35 %
Subordinated Notes 19,483 754 5.16 % 4,953 184 4.95 %
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs") 12,000 225 2.50 % 12,000 307 3.41 %
Total debt 58,206 1,192 2.73 % 159,605 1,700 1.42 %
Total Interest-Bearing Liabilities ("IBLs") 1,492,921 3,228 0.29 % 1,432,598 8,215 0.76 %
Total funds 1,900,296 3,228 0.23 % 1,743,049 8,215 0.63 %

~~Table of Contents~~

Nine Months Ended September 30,
2021 2020
(dollars in thousands) Average Balance Interest Avg. Yield/Cost Average Balance Interest Avg. Yield/Cost
Other liabilities 21,703 23,345
Stockholders’ equity 203,597 188,853
Total Liabilities and Stockholders’ Equity $ 2,125,596 $ 1,955,247
Net interest income $ 49,553 $ 44,945
Interest rate spread 3.31 % 3.19 %
Net yield on interest-earning assets 3.38 % 3.34 %
Average loans to average deposits 86.14 % 96.98 %
Average transaction deposits to total average deposits** 81.23 % 76.28 %
Ratio of average IEAs to average IBLs 130.95 % 125.14 %
Cost of funds 0.23 % 0.63 %
Cost of deposits 0.15 % 0.55 %
Cost of debt 2.73 % 1.42 %

~~__________________________~~

~~(1)~~Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $0.3 million and $0.5 million of accretion interest during the nine months ended September 30, 2021 and 2020, respectively.

**~~Transaction deposits excluded time deposits~~

For the Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020
(dollars in thousands) Volume Due to Rate Total
Interest income:
Loan portfolio $ 1,588 $ (1,289) $ 299
Investment securities, federal funds sold and interest-bearing deposits 1,067 (1,745) (678)
Total interest-earning assets 2,655 (3,034) (379)
Interest-bearing liabilities:
Savings 10 (38) (28)
Interest-bearing demand and money market accounts 94 (1,657) (1,563)
Certificates of deposit (124) (2,764) (2,888)
Long-term debt (282) (421) (703)
Short-term borrowings — (111) (111)
PPPLF Advance — (182) (182)
Subordinated notes 562 8 570
Guaranteed preferred beneficial interest in junior subordinated debentures — (82) (82)
Total interest-bearing liabilities 260 (5,247) (4,987)
Net change in net interest income $ 2,396 $ 2,213 $ 4,608

~~Table of Contents~~

~~Net interest income increased $4.6 million or 10.3% for the comparable periods with $3.1 million of the increase attributable to U.S. SBA PPP program increased net interest income.~~

Interest income decreased $0.4 million for the nine months ended September 30, 2021 compared to the same period of 2020. The decrease in interest income resulted from significantly lower asset yields partially offset by larger average balances of interest-earning assets and the accelerated loan fee recognition following the forgiveness of U.S. SBA PPP loans. Interest income from the Company's participation in the U.S. SBA PPP program was $4.4 million for the nine months ended September 30, 2021 compared to $1.4 million for the nine months ended September 30, 2020.

As a result of organic growth, average total earning assets increased $162.3 million or 9.1%, for the nine months ended September 30, 2021 to $1,955.0 million compared to $1,792.7 million for the nine months ended September 30, 2020. The increase in average total earning assets for the nine months ended September 30, 2021 from the comparable period in 2020 resulted from a $51.2 million increase in average loans and an increase of $111.2 million increase in average investments, federal funds sold, and interest-bearing deposits.

Interest expense decreased $5.0 million for the nine months ended September 30, 2021 compared to the same period of 2020. Lower interest rates accounted for $5.2 million of the decrease in interest expense partially offset by $0.3 million in increased interest expense from larger average balances and changes in the funding mix of interest-bearing liabilities. Interest expense decreased during 2021 as the Bank's cost of funds decreased. The prepayment of FHLB advances in the last six months of 2020, reductions in PPPLF debt, an increase in non-interest bearing accounts as a percentage of total deposits and the repricing of time and transaction deposits at lower rates all contributed to the decrease in interest expense.

Average total interest-bearing liabilities increased $60.3 million, or 4.2%, for the nine months ended September 30, 2021 to $1,492.9 million compared to $1,432.6 million for the nine months ended September 30, 2020. During the same time, average noninterest-bearing demand deposits increased $96.9 million, or 31.2%, to $407.4 million compared to $310.5 million. Noninterest-bearing deposits increased for the comparable periods due to customer acquisition efforts and the Bank's participation in the U.S. SBA PPP program. For the nine-month comparative periods, average total debt decreased $101.4 million, which reflects the second half of 2020 payoff of Federal Reserve's PPPLF advances and the prepayment of FHLB advances, partially offset by an increase in average Subordinated Notes of $14.5 million. During the nine months ended September 30, 2021, average transaction accounts increased $288.4 million or 23.9% to $1,496.3 million from $1,207.8 million for the nine months ended September 30, 2020. During the same time, average time deposits decreased $29.8 million or 7.9% to $345.8 million for the nine months ended September 30, 2021.

Net interest margin of 3.38% for the nine months ended September 30, 2021 was four basis points higher than the 3.34% for the nine months ended September 30, 2020. The increase in net interest margin from the first nine months of 2020 resulted primarily from the Company’s interest earning asset yields decreasing at a slower rate than overall funding costs. Interest earning asset yields decreased 35 basis points from 3.95% for the nine months ended September 30, 2020 to 3.60% for the nine months ended September 30, 2021. The Company’s cost of funds decreased 40 basis points from 0.63% for the nine months ended September 30, 2020 to 0.23% for the nine months ended September 30, 2021. Net interest income was impacted by accretion interest of $0.3 million and $0.5 million for the nine months ended September 30, 2021 and 2020, respectively.

As a result of net U.S. SBA PPP loan interest income and accelerated loan fee recognition net interest margin increased 14 basis point for the nine months ended September 30, 2021. Net interest margin decreased six basis points for the nine months ended September 30, 2020 due to lower yields from U.S. SBA PPP loans compared to other loan portfolios. Loan yields decreased from 4.25% for the nine months ended September 30, 2020 to 4.14% for the nine months ended September 30, 2021. Loan yields, excluding U.S. SBA PPP loan interest income, were 4.35% for the nine months ended September 30, 2020 compared to 4.02% for the nine months ended September 30, 2021.

~~Provision for Loan Losses~~

~~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.~~

Nine Months Ended September 30,
(dollars in thousands) 2021 2020 $ Change % Change
Noninterest Income
Loan appraisal, credit, and miscellaneous charges $ 271 $ 98 $ 173 176.5 %
Gain on sale or disposition of assets 68 6 62 1,033.3 %
Net gains on sale of investment securities 586 670 (84) (12.5) %
Unrealized (loss) gain on equity securities (94) 115 (209) (182) %
Provision for loss on premises and equipment held for sale (20) — (20) — %
Income from bank owned life insurance 652 661 (9) (1.4) %
Service charges 3,066 2,530 536 21.2 %
Referral fee income 1,248 1,966 (718) (36.5) %
Net gain on sale of loans held for sale 30 — 30 — %
Loss on sale of loans (191) — (191) — %
Total Noninterest Income $ 5,616 $ 6,046 $ (430) (7.1) %

Noninterest income for the nine months ended September 30, 2021 decreased compared to the nine months ended September 30, 2020. The decreases were primarily due to decreased referral fee income, a loss on sale of impaired loans, and unrealized loss on equity securities, partially offset by increased service charge and miscellaneous income. 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. Increased service charges reflect increased fees from customer acquisition, new products as well as recognition of sign-on bonus fees associated with our Mastercard program. Noninterest income as a percentage of average assets was 0.35% and 0.41%, respectively, for the nine months ended September 30, 2021 and 2020. In 2020, the COVID-19 crisis had impacted spending habits of customers and reduced growth in service fee income, which has rebounded in 2021. In addition, the COVID-19 crisis curtailed expected commercial loan volume in the first nine months of 2021, which impacted interest rate protection agreement referral fee opportunities.

~~Table of Contents~~

Noninterest Expense

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


		Nine Months Ended September 30,									Three Months Ended June 30,
(dollars in thousands)	(dollars in thousands)	2021		2020		$ Change		% Change		(dollars in thousands)	2022		2021		$ Change		% Change
Noninterest Expense	Noninterest Expense									Noninterest Expense
Compensation and benefits	Compensation and benefits	$	15,770	$	15,001	$	769	5.1	%	Compensation and benefits	$	5,051	$	5,332	$	(281)	(5.3)	%
OREO valuation allowance and expenses	OREO valuation allowance and expenses	689		2,303		(1,614)		(70.1)	%	OREO valuation allowance and expenses	—		488		(488)		(100.0)	%

Sub-total	Sub-total	16,459		17,304		(845)		(4.9)	%	Sub-total	5,051		5,820		(769)		(13.2)	%
Operating Expense
Operating Expenses										Operating Expenses
Occupancy expense	Occupancy expense	2,180		2,204		(24)		(1.1)	%	Occupancy expense	820		688		132		19.2	%
Advertising	Advertising	372		380		(8)		(2.1)	%	Advertising	159		148		11		7.4	%
Data processing expense	Data processing expense	2,766		2,842		(76)		(2.7)	%	Data processing expense	1,008		990		18		1.8	%
Professional fees	Professional fees	1,920		1,755		165		9.4	%	Professional fees	845		604		241		39.9	%

Depreciation of premises and equipment	Depreciation of premises and equipment	419		451		(32)		(7.1)	%	Depreciation of premises and equipment	150		135		15		11.1	%

FDIC Insurance	FDIC Insurance	512		679		(167)		(24.6)	%	FDIC Insurance	177		140		37		26.4	%
Core deposit intangible amortization	Core deposit intangible amortization	380		452		(72)		(15.9)	%	Core deposit intangible amortization	102		126		(24)		(19.0)	%
Other		3,965		2,464		1,501		60.9	%
Total Operating Expense		12,514		11,227		1,287		11.5	%
Fraud losses (recoveries)										Fraud losses (recoveries)	30		(217)		247		(113.8)	%
Other expenses										Other expenses	996		944		52		5.5	%
Total Operating Expenses										Total Operating Expenses	$	4,287	$	3,558	$	729	20.5	%
Total Noninterest Expense	Total Noninterest Expense	$	28,973	$	28,531	$	442	1.5	%	Total Noninterest Expense	$	9,338	$	9,378	$	(40)	(0.4)	%

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The ~~1.5%~~flat overall expense run rate for the comparable periods were primarily due to decreases in compensation and benefits and no credit related expenses for OREO, partially offset by increases in occupancy expenses and professional fees as well as a fraud recovery in the second quarter of 2021. OREO expenses reflect management's actions in 2020 and 2021 to reduce non-performing assets. Increases in occupancy and professional fees were driven by increasing utilities and vendor wage appreciation as well as the opening of our newest branch in Fredericksburg, Virginia.

Lower than anticipated health care costs and a lower average full-time equivalent headcount contributed to a lower compensation and benefits run rate in the second quarter of 2022. In addition, compensation and benefits expense has benefited from the Company's increased use of technology. In the second quarter, the Bank increased base compensation by 4% and its minimum starting wage to $20.00 per hour for non-executive employees to address local wage pressures caused by inflation and to attract and retain our employees. Management's projected quarterly expense run rate for the third quarter of 2022 is estimated between $9.6 million and $9.7 million and includes consideration of the base compensation increases and an average FTE count of 195-197 employees.

The Company’s efficiency ratio was 49.17% for the three months ended June 30, 2022 compared to 51.27% for the three months ended June 30, 2021. The Company’s net operating expense ratio was 1.38% for the three months ended June 30, 2022 compared to 1.42% for the three months ended June 30, 2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to improve asset quality and generate more operating revenues while controlling expense growth.

Income Tax Expense

The effective tax rate for the three months ended June 30, 2022 was 25.74% compared to an effective tax rate of 25.40% for the three months ended June 30, 2021.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

Summary of Financial Results

The Company reported net income for the six months ended June 30, 2022 of $13.1 million or diluted earnings per share of $2.31 compared to net income of $12.7 million or $2.17 per diluted share for the six months ended June 30, 2021. The Company’s ROAA and ROACE were 1.14% and 13.31% for the six months ended June 30, 2022 compared to 1.22% and 12.57% for the six months ended June 30, 2021.

The increase to net income in the first six months of 2022 compared to the same period in 2021 was due to increased net interest income and decreased noninterest expense partially offset by an increase in provision for credit losses and a decrease in non-interest income.


	Six Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change
Interest and dividend income	$	36,110	$	35,122	$	988	2.8	%
Interest expense	2,073		2,178		(105)		(4.8)	%
Net interest income	34,037		32,944		1,093		3.3	%
Provision for credit losses	875		586		289		49.3	%
Recovery for unfunded commitments	(5)		—		(5)		—	%
Noninterest income	2,875		4,216		(1,341)		(31.8)	%
Noninterest expense	18,418		19,526		(1,108)		(5.7)	%
Income before income taxes	17,624		17,048		576		3.4	%
Income tax expense	4,502		4,317		185		4.3	%
Net income	$	13,122	$	12,731	$	391	3.1	%

Net Interest Income

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


	Six Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change
Interest and Dividend Income
Loans, including fees	$	32,382	$	32,912	$	(530)	(1.6)	%
Taxable interest and dividends on investment securities	3,590		2,165		1,425		65.8	%
Interest on deposits with banks	138		45		93		206.7	%
Total Interest and Dividend Income	36,110		35,122		988		2.8	%

Interest Expenses
Deposits	1,332		1,442		(110)		(7.6)	%
Short-term borrowings	16		—		16		—	%
Long-term debt	725		736		(11)		(1.5)	%
Total Interest Expenses	2,073		2,178		(105)		(4.8)	%

Net Interest Income (NII)	$	34,037	$	32,944	$	1,093	3.3	%

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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. The following table presents information on the average balances of the Company’s interest-earning assets and interest-bearing liabilities and interest earned or paid for the six months ended June 30, 2022 and 2021, respectively.


	Six Months Ended June 30,
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets
Commercial real estate	$	1,147,188	$	22,579	3.94	%	$	1,074,874	$	21,648	4.03	%
Residential first mortgages	85,912		1,442		3.36	%	117,097		1,752		2.99	%
Residential rentals	196,136		3,830		3.91	%	139,150		2,855		4.10	%
Construction and land development	31,977		768		4.80	%	37,209		828		4.45	%
Home equity and second mortgages	26,024		519		3.99	%	29,166		499		3.42	%
Commercial loans	44,696		1,068		4.78	%	43,915		1,067		4.86	%
Commercial equipment loans	65,050		1,341		4.12	%	60,782		1,111		3.66	%
U.S. SBA PPP loans	16,122		767		9.51	%	110,183		3,120		5.66	%
Consumer loans	3,629		68		3.75	%	1,373		32		4.66	%
Allowance for credit losses	(21,210)		—		—		(18,936)		—		0.00	%
Loan portfolio (1)	1,595,524		32,382		4.06	%	1,594,813		32,912		4.13	%
Taxable investment securities	484,118		3,379		1.40	%	253,043		1,970		1.56	%
Non-taxable investment securities	19,419		211		2.17	%	18,185		195		2.14	%
Interest bearing deposits in other banks	33,231		124		0.75	%	26,964		28		0.21	%
Federal funds sold	3,106		14		0.90	%	26,794		17		0.13	%
Interest-Earning Assets ("IEAs")	2,135,398		36,110		3.38	%	1,919,799		35,122		3.66	%
Cash and cash equivalents	72,359						74,237
Goodwill	10,835						10,835
Core deposit intangible	941						1,415
Other assets	90,069						87,600
Total Assets	$	2,309,602					$	2,093,886

Liabilities and Stockholders’ Equity
Noninterest-bearing demand deposits	$	630,137	$	—	—	%	$	393,682	$	—	—	%
Interest-bearing liabilities:
Savings	120,939		30		0.05	%	103,809		26		0.05	%
Demand deposits	598,210		535		0.18	%	612,745		183		0.06	%
Money market deposits	382,206		203		0.11	%	352,201		197		0.11	%
Certificates of deposit	320,126		564		0.35	%	347,930		1,036		0.60	%
Total Interest-bearing deposits	1,421,481		1,332		0.19	%	1,416,685		1,442		0.20	%
Total Deposits	2,051,618		1,332		0.13	%	1,810,367		1,442		0.16	%
Long-term debt	7,760		47		1.21	%	27,282		83		0.61	%
Short-term borrowings	2,912		16		1.10	%	—		—		—	%

Subordinated Notes	19,522		503		5.15	%	19,482		503		5.16	%
Guaranteed preferred beneficial interest in junior subordinated debentures ("TRUPs")	12,000		175		2.92	%	12,000		150		2.50	%
Total debt	42,194		741		3.51	%	58,764		736		2.50	%

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	Six Months Ended June 30,
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Total Interest-Bearing Liabilities ("IBLs")	1,463,675		2,073		0.28	%	1,475,449		2,178		0.30	%
Total funds	2,093,812		2,073		0.20	%	1,869,131		2,178		0.23	%
Other liabilities	18,557						22,239
Stockholders’ equity	197,233						202,516
Total Liabilities and Stockholders’ Equity	$	2,309,602					$	2,093,886

Net interest income			$	34,037					$	32,944


Interest rate spread					3.10	%					3.36	%
Net yield on interest-earning assets					3.19	%					3.43	%
Average loans to avg. deposits					77.77	%					88.09	%
Average transaction deposits to total average deposits **					84.40	%					80.78	%
Ratio of average IEAs to average IBLs					145.89	%					130.12	%

Cost of funds					0.20	%					0.23	%
Cost of deposits					0.13	%					0.16	%
Cost of debt					3.51	%					2.50	%

__________________________

(1)Average balance includes non-accrual loans. There are no tax equivalent adjustments. There was $105,000 and $165,000 of accretion interest during the six months ended June 30, 2022 and 2021, respectively.

**Transaction deposits excluded time deposits

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For the Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021
(dollars in thousands)	Volume		Due to Rate		Total
Interest income:
Loan portfolio (1)
Commercial real estate	$	1,423	$	(492)	$	931
Residential first mortgages	(523)		213		(310)
Residential rentals	1,113		(138)		975
Construction and land development	(126)		66		(60)
Home equity and second mortgages	(63)		83		20
Commercial loans	19		(18)		1
Commercial equipment loans	88		142		230
SBA PPP loans	(4,475)		2,122		(2,353)
Consumer loans	42		(6)		36
Taxable investment securities	1,613		(204)		1,409
Nontaxable investment securities	13		3		16
Interest-bearing deposits in other banks	23		73		96
Federal funds sold	(107)		104		(3)
Total interest-earning assets	$	(960)	$	1,948	$	988

Interest-bearing liabilities:
Savings	$	4	$	—	$	4
Demand deposits	(13)		365		352
Money market deposits	16		(10)		6
Certificates of deposit	(49)		(423)		(472)
Long-term debt	(118)		82		(36)
Short-term borrowings	16		—		16

Subordinated notes	1		(1)		—
Guaranteed preferred beneficial interest in junior subordinated debentures	—		25		25
Total interest-bearing liabilities	$	(143)	$	38	$	(105)
Net change in net interest income	$	(817)	$	1,910	$	1,093

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Net interest income increased $1.1 million or 3.3% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021 with interest income increasing $1.0 million and interest expense decreasing of $0.1 million. Increased interest income was primarily due to growth in investments income of $1.5 million. Interest income from the growth of the Company's portfolio loans nearly replaced the decrease in U.S. SBA PPP loan interest income. Overall loan interest income decreased $0.5 million to $32.4 million for the six months ended June 30, 2022 from $32.9 million for the six months ended June 30, 2021. Excluding U.S. SBA PPP loans, interest income for the same comparable periods increased $1.8 million to $31.6 million from $29.8 million. Interest expense decreased $0.1 million due to changes in the Bank's funding mix away from higher cost debt and time deposits into non-interest bearing and transaction deposit accounts.

Net interest margin of 3.19% for the six months ended June 30, 2022 was 24 basis points lower than the 3.43% for the six months ended June 30, 2021. Loan yields decreased from 4.13% for the six months ended June 30, 2021 to 4.06% for the six months ended June 30, 2022. Loan yields, excluding U.S. SBA PPP loan interest income, were 4.00% and 4.01% for the six months ended June 30, 2022 and June 30, 2021. U.S. SBA PPP loan interest positively impacted margins by five basis points for the six months ended June 30, 2022 and 13 basis points for the six months ended June 30, 2021.

As a result of organic growth, average total earning assets increased $215.6 million, or 11.2%, for the six months ended June 30, 2022 to $2,135.4 million compared to $1,919.8 million for the six months ended June 30, 2021. The increase in average total earning assets for the six months ended June 30, 2022 from the comparable period in 2021 resulted primarily from a $0.7 million, or 0.04%, increase in average loans, with average U.S. SBA PPP loans decreasing $94.0 million and average portfolio loans increasing $94.7 million, and an increase of $214.9 million, or 66.1%, increase in average investments, federal funds sold, and interest-bearing deposits.

The Company’s cost of funds was 0.20% during the first six months of 2022 compared to 0.23% for the six months ended June 30, 2021. Average total interest-bearing liabilities decreased $11.8 million, or 0.8%, for the six months ended June 30, 2022 to $1,463.7 million compared to $1,475.4 million for the six months ended June 30, 2021. During the same time, the Company increased balance sheet asset sensitivity with average noninterest-bearing demand deposits increasing $236.5 million, or 60.1%, to $630.1 million, or 30.7% of average deposits compared to $393.7 million, or 21.8% of average deposits.

Provision for Credit Losses

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


	Six Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change

Provision for credit losses	$	875	$	586	$	289	49.32	%

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.

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Noninterest Income

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


	Six Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change
Noninterest Income
Loan appraisal, credit, and miscellaneous charges	$	220	$	242	$	(22)	(9.1)	%
Gain on sale of assets	—		68		(68)		(100.0)	%
Net gains on sale of investment securities	—		586		(586)		(100.0)	%
Unrealized losses on equity securities	(377)		(72)		(305)		423.6	%

Income from bank owned life insurance	431		432		(1)		(0.2)	%
Service charges	2,034		2,079		(45)		(2.2)	%
Referral fee income	361		1,072		(711)		(66.3)	%
Net losses on sale of loans originated for sale	(3)		—		(3)		—	%
Gains (losses) on sale of loans	209		(191)		400		(209.4)	%
Total Noninterest Income	$	2,875	$	4,216	$	(1,341)	(31.8)	%

Noninterest income for the six months ended June 30, 2022 decreased compared to the six months ended June 30, 2021. The decreases were primarily due to decreased referral fee income, gain on sales of investments in the first six months of 2021, and unrealized losses on securities invested in a Community Reinvestment Act mutual fund that was impacted by increases in interest rates. These reductions for the comparable periods were partially offset by $0.4 million related to the sale of impaired loans. In the first quarter of 2021, the Bank sold non-accrual and classified commercial real estate and residential mortgage loans and recognized a loss on the sale of $0.2 million and in the second quarter of 2022, impaired loan sales resulted in a gain of $0.2 million. Noninterest income as a percentage of assets was 0.25% and 0.40%, respectively, for the six months ended June 30, 2022 and 2021.

Noninterest Expense

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


	Six Months Ended June 30,
(dollars in thousands)	2022		2021		$ Change		% Change
Noninterest Expense
Compensation and benefits	$	10,106	$	10,120	$	(14)	(0.1)	%
OREO valuation allowance and expenses	6		669		(663)		(99.1)	%

Sub-total	10,112		10,789		(677)		(6.3)	%
Operating Expense
Occupancy expense	1,552		1,449		103		7.1	%
Advertising	223		227		(4)		(1.8)	%
Data processing expense	2,015		1,926		89		4.6	%
Professional fees	1,576		1,244		332		26.7	%

Depreciation of premises and equipment	299		282		17		6.0	%


FDIC Insurance	356		392		(36)		(9.2)	%
Core deposit intangible amortization	211		259		(48)		(18.5)	%
Fraud losses	70		1,112		(1,042)		(93.7)	%
Other expenses	2,004		1,846		158		8.6	%
Total Operating Expense	8,306		8,737		(431)		(4.9)	%
Total Noninterest Expense	$	18,418	$	19,526	$	(1,108)	(5.7)	%

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The decrease in noninterest expense for the comparable periods was primarily due to ~~increased other expenses, compensation~~decreased OREO expenses and ~~professional fees, partially offset by a decrease~~fraud losses. Noninterest expense decreased for the comparable periods as decreases in OREO expenses, compensation, fraud losses, amortization of core deposit intangible and FDIC ~~insurance. Other expenses include a $1.2 million charge, net of a partial recovery, related to an isolated wire transfer fraud incident that occurred~~insurance were offset by increases in ~~the first quarter of 2021. Compensation expense increased due to fewer deferred costs allocated for PPP loans as well as increased employee health insurance claims~~occupancy, data processing, professional fees, depreciation and larger incentive compensation accruals resulting from improvement in profitability and asset quality. Compensation and benefits for the nine months ended September 30, 2021 and 2020 were reduced $0.28 million and $0.48 million, respectively, for the allocation of deferred origination costs for U.S. SBA PPP loans. Decreased OREO expenses reflect management's actions in 2020 to reduce non-performing assets.other expenses. OREO expenses have moderated as the Bank has ~~reduced foreclosed~~been successful at disposing assets ~~over~~and reducing OREO balances to zero. Noninterest expenses in the ~~last 12 months from $4.0~~first six month of 2021 included a $1.3 million ~~at September 30, 2020~~initial expense and subsequent recovery of $0.2 million related to ~~$1.5 million at September 30, 2021. The FDIC insurance decreased~~an isolated wire transfer fraud incident. Professional fees increased for the comparable prior year period due to ~~improved balance sheet~~costs related to the implementation of CECL, the new retail and commercial credit ~~trends.~~card program, and vendor wage appreciation. Increases in occupancy were driven by increasing utilities as well as the opening of our newest branch in Fredericksburg, Virginia.

~~Our investigation of~~During the first ~~quarter 2021 wire fraud found no evidence that information systems~~six months of ~~the Bank were compromised or that employee fraud was involved.~~2022, lower than anticipated health care costs and a lower average full-time equivalent headcount contributed to lower compensation and benefits. In the second quarter, ~~of 2021,~~ the ~~Company submitted an insurance claim which could result in a recovery of a portion of the expense. Any recovery of insurance proceeds would be recognized in the quarter received.~~

~~Including the wire transfer fraud expense, the Company's quarterly expense run rate~~Bank increased base compensation by 4% and its minimum starting wage to $20.00 per hour for the nine months ended September 30, 2021 averaged $9.7 million. The Company's quarterly expense run rate, excluding the wire transfer fraud expense, for the nine months ended September 30, 2021 averaged $9.3 million.non-executive employees to address local wage pressures caused by inflation and to attract and retain employees. Management's projected quarterly expense run rate for the ~~fourth~~third quarter of ~~2021~~2022 is estimated between ~~$9.4 and~~ $9.6 million ~~with~~and $9.7 million and includes consideration of the ~~increase over the~~base compensation increases and an average ~~attributable to year end incentive compensation and employee benefit costs.~~FTE count of 195-197 employees.

The Company’s efficiency ratio was ~~52.52%~~49.90% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~55.95%~~52.55% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The Company’s net operating expense ratio was ~~1.47%~~1.35% at ~~September~~June 30, ~~2021~~2022 compared to ~~1.53%~~1.46% at ~~September~~June 30, ~~2020.~~2021. The efficiency and net operating expense ratios have improved (decreased) as the Company has been able to generate more noninterest income while controlling expense growth.

Expenses applicable to OREO assets included the following.


	Six Months Ended June 30,
(dollars in thousands)	2022		2021

Valuation allowance	$	—	$	641
Losses (gains) on dispositions	—		(16)
Operating expenses	6		44
	$	6	$	669

~~Table~~To adjust properties to current appraised values, additions to the valuation allowance were taken for the six months ended June 30, 2021. OREO carrying amounts reflect management’s estimate of ~~Contents~~

the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs. At June 30, 2022 and December 31, 2021, the carrying value of OREO assets was zero.

Income Tax Expense

~~The Company's effective tax rate for the nine months ended September 30, 2021 was 25.3%.~~ The Company’s consolidated effective tax rate ~~was 19.1%~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020. The Company's new state apportionment approach~~2022 and June 30, 2021 was ~~implemented during the first quarter of 2020~~25.5% and included the impact of amended income tax filings of the Company and the Bank. The following table shows a breakdown of income tax expense for the nine months ended September 30, 2020 split between the apportionment adjustment and a normalized 2020 income tax provision:

Nine Months Ended September 30, 2020
(dollars in thousands) Tax Provision Effective Tax Rate
Income tax apportionment adjustment $ (743) (6.0) %
Income taxes before apportionment adjustment 3,106 25.1 %
Income tax expense as reported $ 2,363 19.1 %
Income before income taxes $ 12,360
25.3%, respectively.

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COMPARISON OF FINANCIAL CONDITION AT ~~SEPTEMBER~~JUNE 30, ~~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 Quarterly Report for Form 10-Q and in the Annual Report on Form 10-K for the year ended December 31, 2021.


	(Unaudited)
(dollars in thousands, except per share amounts)	June 30, 2022		December 31, 2021
FINANCIAL CONDITION DATA
Total assets	$	2,323,514	$	2,327,306
Loans receivable, net	1,636,077		1,586,791
Investment securities	490,086		502,818
Goodwill	10,835		10,835
Core deposit intangible	821		1,032
Deposits	2,085,376		2,056,164
Borrowings	—		12,231
Junior subordinated debentures	12,000		12,000
Subordinated notes - 4.75% **	19,538		19,510

Stockholders’ equity - common	184,871		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)	June 30, 2022			December 31, 2021
COMMON SHARE DATA
Book value per common share	$	32.72		$	36.40
Tangible book value per common share**	$	30.66		$	34.32
Common shares outstanding at end of period	5,649,729			5,718,528

OTHER DATA
Full-time equivalent employees	190			186
Branches	12			11
Loan Production Offices	4			4

CAPITAL RATIOS
Tier 1 capital to average assets (Leverage)	9.42		%	9.23		%
Tier 1 common capital to risk-weighted assets	11.66			11.92
Tier 1 capital to risk-weighted assets	12.34			12.64
Total risk-based capital to risk-weighted assets	14.68			14.92
Common equity to total assets	7.96			8.94
Tangible common equity to tangible assets**	7.49			8.48

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

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Assets

Total assets at June 30, 2022 were comparable to December 31, 2021 as cash balances decreased to fund loan growth. In addition, net deferred tax assets increased primarily due to ~~growth~~increases in ~~cash, interest-bearing deposits with banks and~~unrealized losses of the Bank's AFS investment ~~securities, which have increased~~portfolio related to changes in ~~2021~~interest rates as ~~U.S. PPP loans have been forgiven and customer deposits have increased. These~~well as increases ~~were partially offset by a decrease~~ in ~~net loans and small net decreases in all other asset accounts.~~the ACL for the adoption of the current expected credit losses ("CECL") accounting standard on January 1, 2022. The differences in allocations between the cash and investment categories reflect operational needs. ~~Total assets and on-balance sheet liquidity increased in the first nine months of 2021 from deposit 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)	September 30, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		December 31, 2021		$ Change		% Change
Cash and due from banks	Cash and due from banks	$	112,314	$	56,887	$	55,427	97.4	%	Cash and due from banks	$	16,164	$	108,990	$	(92,826)	(85.2)	%

Federal funds sold										Federal funds sold	37,320		—		37,320		—	%
Interest-bearing deposits with banks	Interest-bearing deposits with banks	34,929		20,178		14,751		73.1	%	Interest-bearing deposits with banks	34,659		30,664		3,995		13.0	%
Securities available for sale ("AFS"), at fair value	Securities available for sale ("AFS"), at fair value	456,664		246,105		210,559		85.6	%	Securities available for sale ("AFS"), at fair value	485,456		497,839		(12,383)		(2.5)	%

Equity securities carried at fair value through income	Equity securities carried at fair value through income	4,805		4,855		(50)		(1.0)	%	Equity securities carried at fair value through income	4,423		4,772		(349)		(7.3)	%
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	1,472		2,777		(1,305)		(47.0)	%	FHLB stock - at cost	1,234		1,472		(238)		(16.2)	%

Net Loans	Net Loans	1,569,644		1,594,075		(24,431)		(1.5)	%	Net Loans	1,636,077		1,586,791		49,286		3.1	%
Goodwill	Goodwill	10,835		10,835		—		—	%	Goodwill	10,835		10,835		—		—	%
Premises and equipment, net	Premises and equipment, net	21,795		20,271		1,524		7.5	%	Premises and equipment, net	21,802		21,427		375		1.8	%

Other real estate owned ("OREO")		1,536		3,109		(1,573)		(50.6)	%

Accrued interest receivable	Accrued interest receivable	6,045		8,717		(2,672)		(30.7)	%	Accrued interest receivable	6,099		5,588		511		9.1	%
Investment in bank owned life insurance	Investment in bank owned life insurance	38,713		38,061		652		1.7	%	Investment in bank owned life insurance	39,363		38,932		431		1.1	%
Core deposit intangible	Core deposit intangible	1,147		1,527		(380)		(24.9)	%	Core deposit intangible	821		1,032		(211)		(20.4)	%
Net deferred tax assets	Net deferred tax assets	8,790		7,909		881		11.1	%	Net deferred tax assets	20,223		9,033		11,190		123.9	%
Right of use assets, net operating leases	Right of use assets, net operating leases	6,215		7,831		(1,616)		(20.6)	%	Right of use assets, net operating leases	6,123		6,124		(1)		—	%
Other assets	Other assets	3,581		3,095		486		15.7	%	Other assets	2,708		3,600		(892)		(24.8)	%
Total Assets	Total Assets	$	2,278,692	$	2,026,439	$	252,253	12.4	%	Total Assets	$	2,323,514	$	2,327,306	$	(3,792)	(0.2)	%

Cash and Cash Equivalents

Cash and cash equivalents totaled ~~$147.2~~$88.1 million at ~~September~~June 30, ~~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 of Contents~~

Investment Securities and Credit Quality of Investment Securities

Investment securities and FHLB stock at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, estimated fair values were ~~$463.1~~$491.3 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 ~~September~~June 30, ~~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 June 30, 2022, approximately 92%, or $447.6 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 92%, or $456.2 million, at December 31, 2021.

Gross unrealized losses at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 for AFS securities were ~~$4.2~~$43.2 million and ~~$0.4~~$6.0 million, respectively, of amortized cost of ~~$456.7~~$528.5 million and ~~$240.0~~$500.5 million, respectively (see Note 2 in ~~consolidated financial statements)~~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 ~~73.7%~~70.8% or ~~$336.6~~$374.2 million ~~(amortized cost)~~ 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 ~~$57.2~~$52.3 million ~~(amortized cost)~~ in student loan trusts, which represent ~~12.5%~~9.9% of the AFS investment portfolio, are 97% U.S. government guaranteed. At ~~September~~June 30, ~~2021,~~2022, the Company also had ~~$62.6~~$98.8 million or ~~13.7%~~18.7% of AFS investments in municipal bonds.

~~At September~~The average effective duration of the Company's AFS investment portfolio at June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, were 4.10 years and 3.90 years, respectively.

At June 30, 2022 and December 31, 2021, AFS asset-backed securities issued and guaranteed by GSEs and U.S. Agencies had an average life of ~~7.04~~6.51 years and ~~5.09~~6.91 years and an average duration of ~~6.54~~5.70 years and ~~4.81~~6.41 years, respectively. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, AFS asset-backed securities issued by student loan ~~trust~~trusts and others had an average life of ~~6.57~~6.16 years and ~~6.47~~6.24 years and an average duration of ~~6.24~~5.44 years and ~~6.14~~6.03 years, respectively. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, AFS municipal bonds issued by states, political subdivisions or agencies had average life of ~~9.37~~11.07 years and ~~9.81~~8.75 years and an average duration of ~~8.29~~9.24 years and ~~8.53~~7.83 years, respectively.

The amortized cost of AFS investment securities by contractual maturity at June 30, 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 June 30, 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	$	23,064	2.35	%	$	90,237	2.35	%	$	129,441	2.28	%	$	94,655	2.58	%	$	337,397	$	314,042
Asset-backed securities issued by Others	3,590		1.85	%	14,044		1.85	%	20,147		1.83	%	14,732		1.79	%	52,513		50,437
Municipal securities	6,755		2.47	%	26,427		2.47	%	37,908		2.47	%	27,721		2.69	%	98,811		83,452
Corporate bonds	205		3.88	%	802		3.88	%	1,151		3.88	%	842		—	%	3,000		2,857
U.S. Treasury bonds	2,516		1.17	%	9,844		1.24	%	14,120		1.23	%	10,326		—	%	36,806		34,668
Total AFS investment securities	$	36,130	2.25	%	$	141,354	2.25	%	$	202,767	2.26	%	$	148,276	2.53	%	$	528,527	$	485,456

The tables below present the Standard & Poor’s (“S&P”) or equivalent credit rating from other major rating agencies for AFS securities at ~~September~~June 30, ~~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.

September 30, 2021 December 31, 2020
Credit Rating Amount Credit Rating Amount
(dollars in thousands) (dollars in thousands)
AAA $ 422,682 AAA $ 220,757
AA 33,739 AA 25,059
A 243 A 289
Total $ 456,664 Total $ 246,105


June 30, 2022			December 31, 2021
Credit Rating	Amount		Credit Rating	Amount
(dollars in thousands)			(dollars in thousands)
AAA	$	447,599	AAA	$	456,162
AA	34,836		AA	41,455
A	164		A	222
BBB	2,857		BBB	—
Total	$	485,456	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. Management is committed to continue as the leading commercial financial institution in Southern Maryland. 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 ~~September~~June 30, ~~2021,~~2022, loans managed by our Maryland and Virginia lending teams are almost evenly distributed. Management is optimistic that the Virginia market will continue to provide opportunities for organic loan growth.

At June 30, 2022, total net loans, which include portfolio loans and U.S. SBA PPP loans, ~~decreased 2.0%~~increased 6.2% annualized or ~~$24.4~~$49.3 million from December 31, ~~2020. Net~~2021. Total net portfolio loans increased ~~$28.7~~$70.7 million and ~~net~~ U.S. SBA PPP loans decreased ~~$53.2~~$21.4 million for the comparable period ends. The commercial real estate ~~and residential rental portfolios~~portfolio increased in total during the first ~~nine~~six months of ~~2021,~~2022, while increasing slightly as a percentage of ~~gross~~total portfolio loans. The Company’s loan pipeline was ~~$192.0~~$166.0 million at ~~September~~June 30, ~~2021~~2022 compared to ~~$134.0~~$160.0 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 June 30, 2022, there were 48 U.S. SBA PPP loans with outstanding balances of $5.2 million.

The following is a breakdown of the Company’s loan portfolio, net of deferred costs and fees at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


(dollars in thousands)	(dollars in thousands)	September 30, 2021		%		December 31, 2020		%		$ Change		Annualized % Change		(dollars in thousands)	June 30, 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	$	1,088,636	71.02	%	$	1,049,147	69.75	%	$	39,489	5.0	%	Commercial real estate	$	1,178,758	71.33	%	$	1,113,793	70.54	%	$	64,965	11.67	%
Residential first mortgages	Residential first mortgages	96,835		6.32	%	133,779		8.89	%	(36,944)		(36.8)	%	Residential first mortgages	84,782		5.13	%	92,710		5.87	%	(7,928)		(17.10)	%
Residential rentals	Residential rentals	172,082		11.22	%	139,059		9.24	%	33,023		31.7	%	Residential rentals	210,116		12.72	%	194,911		12.35	%	15,205		15.60	%
Construction and land development	Construction and land development	37,139		2.42	%	37,520		2.49	%	(381)		(1.4)	%	Construction and land development	31,068		1.88	%	35,502		2.25	%	(4,434)		(24.98)	%
Home equity and second mortgages	Home equity and second mortgages	26,518		1.73	%	29,129		1.94	%	(2,611)		(12.0)	%	Home equity and second mortgages	25,200		1.53	%	25,661		1.63	%	(461)		(3.59)	%
Commercial loans	Commercial loans	48,327		3.15	%	52,921		3.52	%	(4,594)		(11.6)	%	Commercial loans	43,472		2.63	%	50,512		3.20	%	(7,040)		(27.87)	%
Consumer loans	Consumer loans	2,168		0.14	%	1,027		0.07	%	1,141		148.1	%	Consumer loans	4,511		0.27	%	3,015		0.19	%	1,496		99.24	%
Commercial equipment	Commercial equipment	61,346		4.00	%	61,693		4.10	%	(347)		(0.8)	%	Commercial equipment	74,552		4.51	%	62,706		3.97	%	11,846		37.78	%
Gross portfolio loans		1,533,051		100.00	%	1,504,275		100.00	%	28,776		2.6	%
Net deferred costs		365		0.01	%	1,264		0.08	%	(899)		(94.8)	%
Allowance for loan losses		(18,579)		(1.21)	%	(19,424)		(1.29)	%	845		(5.8)	%
		(18,214)				(18,160)				(54)		0.4	%
Net portfolio loans		1,514,837				1,486,115				28,722		2.6	%

Gross U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans		56,424				$	110,320			(53,896)		(65.1)	%
Net deferred fees		(1,617)				(2,360)				743		(42.0)	%
Net U.S. SBA PPP Loans		54,807				107,960				(53,153)		(65.7)	%
Total portfolio loans														Total portfolio loans	1,652,459		100.00	%	1,578,810		100.00	%	73,649		9.33	%
Less: Allowance for Credit Losses														Less: Allowance for Credit Losses	(21,404)		(1.30)	%	(18,417)		(1.17)	%	(2,987)		32.44	%
Total net portfolio loans														Total net portfolio loans	1,631,055				1,560,393				70,662		9.06	%
U.S. SBA PPP loans														U.S. SBA PPP loans	5,022				26,398				(21,376)		(161.95)	%
Total net loans	Total net loans	$	1,569,644			$	1,594,075			$	(24,431)	(2.0)	%	Total net loans	$	1,636,077			$	1,586,791			$	49,286	6.21	%

Gross Loans		$	1,589,475			$	1,614,595			$	(25,120)	(2.1)	%

**December 31, 2021 reported balance are shown net of deferred costs and fees to conform with the current period's presentation.

Loan Concentrations

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, commercial loans, including residential rentals, represented ~~89.4%~~91.2% 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$776.0~~$893.9 million or ~~325.1%~~351.2% and ~~$695.8~~$813.0 million or ~~316.1%~~331.4%, respectively. Construction loans as a percentage of risk-based capital at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 were ~~$123.6~~$133.1 million or ~~51.8%~~52.3% and ~~$139.2~~$140.4 million or ~~63.2%~~57.2%, respectively.

5963

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Asset Quality

The following tables show asset quality ratios at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

(Unaudited)
(dollars in thousands, except per share amounts) September 30, 2021 December 31, 2020 $ Change % Change
ASSET QUALITY
Total assets $ 2,278,692 $ 2,026,439 $ 252,253 12.4 %
Gross portfolio loans(1)
1,533,051 1,504,275 28,776 1.9
Classified Assets 6,663 22,358 (15,695) (70.2)
Allowance for loan losses 18,579 19,424 (845) (4.4)
Past due loans - 31 to 89 days 189 179 10 5.6
Past due loans >=90 days 1,400 11,965 (10,565) (88.3)
Total past due (delinquency) loans 1,589 12,144 (10,555) (86.9)
Non-accrual loans(2)
5,160 18,222 (13,062) (71.7)
Accruing troubled debt restructures (TDRs)(3)
455 572 (117) (20.5)
Other real estate owned (OREO) 1,536 3,109 (1,573) (50.6)
Non-accrual loans, OREO and TDRs $ 7,151 $ 21,903 $ (14,752) (67.4) %
ASSET QUALITY RATIOS(4)
Classified assets to total assets 0.29 % 1.10 %
Classified assets to risk-based capital 2.75 9.61
Allowance for loan losses to total loans 1.21 1.29
Allowance for loan losses to non-accrual loans 360.06 106.60
Past due loans - 31 to 89 days to total loans 0.01 0.01
Past due loans >=90 days to total loans 0.09 0.80
Total past due (delinquency) to total loans 0.10 0.81
Non-accrual loans to total loans 0.34 1.21
Non-accrual loans and TDRs to total loans 0.37 1.25
Non-accrual loans and OREO to total assets 0.29 1.05
Non-accrual loans and OREO to total loans and OREO 0.44 1.42
Non-accrual loans, OREO and TDRs to total assets 0.31 1.08


	(Unaudited)
(dollars in thousands, except per share amounts)	June 30, 2022			December 31, 2021
ASSET QUALITY
Total portfolio loans	$	1,652,459		$	1,578,810
Classified Assets	6,062			5,211
Allowance for credit losses	21,404			18,417

Past due loans - 31 to 89 days	900			568
Past due loans >=90 days (1)	147			961
Total past due (delinquency) loans	1,047			1,529

Non-accrual loans (2)	6,235			7,631
Accruing troubled debt restructures (TDRs) (3)	439			447
Other real estate owned (OREO)	—			—
Non-accrual loans, OREO and TDRs	$	6,674		$	8,078

ASSET QUALITY RATIOS (4)
Classified assets to total assets	0.26		%	0.22		%
Classified assets to risk-based capital	2.35			2.10
Allowance for credit losses to total portfolio loans	1.30			1.17
Allowance for credit losses to non-accrual loans	343.29			241.34
Past due loans - 31 to 89 days to total portfolio loans	0.05			0.04
Past due loans >=90 days to total portfolio loans	0.01			0.06
Total past due (delinquency) to total portfolio loans	0.06			0.10
Non-accrual loans to total portfolio loans	0.38			0.48
Non-accrual loans and TDRs to total portfolio loans	0.40			0.51
Non-accrual loans and OREO to total assets	0.27			0.33
Non-accrual loans and OREO to total portfolio loans and OREO	0.38			0.48
Non-accrual loans, OREO and TDRs to total assets	0.29			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 September 30, 2021 and December 31, 2020, the Company had current non-accrual loans of $3.8 million and $6.3 million, respectively.

(3)~~At September 30, 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 $0 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 Credit Losses ("ACL"), Provision for Credit Losses ("PCL"), Allowance for Loan Losses ("~~ALLL")~~ALLL) and Provision for Loan Losses ("PLL")

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 year to date 2021 charge-offs were comparable to the prior year, charge-off activity for the periods used to evaluate the allowance remained low. 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~~total portfolio loans at June 30, 2022 and ~~for the three and nine months ended September 30,~~ 2021 and ~~2020 and year ended~~at December 31, ~~2020:~~

Three Months Ended September 30, Nine Months Ended September 30, Year Ended
(dollars in thousands) 2021 2020 2021 2020 December 31, 2020
Beginning of period $ 18,516 $ 16,318 $ 19,424 $ 10,942 $ 10,942
Charge-offs (491) (65) (2,037) (2,328) (2,358)
Recoveries 554 76 606 115 140
Net charge-offs 63 11 (1,431) (2,213) (2,218)
Provision for loan losses — 2,500 534 10,100 10,700
End of period $ 18,579 $ 18,829 $ 18,527 $ 18,829 $ 19,424
Net charge-offs to average loans (annualized) 0.02 % — % (0.38) % (0.61) % (0.61) %
2021:

Breakdown of general and specific allowance as a percentage of ~~gross~~total portfolio loans
September 30, 2021 December 31, 2020
General allowance $ 18,204 $ 18,068
Specific allowance 323 1,356
Total allowance to non-acquired loans 18,527 19,424
PCI loans 52 —
Total allowance to gross portfolio loans with PCI loans $ 18,579 $ 19,424
General allowance 1.19 % 1.20 %
Specific allowance 0.02 % 0.09 %
Total allowance to gross portfolio loans(1)
1.21 % 1.29 %
Total allowance to gross portfolio loans with PCI loans(2)
1.21 % — %
Allowance to non-acquired gross loans 1.25 % 1.35 %
Total acquired loans $ 50,486 $ 60,977
Non-acquired loans(3)
$ 1,482,565 $ 1,443,298
Gross portfolio loans $ 1,533,051 $ 1,504,275
~~____________________________________~~ (1)

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


	June 30, 2022			June 30, 2021			December 31, 2021
General allowance	$	21,108		$	17,738		$	18,151
Specific allowance	296			778			266
	$	21,404		$	18,516		$	18,417
General allowance	1.28		%	1.15		%	1.15		%
Specific allowance	0.02		%	0.05		%	0.02		%
Allowance to total portfolio loans(1)	1.30		%	1.20		%	1.17		%

Allowance to non-acquired loans(2)	n/a			1.25		%	1.20		%

Total acquired loans(2)	n/a			$	54,697		$	42,182
Non-acquired loans**(2)	n/a			$	1,479,179		$	1,536,761
Total portfolio loans	$	1,652,459		$	1,533,876		$	1,578,943

~~(2)There were no allowances for loan loss on the PCI portfolios prior to the three months ended June 30, 2021.~~

~~(3)~~**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.

61(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 and implemented 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 ~~Contents~~

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 economic uncertainty from~~collectability of the ~~COVID-19 pandemic. The Company's allowance methodology considers quantitative~~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 conditions and factors ~~and qualitative factors~~that may affect the borrower’s ability to ~~determine~~repay, or reduce the estimated ~~level~~value of ~~incurred losses~~any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

Upon the ~~Company's loan portfolios. ALLL levels decreased~~adoption of ASC 326, the Company recorded a $2.5 million increase to ~~1.21%~~the ACL. At June 30, 2022, the ACL was $21.4 million increased $3.0 million or 16.2% when compared to $18.4 million at December 31, 2021. The increase is related to the impact of adoption and the current year-to-date provision.

ACL balances increased to 1.30% of portfolio loans at ~~September~~June 30, ~~2021~~2022 compared to ~~1.29%~~1.17% at December 31, ~~2020.~~2021. At ~~September~~and for the six months ended June 30, ~~2021,~~2022, the Company's ~~ALLL decreased $0.9~~ACL increased $3.0 million or ~~4.6%~~16.2% to ~~$18.5~~$21.4 million at ~~September~~June 30, ~~2021~~2022 from ~~$19.4~~$18.4 million at December 31, ~~2020.~~

The Company recorded $0.6 million of PLL for the nine months ended September 30, 2021 compared to $10.1 million for the nine months ended months ended September 30, 2020. Net charge-offs also decreased for the comparable periods from $2.2 million in the first nine months of 2020 to $1.4 million for the nine months ended September 30, 2021. During the three months ended September 30, 2021, net recoveries of $0.1 million included recoveries of $0.6 million partially offset by charge-offs of $0.5 million on two non-accrual relationships totaling $7.8 million that were resolved in the third quarter through a loan sale and a payoff.

~~The Company's general allowance increased from $18.1 million at December 31, 2020 to $18.2 million at September 30,~~ 2021. The ~~stability~~increase in the general allowance was primarily ~~due~~related to ~~improvements~~the impact of adoption of ASC-326 and portfolio loan growth.

The Company recorded a $0.4 million and $0.9 million PCL for the three and six months ended June 30, 2022 compared to a $0.3 million and $0.6 million PLL for the three and six months ended June 30, 2021. There were $0.4 million in ~~some qualitative factors partially offset by 2021 growth~~net charge-offs during the six months ended June 30, 2022 compared to $1.5 million in net charge-offs for the ~~higher risk commercial real estate portfolio.~~six months ended June 30, 2021. During the ~~first quarter of~~six months ended June 30, 2021, the Bank sold 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. InDuring the ~~third quarter~~six months ended June 30, 2022,

Table of ~~2021,~~ Contents

the Bank ~~resolved $7.8~~sold non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $3.4 million, net of ~~non-accrual loans through $0.5 million in~~ charge-offs ~~that resulted in a loan sale and a payoff. The Company's resolution~~ of ~~these impaired loans decreased the specific reserve, improved asset quality and improved several ALLL qualitative factors.~~

~~Gross U.S. SBA PPP loans at September 30, 2021 totaled $56.4~~$0.4 million, and ~~345 loans,~~recognized a ~~decrease~~gain on the sale of $53.9 million compared to December 31, 2020. No credit issues are anticipated with U.S. SBA PPP loans as they are guaranteed by the SBA and the Bank's allowance for loan loss does not include an allowance for U.S. SBA PPP loans.

Management believes that loans included in the COVID-19 deferral program in 2020 and 2021 are more likely to default in the future and that the identification and resolution of problem credits could be delayed. In our evaluation of current and previously deferred loans, we considered the length of the deferral period, the type and amount of collateral and customer industries. 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 September 30, 2021, $3.4 million or 0.2% of gross portfolio loans had deferral agreements, a decrease of $32.0 million from the $35.4 million or 2.4% of gross portfolio loans at December 31, 2020. As of September 30, 2021 and December 31, 2020, there were $1.0 million and $3.4 million of COVID-19 deferred loans deemed to be non-accrual and substandard based on reviews.

~~Below are schedules that provide information on COVID-19 deferred loans as of September 30, 2021:~~

COVID-19 Deferred Loans (Unaudited)
September 30, 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 $ 3,422 100.00 % 0.22 % $ 2,469 2 $ 954 1
Total $ 3,422 100.00 % 0.22 % $ 2,469 2 $ 954 1

COVID-19 Deferred Loans - Next Payment Due by Month (Unaudited)
(dollars in thousands) Loan Balances % Number of Loans
December-21 $ 3,422 100.00 % 3
Total $ 3,422 100.00 % 3

COVID-19 Deferred Loans by NAICS Industry (Unaudited)
(dollars in thousands) September 30, 2021 Number of Loans
Arts, Entertainment, and Recreation $ 3,422 3
Total $ 3,422 3
$209,000.

Management believes that the allowance is adequate at ~~September~~June 30, ~~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.

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.


	June 30, 2022				December 31, 2021
(dollars in thousands)	Amount		%**		Amount		%**
Commercial real estate	$	16,833	71.33	%	$	13,095	72.28	%
Residential first mortgages	255		5.13	%	1,002		5.30	%
Residential rentals	1,660		12.72	%	2,175		11.73	%
Construction and land development	166		1.88	%	260		1.88	%
Home equity and second mortgages	143		1.53	%	274		1.62	%
Commercial loans	238		2.63	%	582		3.00	%
Consumer loans	132		0.27	%	58		0.22	%
Commercial equipment	1,977		4.51	%	971		3.97	%


Total allowance for credit losses	$	21,404	100.00	%	$	18,417	100.00	%

**Percent of loans in each category to total portfolio loans. December 31, 2021 reported percentages are shown net of deferred costs and fees to conform with the current period's presentation.

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The following table indicates net charge-offs by average portfolio loan category for the three and six months ended June 30, 2022 and June 30, 2021, and for the year ended December 31, 2021:


	Three Months Ended
	June 30, 2022						June 30, 2021
(dollars in thousands)	Net (Charge-off) Recovery		Average Balance		%		Net (Charge-off) Recovery		Average Balance		%
Commercial real estate	$	(280)	$	1,181,885	(0.09)	%	$	—	$	1,089,781	—	%
Residential first mortgages	(111)		85,030		(0.52)		—		109,296		—
Residential rentals	—		194,972		—		—		139,080		—
Construction and land development	—		30,302		—		—		38,315		—
Home equity and second mortgages	1		26,101		0.02		2		29,061		0.03
Commercial loans	(49)		42,744		(0.46)		(21)		43,100		(0.19)
Consumer loans	(6)		4,040		(0.59)		—		1,425		—
Commercial equipment loans	42		68,349		0.25		(12)		61,017		(0.08)
	(403)		1,633,423		(0.10)		(31)		1,511,075		(0.01)
Allowance for credit losses	—		(21,375)		—		—		(18,265)		—
Total net charge-off and average portfolio loans	$	(403)	$	1,612,048	(0.10)	%	$	(31)	$	1,492,810	(0.01)	%


	Six Months Ended												Year Ended
	June 30, 2022						June 30, 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	$	(280)	$	1,147,188	(0.05)	%	$	(1,246)	$	1,074,874	(0.23)	%	$	(1,914)	$	1,085,823	(0.18)	%
Residential first mortgages	(111)		85,912		(0.26)		(142)		117,097		(0.24)		(142)		107,011		(0.13)
Residential rentals	—		196,136		—		(46)		139,150		(0.07)		(46)		151,606		(0.03)
Construction and land development	—		31,977		—		—		37,209		—		—		36,891		—
Home equity and second mortgages	1		26,024		0.01		3		29,166		0.02		5		28,051		0.02
Commercial loans	(49)		44,696		(0.22)		(66)		43,915		(0.30)		467		46,390		1.01
Consumer loans	(6)		3,629		(0.33)		—		1,373		—		—		1,783		—
Commercial equipment loans	61		65,050		0.19		3		60,782		0.01		37		60,845		0.06
	(384)		1,600,612		(0.05)		(1,494)		1,503,566		(0.20)		(1,593)		1,518,400		(0.10)
Allowance for credit losses	—		(21,210)		—		—		(18,936)		—		—		(18,788)		—
Total net charge-off and average portfolio loans	$	(384)	$	1,579,402	(0.05)	%	$	(1,494)	$	1,484,630	(0.20)	%	$	(1,593)	$	1,499,612	(0.11)	%

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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 in~~increased due to impact of the ~~first nine months of 2021.~~ASC 326 adoption. 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 $15.7~~increased $0.9 million from ~~$22.4~~$5.2 million at December 31, ~~2020~~2021 to ~~$6.7~~$6.1 million at ~~September~~June 30, ~~2021.~~2022. Management considers classified assets to be an important measure of asset quality. The Company's risk rating process for classified loans isare an important input into the Company's ~~allowance methodology. Risk ratings are expected to be an important indicator in assessing ongoing credit risks of loans that are presently or were for a period of time COVID-19 deferred loans.~~ACL qualitative framework. The following is a breakdown of the Company’s classified and special mention assets at ~~September 30, 2021,~~ June 30, ~~2021,~~2022, and March 31, ~~2021, and~~2022, December 31, 2021, 2020, 2019, ~~2018,~~ and ~~2017,~~2018, respectively:


		As of																						As of
(dollars in thousands)	(dollars in thousands)	9/30/2021			6/30/2021			3/31/2021			12/31/2020			12/31/2019			12/31/2018			12/31/2017			(dollars in thousands)		6/30/2022			3/31/2022			12/31/2021			12/31/2020			12/31/2019			12/31/2018
Classified loans	Classified loans																						Classified loans
Substandard	Substandard	$	5,127		$	13,382		$	13,816		$	19,249		$	26,863		$	32,226		$	40,306		Substandard		$	6,062		$	4,745		$	5,211		$	19,249		$	26,863		$	32,226
Doubtful	Doubtful	—			—			—			—			—			—			—			Doubtful		—			—			—			—			—			—

Total classified loans	Total classified loans	5,127			13,382			13,816			19,249			26,863			32,226			40,306			Total classified loans		6,062			4,745			5,211			19,249			26,863			32,226
Special mention loans	Special mention loans	780			4,524			7,769			7,672			—			—			96			Special mention loans		160			—			—			7,672			—			—
Total classified and special mention loans	Total classified and special mention loans	5,907			17,906			21,585			26,921			26,863			32,226			40,402			Total classified and special mention loans		$	6,222		$	4,745		$	5,211		$	26,921		$	26,863		$	32,226

Classified loans	Classified loans	5,127			13,382			13,816			19,249			26,863			32,226			40,306			Classified loans		6,062			$	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	1,536			1,536			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	$	6,663		$	14,918		$	16,145		$	22,358		$	34,636		$	40,819		$	50,298		Total classified assets		$	6,062		$	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	0.29		%	0.68		%	0.75		%	1.10		%	1.93		%	2.42		%	3.58		%	Total classified assets as a percentage of total assets		0.26		%	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	2.75		%	6.24		%	6.81		%	9.61		%	16.21		%	21.54		%	32.10		%	Total classified assets as a percentage of Risk Based Capital		2.35		%	1.87		%	2.10		%	9.61		%	16.21		%	21.54		%

~~Asset quality has continued to improve in 2021 with the resolution~~

Table of $16.9 million in non-accrual and impaired loans through loan sales and negotiated payoffs. Management remains committed to expeditiously resolve non-performing or substandard credits that are not likely to become performing or passing credits in a reasonable timeframe. During the first nine months of 2021 classified loans decreased $14.1 million from $19.2 million at December 31, 2020 to $5.1 million at September 30, 2021.Contents

Non-Performing Assets


(dollars in thousands)	June 30, 2022		December 31, 2021
Non-accrual loans:
Commercial real estate	$	4,702	$	4,890
Residential first mortgages	—		450
Residential rentals	981		942
Construction and land development	—		—
Home equity and second mortgages	267		601
Commercial loans	25		—
Consumer loans	—		—
Commercial equipment	260		691

U.S. SBA PPP loans	—		57
Total non-accrual loans (1)	6,235		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	438		447

U.S. SBA PPP loans	—		—
Total TDRs	438		447
Total Accrual TDRs	438		447

Total non-accrual loans, OREO and Accrual TDRs	$	6,673	$	8,078

Interest income due at stated rates, but not recognized on non-accruals	$	23	$	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 ~~$14.8~~$1.4 million from ~~$21.9~~$8.1 million at December 31, ~~2020~~2021 to ~~$7.2~~$6.7 million at ~~September~~June 30, ~~2021.~~2022.

Non-accrual loans and OREO to total portfolio loans and OREO decreased 10 basis points from 0.48% at December 31, ~~2020~~2021 to ~~September~~0.38% at June 30, ~~2021. There were no additions~~2022. Non-accrual loans, OREO and TDRs to ~~OREO during the nine months ended September~~total assets decreased six basis points from 0.35% at December 31, 2021 to 0.29% at June 30, ~~2021. See Note 5~~2022.

All interest accrued but not collected from 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 ~~financial statements~~opinion of management, the collection of additional interest is doubtful. The accrual of interest on 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 considered impaired and evaluated for an analysis of OREO activity for the nine-month periods ended September 30, 2021 and 2020 and the year ended December 31, 2020. 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.impairment on a loan-by-loan basis.

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~~Non-accrual loans decreased $13.1~~At June 30, 2022, there were $6.1 million ~~from $18.2 million at December 31, 2020 to $5.2 million at September 30, 2021. The decrease in~~(98.0%) of non-accrual loans during the first nine months of 2021 was largely the result of the March 2021 and August 2021 sales and negotiated payoffs of several substandard classified relationships. Non-accrual loans of $3.8 million (73%) were current with all payments of principal and interest with specific reserves of ~~$32,000 at September 30, 2021.~~$0.3 million. Delinquent non-accrual loans were ~~$1.4~~$0.1 million ~~(27%~~(2.0%) of with no specific reserves ~~of $0.3 million~~ at ~~September~~June 30, ~~2021.~~

~~Non-accrual loans and OREO to total gross portfolio loans and OREO decreased 98 basis points from 1.42% at~~2022. At December 31, ~~2020 to 0.44%~~2021, there were $6.3 million (83.7%) of non-accrual loans current with all payments of principal and interest with no impairment and $1.2 million (16.3%) of delinquent non-accrual loans with a total of zero specifically reserved. There were no non-accrual TDRs at ~~September~~June 30, ~~2021.~~2022. Non-accrual ~~loans, OREO and TDRs to total assets decreased 77 basis points from 1.08% at December 31, 2020 to 0.31% at September 30, 2021.~~

~~Loan delinquency (90 days or greater delinquent and 31-89 days delinquent) decreased $10.6 million from $12.1 million or 0.81% of portfolio~~ loans at December 31, ~~2020 to $1.6 million, or 0.10%~~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 ~~September~~June 30, ~~2021. Early-stage delinquency (31-89 days delinquent) remained flat at $0.2 million~~2022 and at December 31, ~~2020 and at September 30,~~ 2021.

~~Table~~ For additional information on OREO, refer to Note 5 of ~~Contents~~

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)	September 30, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		December 31, 2021		$ Change		% Change
Deposits	Deposits									Deposits
Non-interest-bearing deposits	Non-interest-bearing deposits	$	432,606	$	362,079	$	70,527	19.5	%	Non-interest-bearing deposits	$	635,649	$	445,778	$	189,871	42.6	%
Interest-bearing deposits	Interest-bearing deposits	1,572,001		1,383,523		188,478		13.6	%	Interest-bearing deposits	1,449,727		1,610,386		(160,659)		(10.0)	%
Total deposits	Total deposits	2,004,607		1,745,602		259,005		14.8	%	Total deposits	2,085,376		2,056,164		29,212		1.4	%

Long-term debt	Long-term debt	12,249		27,302		(15,053)		(55.1)	%	Long-term debt	—		12,231		(12,231)		(100.0)	%

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%	19,496		19,526		(30)		—	%	Subordinated notes net of debt issuance costs - 4.75%	19,538		19,510		28		—	%
Lease liabilities - operating leases	Lease liabilities - operating leases	6,418		8,088		(1,670)		(20.6)	%	Lease liabilities - operating leases	6,372		6,343		29		0.5	%
Accrued expenses and other liabilities	Accrued expenses and other liabilities	19,794		15,908		3,886		24.4	%	Accrued expenses and other liabilities	15,357		12,925		2,432		18.8	%
Total Liabilities	Total Liabilities	$	2,074,564	$	1,828,426	$	246,138	13.5	%	Total Liabilities	$	2,138,643	$	2,119,173	$	19,470	0.9	%

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 ~~$1,996.6~~$2,060.4 million or 98.8% of funding at June 30, 2022 compared to $2,048.2 million or 99.0% of funding at ~~September 30, 2021 compared to $1,737.6 million or 98.0% of funding at~~ December 31, ~~2020.~~2021. Wholesale funding, which consists of FHLB advances and brokered deposits, was ~~$20.3~~$25.0 million or 1.2% of funding at June 30, 2022 compared to $20.2 million or 1.0% of funding at ~~September 30, 2021 compared to $35.3 million or 2.0% of funding at~~ December 31, ~~2020.~~2021.

~~The~~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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

The following is a breakdown of the Company’s deposit portfolio at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:

September 30, 2021 December 31, 2020
(dollars in thousands) Balance % Balance %
Noninterest-bearing demand $ 432,606 21.58 % $ 362,079 20.74 %
Interest-bearing:
Demand 764,482 38.14 % 590,159 33.81 %
Money market deposits 355,582 17.74 % 340,725 19.52 %
Savings 112,282 5.60 % 98,783 5.66 %
Certificates of deposit 339,655 16.94 % 353,856 20.27 %
Total interest-bearing 1,572,001 78.42 % 1,383,523 79.26 %
Total Deposits $ 2,004,607 100.00 % $ 1,745,602 100.00 %
Transaction accounts $ 1,664,952 83.06 % $ 1,391,746 79.73 %

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	June 30, 2022				December 31, 2021
(dollars in thousands)	Balance		%		Balance		%
Noninterest-bearing demand	$	635,649	30.48	%	$	445,778	21.68	%
Interest-bearing:
Demand	635,344		30.47	%	790,481		38.45	%
Money market deposits	380,712		18.26	%	372,717		18.13	%
Savings	119,363		5.72	%	119,767		5.82	%
Certificates of deposit	314,308		15.07	%	327,421		15.92	%
Total interest-bearing	1,449,727		69.52	%	1,610,386		78.32	%

Total Deposits	$	2,085,376	100.00	%	$	2,056,164	100.00	%

Transaction accounts	$	1,771,068	84.93	%	$	1,728,743	84.08	%

Total deposits increased ~~$259.0~~$29.2 million or ~~14.84% (19.8%~~1.42% (2.8% annualized) at ~~September~~June 30, ~~2021~~2022 compared to December 31, ~~2020.~~2021. The increase ~~consisted of~~reflects a ~~$273.2~~$42.3 million increase to transaction deposits ~~partially offset by~~offsetting a ~~$14.2~~$13.1 million decrease to time deposits. InDuring the first ~~nine~~six months of ~~2021, transaction~~2022, non-interest-bearing demand deposits increased ~~due~~$189.9 million to ~~new customer acquisitions as well as~~$635.6 million at June 30, 2022, representing 30.5% of deposits, compared to 21.7% of deposits at December 31, 2021. The Company's business development efforts continue to focus on increasing non-interest bearing and lower ~~levels of consumer and business spending related to the COVID-19 pandemic.~~cost transaction accounts. The Bank's increased customer deposit balances provided additional on-balance sheet liquidity compared to the prior year.

~~Table of Contents~~

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 ~~September~~June 30, ~~2021~~2022 were ~~$62.2~~$71.7 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.

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)	September 30, 2021		December 31, 2020		$ Change		% Change		(dollars in thousands)	June 30, 2022		December 31, 2021		$ Change		% Change
Common Stock at par of $0.01	Common Stock at par of $0.01	$	57	$	59	$	(2)	(3.39)	%	Common Stock at par of $0.01	$	56	$	57	$	(1)	(1.75)	%
Additional paid in capital	Additional paid in capital	96,649		95,965		684		0.71	%	Additional paid in capital	97,455		96,896		559		0.58	%
Retained earnings	Retained earnings	107,890		97,944		9,946		10.15	%	Retained earnings	119,523		113,448		6,075		5.35	%
Accumulated other comprehensive (loss) income		(9)		4,504		(4,513)		(100.20)	%
Accumulated other comprehensive loss										Accumulated other comprehensive loss	(31,847)		(1,952)		(29,895)		1,531.51	%
Unearned ESOP shares	Unearned ESOP shares	(459)		(459)		—		—	%	Unearned ESOP shares	(316)		(316)		—		—	%
Total Stockholders’ Equity	Total Stockholders’ Equity	$	204,128	$	198,013	$	6,115	3.09	%	Total Stockholders’ Equity	$	184,871	$	208,133	$	(23,262)	(11.18)	%

Total stockholders’ equity decreased $23.3 million during the six months ended June 30, 2022. Equity increased ~~primarily~~ due to net income of ~~$19.1~~$13.1 million ~~partially offset by~~and net stock related activities in connection with stock-based compensation and ESOP activity of $0.5 million. The decrease in equity was primarily due to an increase of $29.9 million in accumulated other comprehensive loss ~~of $4.5 million~~("AOCL") in the Bank's AFS securities portfolio due to ~~a reduction~~changes in ~~unrealized gains in the investment portfolio, repurchases of common stock of $6.7 million and~~market interest rates. In addition, equity decreased for common dividends paid of ~~$2.4 million.~~$1.9 million, stock repurchases of $3.0 million and $2.0 million for the adoption of the CECL accounting standard on January 1, 2022. On May 25, 2022, the Company announced a quarterly cash dividend of $0.175 per share of common stock. The dividend was paid on or about July 26, 2022 to stockholders of record as of the close of business on July 12, 2022.

The Company had a book value per common share of ~~$35.66~~$32.72 and ~~$33.54~~$36.40, at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Tangible book value at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 were $33.57~~2021 was $30.66 and ~~$31.45.~~$34.32. The Company's common equity to assets ratio decreased to ~~8.96%~~7.96% at ~~September~~June 30, ~~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 ~~8.48%~~7.49% at ~~September~~June 30, ~~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 ~~repurchases of 190,587 shares of Company's common stock during~~increased unrealized losses in the ~~first nine months of 2021 and significant increases in cash and investments.~~Bank's AFS investment portfolio.

In April 2020, banking regulators issued an interim final rule that excluded U.S. SBA PPP loans ~~are excluded~~ from the calculation of risk-based capital ratios by assigning a zero percent risk weight. The Company remains well capitalized at ~~September~~June 30, ~~2021~~2022 with a Tier 1 capital to average assets ("leverage ratio") of ~~9.41%~~9.42% at ~~September~~June 30, ~~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 ~~September~~June 30, ~~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 ~~September~~June 30, ~~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.~~Consolidated Financial Statements.

Liquidity

Liquidity is our ability to meet cash demands as they arise. Cash needs may come from ~~operations,~~ 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had ~~$80.2~~$90.1 million and ~~$66.5~~$64.4 million, respectively, in loan commitments outstanding. In addition, at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Bank had ~~$22.3~~$19.9 million and ~~$20.0~~$22.0 million, respectively, in letters of credit and approximately ~~$237.1~~$240.2 million and ~~$225.5~~$241.7 million, respectively, available under lines of credit. Certificates of deposit due within one year of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 totaled ~~$272.8~~$254.1 million, or ~~80.3%~~80.85% and ~~$266.1~~$256.9 million, or ~~75.2%~~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 ~~monitors~~has increased oversight and review of customer line of credit ~~usage.~~usage due to current inflationary pressures and the possibility of a recession. 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 ~~September~~June 30, ~~2021,~~2022, the Company had on-balance sheet liquidity of ~~$147.2~~$88.1 million in cash and cash equivalents. At ~~September~~June 30, ~~2021,~~2022, the Company had loans and securities pledged or in safekeeping at FHLB which provided for funding availability of ~~$515.2~~$586.4 million at ~~September~~June 30, ~~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. ~~In addition,~~FHLB long-term debt may consist of adjustable-rate advances with rates based upon LIBOR, fixed-rate advances, and convertible advances. As of June 30, 2022, the Bank has no FHLB long-term debt outstanding. The Bank has also established unsecured and secured lines of credit with the Federal Reserve Bank and commercial banks.

The decrease in equity of $23.3 million during the six months ended June 30, 2022 was primarily due to an increase of $29.9 million in AOCL in the Bank's AFS securities portfolio due to changes in market interest rates. The Company intends and has the ability to hold AFS securities with unrealized losses until maturity or interest rates decrease. Management believe there is adequate available liquidity with available lines of credit and cash to fund operational needs.

For additional information on these agreements, including collateral, see Note 8 of the ~~consolidated financial statements~~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 ~~78.3%~~78.5% at ~~September~~June 30, ~~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 ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, all financing activities provided ~~$234.9~~$12.0 million in cash compared to ~~$325.5~~$156.8 million in cash for the same period in ~~2020.~~2021. Cash from financing activities decreased ~~$90.6~~$144.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 primarily due to ~~a decrease in long term borrowings of $102.9 million,~~ decreased deposit growth of ~~$8.8~~$133.3 million and ~~the repurchase~~increase in dividends paid and repurchases of common ~~stock of $6.7 million, partially offset by a decrease in subordinated debt activities of $23.0 million.~~stock.

During the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 all investing activities used ~~$195.2~~$83.0 million in cash compared to ~~$190.2~~$114.1 million in cash used for the same period in ~~2020.~~2021. The ~~increase~~decrease in cash used was primarily the result of ~~cash used for~~ purchases of investment securities ~~partially offset by a decrease in~~which decreased $84.5 million from $142.2 million for the six months ended June 30, 2021 to $57.7 million for the six months ended June 30, 2022. Cash used increased $42.3 million as cash used for loan ~~activities. Cash used for loan~~ activities ~~decreased $186.0 million from $176.4 million,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2020 to $9.6 million of cash provided for the nine months ended September 30, 2021 primarily due to decreased PPP originations in 2021 compared to~~2022 increased over the prior year comparable period. Cash used for the purchase of investment securities increased $158.4 million from $107.4 million for the nine months ended September 30, 2020 to $265.7 million for the nine months ended September 30, 2021. CashIn addition, cash used decreased ~~$41.9~~$10.6 million as total proceeds from the sales and principal payments of available for sale securities for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 decreased over the prior year comparable period.

Operating activities provided cash of ~~$30.5~~$19.4 million, or ~~$10.5~~$0.3 million more cash, for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$20.0~~$19.1 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. ~~Increasing~~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 ~~by modeling changes to Net Interest Income ("NII")~~over the short and ~~changes to~~long term. The Company measures interest rate risk as the ~~Economic Value of Equity ("EVE"~~change in net interest income (“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 (“~~NII”~~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 approved the Company's interest rate risk policy and assigned oversight to the Board Risk Oversight Committee (“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 ~~modeled over twelve and twenty-four months.~~used by management to maintain interest rate risk exposure within Board policy guidelines.

The Company’s interest rate risk (“IRR”) model ~~bases its results on~~uses assumptions which include factors such as call features, prepayment options and interest rate caps and floors included in investment and loan portfolio contracts. The IRR model estimates the ~~characteristics~~lives and interest rate sensitivity of the ~~Company's assets~~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 ~~liabilities including contractual features as well as estimates of consumer behavior.~~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 ~~changes in EVE~~movements of interest-earning assets and ~~NII~~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 ~~that model non-parallel changes in rates.~~(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 interest rate risk policy establishes~~Company’s internal limits ~~on the percentage change in NII and EVE resulting from changes in interest rates. The limits established~~ 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company did not exceed any Board approved sensitivity limits for percentage change in ~~NII.~~net interest income. In the ~~third~~second quarter of ~~2021~~2022 the percentage change in ~~EVE~~economic value of equity exceeded policy guidelines due to ~~the historically~~already low ~~interest rate environment. The Company~~level of rates on non-maturing deposit instruments. Management has determined that due to the level of market rates at ~~September~~June 30, ~~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.

~~Estimated~~ Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. The below schedule estimates the changes ~~for NII~~in 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
Change in Interest Rates: + 200 bp + 100 bp -100 bp
Policy Limit (15.00) % (10.00) % (10.00) %
September 30, 2021 (1.28) % (0.60) % (1.17) %
June 30, 2021 1.69 % 0.82 % (1.09) %
March 31, 2021 (0.89) % (0.53) % (1.02) %
December 31, 2020 (1.28) % (0.23) % (1.17) %


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


June 30, 2022	1.60	%	1.55	%	(6.23)	%
March 31, 2022	(1.83)	%	(0.84)	%	(5.95)	%
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 ~~details~~estimates the ~~estimated~~ 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) %
September 30, 2021 27.10 % 16.77 % (29.34) %
June 30, 2021 32.17 % 19.50 % (32.54) %
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)	%


June 30, 2022	10.34	%	6.82	%	(11.88)	%
March 31, 2022	13.66	%	9.28	%	(16.40)	%
December 31, 2021	24.45	%	15.16	%	(25.07)	%

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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 September 30, 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.~~3, 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.~~3, 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. 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 using up to $4.0 million in the aggregate and up to $1.5 million in the aggregate on a quarterly basis. As of ~~September~~June 30, ~~2021, 200,550~~2022, 13,647 shares were ~~purchased at a total cost of approximately $7.0 million or an average of $34.81 per share~~available to be repurchased under the 2020 repurchase ~~plan, which completed the usage of the proceeds the Company allocated from its October 2020 $20.0 million subordinated debt offering toward share repurchases under the 2020 repurchase~~ plan. The Company will continue to evaluate the use of additional capital management strategies to enhance overall shareholder value, including repurchasing some or all of the 99,450 shares remaining under the 2020 repurchase plan. Any further plans to resume repurchases under the 2020 repurchase plan will be publicly announced. The following schedule shows the repurchases during the three months ended ~~September~~June 30, ~~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
July 1-31, 2021 71,196 $ 35.63 71,196 99,725
August 1-31, 2021 275 $ 37.78 275 99,450
September 1-30, 2021 — $ — — 99,450
Total 71,471 $ 35.64 71,471 99,450


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
April 1-30, 2022	38,017	$	39.43	38,017	13,647
May 1-31, 2022	—	$	—	—	13,647
June 1-30, 2022	—	$	—	—	13,647
Total	38,017	$	39.43	38,017	13,647

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

~~3.1~~16.1						~~Amended~~ ~~and Restated Bylaws~~Letter of ~~The Community Financial Corporation~~FORVIS, LLP dated June 6, 2022 to the SEC (Incorporated by reference to Exhibit ~~3.1~~16.1 to the Form 8-K filed on ~~September 27, 2021).~~
~~10.1~~*						~~Amendment No. 4 to the Consulting Agreement by and between Community Bank of the Chesapeake and James F. Di Misa (Incorporated by reference to Exhibit 10.1 to the Form 8-K filed on October 4, 2021)~~June 6, 2022).
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 ~~September~~June 30, ~~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 (vi) the Notes to the Consolidated Financial Statements.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*~~Management contract or compensation arrangement.~~

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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: ~~November 8, 2021~~August 3, 2022	By:	/s/ William J. Pasenelli
		William J. Pasenelli
		Chief Executive Officer



Date: ~~November 8, 2021~~August 3, 2022	By:	/s/ Todd L. Capitani
		Todd L. Capitani
		Chief Financial Officer

7378


	Commercial Real Estate				Construction and Land Dev.				Residential Rentals
(dollars in thousands)	9/30/2021		12/31/2020		9/30/2021		12/31/2020		9/30/2021		12/31/2020
Unrated	$	—	$	162,434	$	—	$	1,036	$	—	$	47,605
Pass	1,084,372		866,648		37,139		36,484		171,121		90,633
Special mention	600		2,417		—		—		—		821
Substandard	3,664		17,648		—		—		961		—
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	1,088,636	$	1,049,147	$	37,139	$	37,520	$	172,082	$	139,059


	Non-Commercial Portfolios**				U.S. SBA PPP Loans				Total Loans Portfolios
(dollars in thousands)	9/30/2021		12/31/2020		6/30/2020		12/31/2019		9/30/2021		12/31/2020
Unrated	$	103,696	$	136,792	$	56,424	$	110,320	$	160,120	$	497,734
Pass	21,355		25,125		—		—		1,423,448		1,089,940
Special mention	—		457		—		—		780		7,672
Substandard	470		1,561		—		—		5,127		19,249
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	125,521	$	163,935	$	56,424	$	110,320	$	1,589,475	$	1,614,595


	Residential First Mortgages				Home Equity and Second Mtg.				Consumer Loans
(dollars in thousands)	9/30/2021		12/31/2020		9/30/2021		12/31/2020		9/30/2021		12/31/2020
Performing	$	96,653	$	133,444	$	26,316	$	28,927	$	2,168	$	1,027
Nonperforming	182		335		202		202		—		—
Total	$	96,835	$	133,779	$	26,518	$	29,129	$	2,168	$	1,027


	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020		Nine Months Ended September 30, 2021		Nine Months Ended September 30, 2020
(dollars in thousands)	Net Unrealized Gains And Losses		Net Unrealized Gains And Losses		Net Unrealized Gains And Losses		Net Unrealized Gains And Losses
Beginning of period	$	3,063	$	4,517	$	4,504	$	1,504
Other comprehensive (loss) gain, net of tax before reclassifications	(3,072)		94		(4,946)		2,781
Amounts reclassified from accumulated other comprehensive gain	—		169		433		495
Net other comprehensive (loss) income	(3,072)		263		(4,513)		3,276

End of period	$	(9)	$	4,780	$	(9)	$	4,780


	Nine Months Ended September 30, 2020
(dollars in thousands)		Tax Provision		Effective Tax Rate
Income tax apportionment adjustment		$	(743)	(6.0)	%
Income taxes before apportionment adjustment		3,106		25.1	%
Income tax expense as reported		$	2,363	19.1	%

Income before income taxes		$	12,360


COVID-19 Deferred Loans	(Unaudited)
	September 30, 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	$	3,422	100.00	%	0.22	%	$	2,469	2	$	954	1







Total	$	3,422	100.00	%	0.22	%	$	2,469	2	$	954	1