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LOANS
 3 Months Ended
Mar. 31, 2022
Receivables [Abstract]  
Loans LOANS
Portfolio loans, net of deferred costs and fees, are summarized by type as follows at March 31, 2022:
 March 31, 2022
(dollars in thousands)Total% of Total Loans
Portfolio Loans:
Commercial real estate$1,177,761 72.28 %
Residential first mortgages86,416 5.30 %
Residential rentals191,065 11.73 %
Construction and land development30,649 1.88 %
Home equity and second mortgages26,445 1.62 %
Commercial loans48,948 3.00 %
Consumer loans3,592 0.22 %
Commercial equipment64,662 3.97 %
Total portfolio loans (1)
1,629,538 100.00 %
Less: Allowance for Credit Losses(21,382)(1.31)%
Total net portfolio loans1,608,156 
U.S. SBA PPP loans (1)
15,279 
Total net loans$1,623,435 
Portfolio loans are summarized by type as follows at December 31, 2021:
Portfolio Loans:December 31, 2021
Commercial real estate$1,115,485 70.66 %
Residential first mortgages91,120 5.77 %
Residential rentals195,035 12.35 %
Construction and land development35,590 2.25 %
Home equity and second mortgages25,638 1.62 %
Commercial loans50,574 3.20 %
Consumer loans3,002 0.19 %
Commercial equipment62,499 3.96 %
Gross portfolio loans (1)
1,578,943 100.00 %
Adjustments:
Net deferred costs(133)(0.01)%
Allowance for loan losses(18,417)(1.17)%
(18,550)
Net portfolio loans1,560,393 
Gross U.S. SBA PPP loans (1)
27,276 
Net deferred fees(878)
Net U.S. SBA PPP Loans26,398 
Total net loans$1,586,791 
Total gross loans$1,606,219 
(1)Excludes accrued interest receivable of $4.2 million and $4.5 million, at March 31, 2022 and December 31, 2021, respectively.
The Company has segregated its loans into portfolio loans and U.S. SBA PPP loans at December 31, 2021.
Deferred Costs/Fees
Portfolio net deferred costs of $0.2 million at March 31, 2022 included deferred fees paid by customers of $4.2 million offset by deferred costs of $4.0 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs in accordance with ASC 310-20. Net deferred loan costs of $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 of $0.5 million at March 31, 2022 included deferred fees paid by the U.S. SBA of $0.5 million partially offset by deferred costs of $41,000. U.S. SBA PPP net deferred loan fees of $0.9 million at December 31, 2021 included deferred fees paid by the SBA of $1.0 million offset by deferred costs of $0.1 million. The net deferred fees are being amortized as a component of interest income through the contractual maturity date of each U.S. SBA PPP loan. Net deferred fees include fees (deferred fees) paid to participant banks for each U.S. SBA PPP loan underwritten and funded net of costs incurred to underwrite the loans (deferred costs). Net deferred fees will be recognized in income when the U.S. SBA PPP loan is forgiven or paid.
Risk Characteristics of Portfolio Segments
Concentrations of Credit - Loans are primarily made within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has business loans secured by real estate and real estate development loans. At March 31, 2022 and December 31, 2021, the Company had no loans outstanding with foreign entities.
The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:
Commercial Real Estate (“CRE”)
Commercial and other real estate projects include office, medical and professional buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 6.7% and 6.5% of the CRE portfolio at March 31, 2022 and December 31, 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 $15.1 million or 0.9% of total portfolio loans of $1.6 billion at March 31, 2022 compared to $18.9 million or 1.2% of total gross portfolio loans of $1.6 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 March 31, 2022 and December 31, 2021, the Bank serviced $21.4 million and $20.9 million, respectively, in residential mortgage loans for others.
Residential Rentals
Residential rental mortgage loans are amortizing long-term loans. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years. 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 adverse conditions in the rental real estate market or the economy than similar owner-occupied properties.
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 and interest rates. The repayment of these loans is also dependent on the borrower’s ability to successfully manage the construction and development activities.
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 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 as determined by the Bank. Commercial loans are of higher risk and these loans are dependent on the success of the underlying business or the strength of the guarantor.
U.S. SBA PPP Loans
U.S. SBA PPP loans are fully guaranteed by the Small Business Administration and the Bank's 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.
Loans
Non-accrual loans as of March 31, 2022 and December 31, 2021 were as follows:
March 31, 2022
(dollars in thousands)Nonaccrual with No Allowance for Credit LossesNonaccrual with
Allowance for Credit Losses		Total Nonaccrual Loans
Commercial real estate$4,899 $89 $4,988 
Residential first mortgages736 — 736 
Residential rentals672 — 672 
Home equity and second mortgages377 — 377 
Commercial loans— 25 25 
Commercial equipment500 166 666 
U.S. SBA PPP1 — 1 
Total$7,185 $280 $7,465 
Interest Income on Nonaccrual Loans$40 $— $40 
 December 31, 2021
(dollars in thousands)Non-accrual Delinquent LoansNon-accrual Current LoansTotal Non-accrual Loans
Commercial real estate$— $4,890 $4,890 
Residential first mortgages450 — 450 
Residential rentals252 690 942 
Home equity and second mortgages202 399 601 
Commercial equipment— 691 691 
U.S. SBA PPP loans57 — 57 
$961 $6,670 $7,631 
Non-accrual loans decreased $0.2 million from $7.6 million or 0.48% of total loans at December 31, 2021 to $7.5 million or 0.45% of total loans at March 31, 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 no impairment and $1.0 million (13%) of non-accrual loans were delinquent with specific valuation reserves of $0.3 million.
Loan delinquency (total past due) increased $0.2 million from $1.4 million, or 0.09% of loans, at December 31, 2021 to $1.6 million, or 0.10% of loans, at March 31, 2022.
Non-accrual loans at March 31, 2022 and December 31, 2021 included no delinquent TDRs. Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $7.2 million and $7.4 million at March 31, 2022 and December 31, 2021, respectively. Interest due but not recognized on these balances at March 31, 2022 and December 31, 2021 was $0.1 million and $0.1 million, respectively. Non-accrual loans with a specific allowance for impairment amounted to $0.3 million and $0.3 million at March 31, 2022 and December 31, 2021, respectively. Interest due but not recognized on these balances at March 31, 2022 and December 31, 2021 was $2,000 and $1,000, respectively.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of days past due ("DPD") loans as of March 31, 2022 and December 31, 2021 were as follows:
 March 31, 2022
(dollars in thousands)31-60 DPD61-89 DPD90 DPD and
Still Accruing		CurrentNon-AccrualTotal LoansCurrent Non-Accrual
Commercial real estate$— $— $— $1,172,773 $4,988 $1,177,761 $4,516 
Residential first mortgages— — — 85,680 736 86,416 276 
Residential rentals281 — — 190,112 672 191,065 672 
Construction and land development51 — — 30,598 — 30,649 — 
Home equity and second mortgages— — — 26,068 377 26,445 95 
Commercial loans30 — — 48,893 25 48,948 25 
Consumer loans1 15 20 3,556 — 3,592 — 
Commercial equipment— — — 63,996 666 64,662 666 
U.S. SBA PPP— 8 — 15,270 1 15,279 — 
Total Loans$363 $23 $20 $1,636,946 $7,465 $1,644,817 $6,250 
 December 31, 2021
(dollars in thousands)31-60 Days61-89 Days90 or Greater DaysTotal Past DuePCI LoansCurrentTotal Loan Receivables
Commercial real estate$— $— $— $— $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 mortgages200 — 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 no loans that were past due 90 days or greater accruing interest at December 31, 2021.
Allowance for Credit Losses ("ACL")
The following tables detail activity in the ACL at and for the three months ended March 31, 2022 and 2021, respectively. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.
Three Months EndedMarch 31, 2022
(dollars in thousands)Beginning BalanceImpact of ASC 326 AdoptionCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$13,095 $3,734 $— $— $484 $17,313 
Residential first mortgages1,002 (679)— — (39)284 
Residential rentals2,175 (586)— — (43)1,546 
Construction and land development260 (82)— — (41)137 
Home equity and second mortgages274 (86)— — (10)178 
Commercial loans582 (290)— 1 26 319 
Consumer loans58 2 — — 13 73 
Commercial equipment971 483 — 18 60 1,532 
 $18,417 $2,496 $— $19 $450 $21,382 
_______________________________________
**There is no allowance for loan loss on the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.
Three Months EndedMarch 31, 2021
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$13,744 $(1,247)$1 $787 $13,285 
Residential first mortgages1,305 (142)— (139)1,024 
Residential rentals1,413 (46)— (6)1,361 
Construction and land development401 — — (36)365 
Home equity and second mortgages261 — 1 1 263 
Commercial loans1,222 (50)5 (165)1,012 
Consumer loans20 — — 9 29 
Commercial equipment1,058 — 15 (156)917 
$19,424 $(1,485)$22 $295 $18,256 
Purchase Credit Impaired**$— $— $— $— $— 
_______________________________________
**There is no allowance for loan loss on the PCI or the SBA PPP portfolios. A more detailed rollforward schedule will be presented if an allowance is required.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans.
March 31, 2022
(dollars in thousands)Business/Other AssetsReal Estate
Commercial real estate$— $4,987 
Residential first mortgages— 1,149 
Residential rentals— 672 
Home equity and second mortgages— 376 
Commercial loans25 — 
Commercial equipment1,109 — 
Total$1,134 $7,184 
Credit Quality Indicators
Credit quality indicators as of March 31, 2022 were as follows:
Credit Risk Profile by Internally Assigned Grade
The risk category of loans by class of loans is as follows:
Term Loans by Origination Year
(dollars in thousands)Prior20182019202020212022Revolving LoansTotal
Commercial Real Estate
Pass$367,685 $77,563 $122,999 $196,400 $281,702 $111,430 $— $1,157,779 
Watch— 4,253 — 5,564 — 7,012 — 16,829 
Special Mention— — — — — — — — 
Substandard3,153 — — — — — — 3,153 
Total$370,838 $81,816 $122,999 $201,964 $281,702 $118,442 $— $1,177,761 
Residential Rentals
Pass$47,557 $4,788 $23,584 $44,156 $67,567 $2,741 $— $190,393 
Watch— — — — — — — — 
Special Mention— — — — — — — — 
Substandard672 — — — — — — 672 
Total$48,229 $4,788 $23,584 $44,156 $67,567 $2,741 $— $191,065 
Construction and Land Development
Pass$8,560 $10,797 $6,642 $1,669 $2,968 $13 $— $30,649 
Watch— — — — — — — — 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$8,560 $10,797 $6,642 $1,669 $2,968 $13 $— $30,649 
Commercial Loans
Pass$27,484 $6,331 $5,006 $1,848 $6,865 $1,414 $— $48,948 
Watch— — — — — — — — 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$27,484 $6,331 $5,006 $1,848 $6,865 $1,414 $— $48,948 
Commercial Equipment
Pass$10,247 $6,330 $18,746 $9,076 $15,259 $4,623 $— $64,281 
Watch30 185 — — — — — 215 
Special Mention— — — — — — — — 
Substandard— — 166 — — — — 166 
Total$10,277 $6,515 $18,912 $9,076 $15,259 $4,623 $— $64,662 
Total loans by risk category$465,388 $110,247 $177,143 $258,713 $374,361 $127,233 $— $1,513,085 
Loans evaluated by performance category are as follows:
Term Loans by Origination Year
(dollars in thousands)Prior20182019202020212022Revolving LoansTotal
Residential First Mortgages
Performing$44,141 $4,112 $20,427 $8,958 $6,052 $1,990 $— $85,680 
Non-performing182 — 554 — — — — 736 
Total$44,323 $4,112 $20,981 $8,958 $6,052 $1,990 $— $86,416 
Home Equity and Second Mortgages
Performing$17,581 $1,295 $1,150 $2,120 $3,078 $844 $— $26,068 
Non-performing377 — — — — — — 377 
Total$17,958 $1,295 $1,150 $2,120 $3,078 $844 $— $26,445 
Consumer Loans
Performing$66 $4 $167 $183 $798 $291 $2,063 $3,572 
Non-performing— — 20 20 
Total$66 $4 $167 $183 $798 $291 $2,083 $3,592 
U.S. SBA PPP Loans
Performing$— $— $— $1,137 $14,141 $— $— $15,278 
Non-performing— — — 1 — — — 1 
Total$— $— $— $1,138 $14,141 $— $— $15,279 
Total loans evaluated by performing status$62,347 $5,411 $22,298 $12,399 $24,069 $3,125 $2,083 $131,732 
Total Recorded Investment$527,735 $115,658 $199,441 $271,112 $398,430 $130,358 $2,083 $1,644,817 
Credit quality indicators as of December 31, 2021 were as follows:
 Commercial Real EstateConstruction and Land DevelopmentResidential Rentals
(dollars in thousands)12/31/202112/31/202112/31/2021
Unrated$— $— $— 
Pass1,111,857 35,590 194,093 
Special mention— — — 
Substandard3,628 — 942 
Doubtful— — — 
Loss— — — 
Total$1,115,485 $35,590 $195,035 
 Commercial LoansCommercial EquipmentTotal Commercial Portfolios
(dollars in thousands)12/31/202112/31/202112/31/2021
Unrated$— $— $— 
Pass50,574 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 LoansTotal Loans Portfolios
(dollars in thousands)12/31/202112/31/202112/31/2021
Unrated$100,403 $27,276 $127,679 
Pass18,889 — 1,473,329 
Special mention— — — 
Substandard468 — 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 MortgagesHome Equity and Second MortgagesConsumer Loans
(dollars in thousands)12/31/202112/31/202112/31/2021
Performing$90,670 $25,436 $3,002 
Nonperforming450 202 — 
Total$91,120 $25,638 $3,002 
A risk-grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. At December 31, 2020 and prior, only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater were subject to being risk rated. During the quarter ended March 31, 2021, the Bank's policy was amended to risk rate all commercial loan relationships.
Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned ("OAEM") or higher risk rating due to a delinquency payment history.
The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk-grading scale, the level and trends of net charge-offs, nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.
Ratings 1 thru 6 - Pass
Ratings 1 thru 6 have asset risks ranging from excellent-low to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.
Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention
These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM loans relationships are reviewed at least quarterly.
Rating 8 - Substandard
Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. Substandard loans are the first adversely classified loans on the Bank's watchlist. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.
Rating 9 - Doubtful
Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.
Rating 10 – Loss
Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however, it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be non-collectable.
TDRs included in the impaired loan schedules above, as of March 31, 2022 and December 31, 2021 were as follows:
 March 31, 2022December 31, 2021
(dollars in thousands)Number of LoansRecorded InvestmentsNumber of LoansRecorded Investments
Commercial real estate— $— — $— 
Commercial equipment1 442 1 447 
Total TDRs1 $442 1 $447 
Less: TDRs included in non-accrual loans— — — — 
Total accrual TDR loans1 $442 1 $447 
The Company had no specific reserves on TDRs at March 31, 2022 and at December 31, 2021. During the year ended December 31, 2021, TDR disposals, which included payoffs and refinancing, included three loans totaling $0.1 million. TDR loan principal curtailment was $5,000 for the quarter ended March 31, 2022 and $19,000 for the year ended December 31, 2021. There were no TDRs added during the three months ended March 31, 2022 or the year ended December 31, 2021.