Major categories of loans as of September 30, 2022 and December 31, 2021 are as follows:

Management has an established methodology to determine the adequacy of the allowance for credit losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for credit losses, the Company has segmented the loan portfolio into the following classifications:

Each of these segments are reviewed and analyzed quarterly using historical charge-off experience for their respective segments as well as the following qualitative factors:

●

Changes in the levels and trends in delinquencies, nonaccruals, classified assets and TDRs

●

Changes in the value of underlying collateral

●

Changes in the nature and volume of the portfolio

●

Effects of any changes in lending policies, procedures, including underwriting standards and collections, charge off and recovery practices

●

Changes in the experience, depth and ability of management

●

Changes in the national and local economic conditions and developments, including the condition of various market segments

●

Changes in the concentration of credits within each pool

●

Changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors

●

Changes in external factors such as competition and the legal environment

The above factors result in a Financial Accounting Standards Board (“FASB”) ASC 450-10-20 calculated reserve for environmental factors.

All credit exposures graded at a rating of “non-pass” with outstanding balances less than or equal to $250 thousand and credit exposures graded at a rating of “pass” are reviewed and analyzed quarterly using historical charge-off experience for their respective segments as well as the qualitative factors discussed above. The historical charge-off experience is further adjusted based on delinquency risk trend assessments and concentration risk assessments.

All credit exposures graded at a rating of “non-pass” with outstanding balances greater than $250 thousand, as well as any loans considered TDRs, are to be reviewed no less than quarterly for the purpose of determining if a specific allocation is needed for that credit. The determination for a specific reserve is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance for credit losses estimate or a charge-off to the allowance for credit losses.

The establishment of a specific reserve does not necessarily mean that the credit with the specific reserve will definitely incur loss at the reserve level. It is only an estimation of potential loss based upon known events that are subject to change. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts. The total allowance for credit losses reflects management's estimate of loan losses inherent in the loan portfolio as of September 30, 2022 and December 31, 2021.

The following tables include impairment information relating to loans and the allowance for credit losses as of September 30, 2022 and December 31, 2021:


	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Balance at September 30, 2022
Purchased credit impaired loans
Balance in allowance	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Related loan balance		—		715		353		—		18		—		—		1,086
Individually evaluated for impairment:
Balance in allowance	$	—	$	21	$	—	$	—	$	279	$	—	$	—	$	300
Related loan balance		575		1,731		4,092		53		337		—		—		6,788
Collectively evaluated for impairment:
Balance in allowance	$	1,093	$	1,962	$	8,163	$	248	$	1,612	$	86	$	354	$	13,518
Related loan balance		118,636		221,875		693,869		30,716		127,318		3,672		—		1,196,086

Note: The balances above include unamortized discounts on acquired loans of $1.8 million.


	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Balance at December 31, 2021
Purchased credit impaired loans
Balance in allowance	$	—	$	9	$	—	$	—	$	—	$	—	$	—	$	9
Related loan balance		46		1,633		376		—		126		—		—		2,181
Individually evaluated for impairment:
Balance in allowance	$	—	$	3	$	1,000	$	—	$	452	$	—	$	—	$	1,455
Related loan balance		598		2,082		9,901		53		584		—		—		13,218
Collectively evaluated for impairment:
Balance in allowance	$	1,143	$	1,881	$	8,239	$	212	$	1,433	$	36	$	248	$	13,192
Related loan balance		107,339		197,515		631,940		30,342		130,198		4,462		—		1,101,796

Note: The balances above include unamortized discounts on acquired loans of $2.3 million.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2022 and for the year ended December 31, 2021. Allocation of a portion of the allowance for credit losses to one loan class does not preclude its availability to absorb losses in other loan classes.


	September 30, 2022
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	935	$	1,869	$	9,203	$	234	$	1,663	$	31	$	124	$	14,059
Charge-offs		—		—		(659)		—		(47)		(16)		—		(722)
Recoveries		1		16		6		—		2		37		—		62
Provision/(recovery)		157		98		(387)		14		273		34		230		419
Ending Balance	$	1,093	$	1,983	$	8,163	$	248	$	1,891	$	86	$	354	$	13,818
Nine Months Ended
Beginning Balance	$	1,143	$	1,893	$	9,239	$	212	$	1,885	$	36	$	248	$	14,656
Charge-offs		—		—		(1,545)		(27)		(167)		(41)		—		(1,780)
Recoveries		—		56		22		6		13		42		—		139
Provision/(recovery)		(50)		34		447		57		160		49		106		803
Ending Balance	$	1,093	$	1,983	$	8,163	$	248	$	1,891	$	86	$	354	$	13,818


	December 31, 2021
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Year Ended
Beginning Balance	$	903	$	2,351	$	7,584	$	271	$	1,943	$	37	$	114	$	13,203
Charge-offs		—		(39)		(692)		(7)		(184)		(66)		—		(988)
Recoveries		1		23		53		3		16		22		—		118
Provision/(recovery)		239		(442)		2,294		(55)		110		43		134		2,323
Ending Balance	$	1,143	$	1,893	$	9,239	$	212	$	1,885	$	36	$	248	$	14,656

On March 27, 2020, the CARES Act was signed into law, which established the Paycheck Protection Program (“PPP”) and allocated $349.0 billion of loans to be issued by financial institutions. Under the program, the Small Business Administration (“SBA”) will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for paycheck and other permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00%, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and payments are deferred for the first six months of the loan. The Company received a processing fee ranging from 1% to 5% based on the size of the loan from the SBA. The Paycheck Protection Program and Health Care Enhancement Act (“PPP/ HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized additional funding under the CARES Act of $310.0 billion for PPP loans to be issued by financial institutions through the SBA. The PPP loan funding program expired on May 31, 2021. The Company provided $95.1 million in funding to over 1,130 customers through the PPP, of which approximately $8.2 million remained outstanding as of December 31, 2021. There were no loans outstanding under the PPP at September 30, 2022. Because these loans were 100% guaranteed by the SBA and did not undergo the Company’s typical underwriting process, they were not graded and did not have an associated allocation for credit losses at that time.

Credit Quality Information

The following tables represent credit exposures by creditworthiness category at September 30, 2022 and December 31, 2021. The use of creditworthiness categories to grade loans permits management to estimate a portion of credit risk. The Company’s internal creditworthiness is based on experience with similarly graded credits. The Company uses the definitions below for categorizing and managing its criticized loans. Loans categorized as “Pass” do not meet the criteria set forth below and are not considered criticized.

Marginal — Loans in this category are presently protected from loss, but weaknesses are apparent which, if not corrected, could cause future problems. Loans in this category may not meet required underwriting criteria and have no mitigating factors. More than the ordinary amount of attention is warranted for these loans.

Substandard — Loans in this category exhibit well-defined weaknesses that would typically bring normal repayment into jeopardy. These loans are no longer adequately protected due to well-defined weaknesses that affect the repayment capacity of the borrower. The possibility of loss is much more evident and above average supervision is required for these loans.

Doubtful — Loans in this category have all the weaknesses inherent in a loan categorized as Substandard, with the characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss — Loans in this category are of little value and are not warranted as a bankable asset.

Nonaccruals

In general, a loan will be placed on nonaccrual status at the end of the reporting month in which the interest or principal is past due more than 90 days. Exceptions to the policy are those loans that are in the process of collection and are well-secured. A well-secured loan is secured by collateral with sufficient market value to repay principal and all accrued interest.

A summary of loans by risk rating is as follows:


	Real Estate Mortgage
	Construction &
	Land		Residential								Consumer &
September 30, 2022	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Pass	$	118,636	$	222,647	$	691,287	$	30,671	$	126,214	$	3,325	$	1,192,780
Marginal		—		—		4,873		—		1,122		347		6,342
Substandard		575		1,674		2,154		98		337		—		4,838
TOTAL	$	119,211	$	224,321	$	698,314	$	30,769	$	127,673	$	3,672	$	1,203,960
Nonaccrual	$	576	$	1,243	$	1,894	$	—	$	337	$	—	$	4,050


	Real Estate Mortgage
	Construction &
	Land		Residential								Consumer &
December 31, 2021	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Pass	$	107,339	$	199,037	$	622,648	$	30,159	$	128,949	$	3,960	$	1,092,092
Marginal		46		507		12,819		183		1,364		502		15,421
Substandard		598		1,686		6,750		53		595		—		9,682
TOTAL	$	107,983	$	201,230	$	642,217	$	30,395	$	130,908	$	4,462	$	1,117,195
Nonaccrual	$	598	$	1,293	$	6,486	$	—	$	584	$	—	$	8,961

No loans were modified as a TDR during the three months ended September 30, 2022. There was one loan modified under the terms of a TDR during the nine months ended September 30, 2022. A summary of loans that were modified under the terms of a TDR during the three and nine months ended September 30, 2022 and 2021 is shown below by class. The post-modification recorded balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal pay-downs, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.


	Real Estate Mortgage
	Construction &
	Land		Residential								Consumer &
	Development		Real Estate		Nonresidential		Home Equity		Commercial		Other		Total

	Dollars in Thousands
Three months ended September 30, 2022
Number of loans modified during the period		—		—		—		—		—		—		—
Pre-modification recorded balance	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Post- modification recorded balance		—		—		—		—		—		—		—
Nine months ended September 30, 2022
Number of loans modified during the period		—		1		—		—		—		—		1
Pre-modification recorded balance	$	—	$	48	$	—	$	—	$	—	$	—	$	48
Post- modification recorded balance		—		48		—		—		—		—		48

Three months ended September 30, 2021
Number of loans modified during the period		—		—		1		—		—		—		1
Pre-modification recorded balance	$	—	$	—	$	2,919	$	—	$	—	$	—	$	2,919
Post- modification recorded balance		—		—		2,907		—		—		—		2,907
Nine months ended September 30, 2021
Number of loans modified during the period		—		—		2		—		—		—		2
Pre-modification recorded balance	$	—	$	—	$	3,197	$	—	$	—	$	—	$	3,197
Post- modification recorded balance		—		—		2,907		—		—		—		2,907

During the nine months ended September 30, 2022 and 2021, there were no loans modified as a TDR that subsequently defaulted during the periods ended September 30, 2022 and September 30, 2021 which had been modified as a TDR during the twelve months prior to default.

There were no loans secured by 1-4 family residential properties in the process of foreclosure at September 30, 2022. There were two loans secured by 1-4 family residential properties with aggregate balances of $345 thousand that were in the process of foreclosure at December 31, 2021.

The following tables include an aging analysis of the recorded investment of past due financing receivables as of September 30, 2022 and December 31, 2021:


													Recorded
													Investment
					Greater than						Total		>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Financing		Past Due
At September 30, 2022	Past Due		Past Due *		Past Due**		Past Due		Balance***		Receivables		and Accruing

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	—	$	—	$	575	$	575	$	118,636	$	119,211	$	—
Residential real estate		207		1,081		380		1,668		222,653		224,321		230
Nonresidential		427		—		311		738		697,576		698,314		—
Home equity loans		—		—		45		45		30,724		30,769		45
Commercial		—		7		—		7		127,666		127,673		—
Consumer and other loans		1		—		—		1		3,671		3,672		—
TOTAL	$	635	$	1,088	$	1,311	$	3,034	$	1,200,926	$	1,203,960	$	275

* Includes $223 thousand of nonaccrual loans.

** Includes $1.0 million of nonaccrual loans.

*** Includes $2.8 million of nonaccrual loans.


													Recorded
													Investment
					Greater than						Total		>90 Days
	30 - 59 Days		60 - 89 Days		90 Days		Total		Current		Financing		Past Due
At December 31, 2021	Past Due*		Past Due		Past Due**		Past Due		Balance***		Receivables		and Accruing

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	—	$	—	$	598	$	598	$	107,385	$	107,983	$	—
Residential real estate		658		245		361		1,264		199,966		201,230		—
Nonresidential		—		—		2,915		2,915		639,302		642,217		—
Home equity loans		160		—		—		160		30,235		30,395		—
Commercial		46		—		77		123		130,785		130,908		—
Consumer and other loans		15		—		—		15		4,447		4,462		—
TOTAL	$	879	$	245	$	3,951	$	5,075	$	1,112,120	$	1,117,195	$	—

* Includes $55 thousand of nonaccrual loans.

** Includes $4.0 million of nonaccrual loans.

*** Includes $5.0 million of nonaccrual loans.

Impaired Loans

Impaired loans are defined as nonaccrual loans, TDRs, purchased credit impaired loans (“PCI”) and loans risk rated substandard or above. When management identifies a loan as impaired, the impairment is measured for potential loss based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance for credit losses.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual status, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual status, contractual interest is credited to interest income when received, under the cash basis method.

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI, with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
September 30, 2022	Investment		Balance		Recognized		Reserve		Investment

	Dollars in Thousands
Impaired loans with specific reserves:
Real Estate Mortgage
Construction and land development	$	—	$	—	$	—	$	—	$	—
Residential real estate		24		24		1		21		25
Nonresidential		—		—		—		—		—
Home equity loans		—		—		—		—		—
Commercial		337		348		32		279		367
Consumer and other loans		—		—		—		—		—
Total impaired loans with specific reserves	$	361	$	372	$	33	$	300	$	392
Impaired loans with no specific reserve:
Real Estate Mortgage
Construction and land development	$	575	$	575	$	5	$	—	$	533
Residential real estate		1,707		1,707		30		—		1,742
Nonresidential		4,092		4,092		241		—		4,776
Home equity loans		53		53		1		—		53
Commercial		—		—		—		—		—
Consumer and other loans		—		—		—		—		—
Total impaired loans with no specific reserve	$	6,427	$	6,427	$	277	$	—	$	7,104
TOTAL	$	6,788	$	6,799	$	310	$	300	$	7,496

Total impaired loans of $6.8 million at September 30, 2022 do not include PCI loan balances of $1.1 million, which are net of a remaining purchase discount of $413 thousand.


			Unpaid		Interest				Average
	Recorded		Principal		Income		Specific		Recorded
December 31, 2021	Investment		Balance		Recognized		Reserve		Investment

	Dollars in Thousands
Impaired loans with specific reserves:
Real Estate Mortgage
Construction and land development	$	—	$	—	$	—	$	—	$	—
Residential real estate		426		426		22		3		433
Nonresidential		6,437		6,559		369		1,000		6,528
Home equity loans		—		—		—		—		—
Commercial		507		517		119		452		583
Consumer and other loans		—		—		—		—		—
Total impaired loans with specific reserves	$	7,370	$	7,502	$	510	$	1,455	$	7,544
Impaired loans with no specific reserve:
Real Estate Mortgage
Construction and land development	$	598	$	598	$	13	$	—	$	599
Residential real estate		1,656		1,687		26		—		1,698
Nonresidential		3,464		3,462		344		—		3,510
Home equity loans		53		53		1		—		53
Commercial		77		154		2		—		109
Consumer and other loans		—		—		—		—		—
Total impaired loans with no specific reserve	$	5,848	$	5,954	$	386	$	—	$	5,969
TOTAL	$	13,218	$	13,456	$	896	$	1,455	$	13,513

Total impaired loans of $13.2 million at December 31, 2021 do not include PCI loan balances of $2.2 million, which are net of a remaining purchase discount of $432 thousand. At December 31, 2021, there was $9 thousand in specific reserves related to PCI loans included in the allowance for credit losses.

All acquired loans were initially recorded at fair value at the acquisition date. The outstanding balance and the carrying amount of acquired loans included in the consolidated balance sheets are as follows:


Dollars in Thousands	September 30, 2022		December 31, 2021
Accountable for under ASC 310-30 (PCI loans)
Outstanding balance	$	1,499	$	2,613
Carrying amount		1,086		2,181
Accountable for under ASC 310-20 (non-PCI loans)
Outstanding balance	$	145,846	$	203,596
Carrying amount		144,450		201,700
Total acquired loans
Outstanding balance	$	147,345	$	206,209
Carrying amount		145,536		203,881

The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-20 for the nine months ended September 30, 2022 and the year ended December 31, 2021:


Dollars in Thousands	September 30, 2022		December 31, 2021
Balance at beginning of period	$	1,896	$	3,361
Accretion		(500)		(1,464)
Other changes, net		—		(1)
Balance at end of period	$	1,396	$	1,896

During the three and nine months ended September 30, 2022, the Company recorded $12 thousand and $67 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30. During the three and nine months ended September 30, 2021, the Company recorded $9 thousand and $23 thousand, respectively, in accretion on acquired loans accounted for under ASC 310-30.

Non-accretable yield on PCI loans was $1.4 million at September 30, 2022 and December 31, 2021.

The Company had no commitments to loan additional funds to the borrowers of restructured, impaired, or nonaccrual loans as of September 30, 2022 and December 31, 2021.

Concentration of Risk:

The Company makes loans to customers located primarily within Anne Arundel, Charles, Calvert, St. Mary’s, Wicomico and Worcester Counties, Maryland, Sussex County, Delaware, Camden and Burlington Counties, New Jersey, the Greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia) and the Greater Washington D.C. area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia). A substantial portion of its loan portfolio consists of residential and commercial real estate mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in these areas.