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Loans
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Loans LOANS
Portfolio loans, net of deferred costs and fees, are summarized by type as follows at March 31, 2023 and December 31, 2022:
 March 31, 2023December 31, 2022
(dollars in thousands)Total% of Total LoansTotal% of Total Loans
Portfolio Loans:
Commercial real estate$1,265,519 68.63 %$1,232,826 67.69 %
Residential first mortgages78,186 4.24 %79,872 4.39 %
Residential rentals329,417 17.86 %338,292 18.58 %
Construction and land development18,474 1.00 %17,259 0.95 %
Home equity and second mortgages25,492 1.38 %25,602 1.41 %
Commercial loans40,666 2.20 %42,055 2.31 %
Consumer loans7,271 0.39 %6,272 0.34 %
Commercial equipment79,296 4.30 %78,890 4.33 %
Total portfolio loans (1)
1,844,321 100.00 %1,821,068 100.00 %
Less: Allowance for Credit Losses(23,515)(1.27)%(22,890)(1.26)%
Total net portfolio loans1,820,806 1,798,178 
U.S. SBA PPP loans (1)
— 339 
Total net loans$1,820,806 $1,798,517 
___________________________________________
(1)Excludes accrued interest receivable of $6.8 million and $6.6 million, at March 31, 2023 and December 31, 2022, respectively.
The Company has segregated its loans into portfolio loans and U.S. SBA PPP loans at December 31, 2022.
Deferred Costs/Fees
Portfolio net deferred fees of $3.9 million at March 31, 2023 included deferred fees paid by customers of $8.3 million offset by deferred costs of $4.4 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 fees of $3.0 million at December 31, 2022 included deferred fees paid by customers of $7.3 million offset by deferred costs of $4.3 million.
U.S. SBA PPP net deferred loan fees of $8,000 at December 31, 2022 included deferred fees paid by the SBA of $9,000 offset by deferred costs of $1,000. 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 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 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, 2023 and December 31, 2022, 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 6.2% and 6.9% of the CRE portfolio at March 31, 2023 and December 31, 2022, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. 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 CRE portfolio was $914.8 million or 49.6% of total portfolio loans of $1.8 billion at March 31, 2023 compared to $918.4 million or 50.4% of total gross portfolio loans of $1.82 billion at December 31, 2022. 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 $12.9 million or 0.7% of total portfolio loans of $1.8 billion at March 31, 2023 compared to $13.1 million or 0.7% of total gross portfolio loans of $1.82 billion at December 31, 2022.
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, 2023 and December 31, 2022, the Bank serviced $19.1 million and $19.5 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 the borrower’s ability to successfully manage construction and development activities. The repayment of these loans is also subject to economic risks such as changing prices and 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 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 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, 2023 and December 31, 2022 were as follows:
March 31, 2023
(dollars in thousands)Nonaccrual with No Allowance for Credit LossesNonaccrual with Allowance for Credit LossesTotal Nonaccrual Loans
Commercial real estate$4,498 $1,391 $5,889 
Residential rentals1,631 — 1,631 
Home equity and second mortgages444 — 444 
Consumer loans— 9 9 
Commercial equipment124 27 151 
Total$6,697 $1,427 $8,124 
Interest Income on Nonaccrual Loans$63 $— $63 
December 31, 2022
(dollars in thousands)Nonaccrual with No Allowance for Credit LossesNonaccrual with Allowance for Credit LossesTotal Nonaccrual Loans
Commercial real estate$4,521 $81 $4,602 
Residential rentals1,142 — 1,142 
Home equity and second mortgages206 — 206 
Commercial equipment137 28 165 
Total$6,006 $109 $6,115 
Interest Income on Nonaccrual Loans$121 $— $121 
March 31, 2023
(dollars in thousands)Non-accrual Delinquent LoansNon-accrual Current LoansTotal Non-accrual Loans
Commercial real estate$— $5,889 $5,889 
Residential rentals274 1,357 1,631 
Home equity and second mortgages444 — 444 
Consumer loans9 — 9 
Commercial equipment— 151 151 
$727 $7,397 $8,124 
 December 31, 2022
(dollars in thousands)Non-accrual Delinquent LoansNon-accrual Current LoansTotal Non-accrual Loans
Commercial real estate$— $4,602 $4,602 
Residential first mortgages— — — 
Residential rentals449 693 1,142 
Home equity and second mortgages206 — 206 
Commercial equipment— 165 165 
U.S. SBA PPP loans— — — 
$655 $5,460 $6,115 
Non-accrual loans increased $2.0 million from $6.1 million or 0.34% of total loans at December 31, 2022 to $8.1 million or 0.44% of total loans at March 31, 2023. 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, 2022, there were $5.5 million (89%) of non-accrual loans were current with all payments of principal and interest with specific reserves of $0.1 million and $0.7 million (11%) of non-accrual loans were delinquent with no specific reserves.
Non-accrual loans at March 31, 2023 and December 31, 2022 included no delinquent BEFD modifications. Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $6.7 million and $6.0 million at March 31, 2023 and December 31, 2022, respectively. Interest due but not recognized on these balances at March 31, 2023 and December 31, 2022 was $43,000 and $22,000, respectively. Non-accrual loans with a specific allowance for impairment amounted to $1.4 million and $0.1 million at March 31, 2023 and December 31, 2022, respectively. Interest due but not recognized on these balances at March 31, 2023 and December 31, 2022 was $5,000 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. 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, 2023 follows:
 March 31, 2023
(dollars in thousands)31-60 DPD61-89 DPD90 DPD and Still Accruing90 DPD and Not AccruingTotal Past DueCurrent Non-Accrual LoansCurrent Accrual LoansTotal Loans
Commercial real estate$525 $— $— $— $525 $5,889 $1,259,105 $1,265,519 
Residential first mortgages— — — — — — 78,186 78,186 
Residential rentals— — — 274 274 1,357 327,786 329,417 
Construction and land development— — — — — — 18,474 18,474 
Home equity and second mortgages263 70 — 205 538 — 24,954 25,492 
Commercial loans— — — — — — 40,666 40,666 
Consumer loans66 30 35 — 131 — 7,140 7,271 
Commercial equipment— — — — — 151 79,145 79,296 
Total Loans$854 $100 $35 $479 $1,468 $7,397 $1,835,456 $1,844,321 
Loan delinquency (total past due) increased $0.4 million from $1.0 million, or 0.06% of loans, at December 31, 2022 to $1.5 million, or 0.08% of loans, at March 31, 2023.
An analysis of days past due loans as of December 31, 2022 follows:
 December 31, 2022
(dollars in thousands)31-60 DPD61-89 DPD90 DPD and Still Accruing90 DPD and Not AccruingTotal Past DueCurrent Non-Accrual LoansCurrent Accrual LoansTotal Loans
Commercial real estate$147 $— $— $— $147 $4,602 $1,228,077 $1,232,826 
Residential first mortgages— — — — — — 79,872 79,872 
Residential rentals— 177 — 272 449 693 337,150 338,292 
Construction and land development— — — — — — 17,259 17,259 
Home equity and second mortgages53 160 — 116 329 — 25,273 25,602 
Commercial loans— — — — — — 42,055 42,055 
Consumer loans21 35 50 — 106 — 6,166 6,272 
Commercial equipment11 — — — 11 165 78,714 78,890 
U.S. SBA PPP loans— — — — — — 339 339 
Total portfolio loans$232 $372 $50 $388 $1,042 $5,460 $1,814,905 $1,821,407 
Allowance for Credit Losses ("ACL")
The following tables detail activity in the ACL at and for the three months ended March 31, 2023 and 2022. 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, 2023
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$17,650 $— $16 $726 $18,392 
Residential first mortgages207 — — (4)203 
Residential rentals3,061 — — (156)2,905 
Construction and land development160 — — 1 161 
Home equity and second mortgages126 — — 5 131 
Commercial loans190 — — 14 204 
Consumer loans154 (44)— 56 166 
Commercial equipment1,342 (21)4 28 1,353 
 $22,890 $(65)$20 $670 $23,515 
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 $21,382 
The following table presents the amortized cost basis of collateral-dependent loans by class of loans.
March 31, 2023December 31, 2022
(dollars in thousands)Business/Other AssetsReal EstateBusiness/Other AssetsReal Estate
Commercial real estate$— $5,889 $— $4,601 
Residential rentals— 1,631 — 1,142 
Home equity and second mortgages— 444 — 206 
Consumer loans9 — — — 
Commercial equipment151 — 595 — 
Total$160 $7,964 $595 $5,949 
Credit Quality Indicators
Credit quality indicators as of March 31, 2023 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)Prior20192020202120222023Revolving LoansTotal
Commercial Real Estate
Pass$393,557 $108,531 $175,180 $261,755 $287,060 $23,827 $— $1,249,910 
Special Mention4,167 — 5,553 — — — — 9,720 
Substandard2,088 2,960 — 841 — — — 5,889 
Total$399,812 $111,491 $180,733 $262,596 $287,060 $23,827 $— $1,265,519 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Residential Rentals
Pass$46,757 $20,527 $47,452 $72,733 $119,293 $21,024 $— $327,786 
Special Mention— — — — — — — — 
Substandard1,631 — — — — — — 1,631 
Total$48,388 $20,527 $47,452 $72,733 $119,293 $21,024 $— $329,417 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Construction and Land Development
Pass$11,181 $2,595 $631 $3,360 $148 $559 $— $18,474 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$11,181 $2,595 $631 $3,360 $148 $559 $— $18,474 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Commercial Loans
Pass$25,502 $2,260 $1,985 $6,258 $3,708 $953 $— $40,666 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$25,502 $2,260 $1,985 $6,258 $3,708 $953 $— $40,666 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Commercial Equipment
Pass$11,833 $13,361 $6,536 $12,185 $30,638 $4,426 $— $78,979 
Special Mention165 — — — — — — 165 
Substandard— 124 — — 28 — — 152 
Total$11,998 $13,485 $6,536 $12,185 $30,666 $4,426 $— $79,296 
Current Period Gross Write-off$(21)$— $— $— $— $— $— $(21)
Term Loans by Origination Year
(dollars in thousands)Prior20192020202120222023Revolving LoansTotal
Total loans by risk category$496,881 $150,358 $237,337 $357,132 $440,875 $50,789 $— $1,733,372 
Loans evaluated by performance category are as follows:
Term Loans by Origination Year
(dollars in thousands)Prior20192020202120222023Revolving LoansTotal
Residential First Mortgages
Performing$39,629 $19,273 $8,465 $5,178 $5,641 $— $— $78,186 
Non-performing— — — — — — — — 
Total$39,629 $19,273 $8,465 $5,178 $5,641 $— $— $78,186 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Home Equity and Second Mortgages
Performing$15,259 $1,012 $1,244 $3,599 $3,729 $205 $— $25,048 
Non-performing444 — — — — — — 444 
Total$15,703 $1,012 $1,244 $3,599 $3,729 $205 $— $25,492 
Current Period Gross Write-off$— $— $— $— $— $— $— $— 
Consumer Loans
Performing$46 $69 $101 $573 $774 $271 $5,437 $7,271 
Non-performing— — — — 
Total$46 $69 $101 $573 $774 $271 $5,437 $7,271 
Current Period Gross Write-off$— $— $— $— $— $— $(44)$(44)
Total loans evaluated by performing status$55,378 $20,354 $9,810 $9,350 $10,144 $476 $5,437 $110,949 
Total Recorded Investment$552,259 $170,712 $247,147 $366,482 $451,019 $51,265 $5,437 $1,844,321 
Credit quality indicators as of December 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$329,575 $73,742 $107,264 $184,263 $272,567 $256,622 $— $1,224,033 
Special Mention— 4,191 — — — — — 4,191 
Substandard792 — 2,967 — 843 — — 4,602 
Total$330,367 $77,933 $110,231 $184,263 $273,410 $256,622 $— $1,232,826 
Residential Rentals
Pass$44,257 $4,429 $20,690 $48,237 $65,889 $153,648 $— $337,150 
Special Mention— — — — — — — — 
Substandard1,142 — — — — — — 1,142 
Total$45,399 $4,429 $20,690 $48,237 $65,889 $153,648 $— $338,292 
Construction and Land Development
Pass$2,355 $7,788 $4,255 $729 $2,020 $112 $— $17,259 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$2,355 $7,788 $4,255 $729 $2,020 $112 $— $17,259 
Commercial Loans
Pass$23,225 $4,298 $2,463 $1,872 $6,420 $3,777 $— $42,055 
Special Mention— — — — — — — — 
Substandard— — — — — — — — 
Total$23,225 $4,298 $2,463 $1,872 $6,420 $3,777 $— $42,055 
Commercial Equipment
Pass$8,206 $4,411 $14,329 $7,346 $12,948 $31,315 $— $78,555 
Special Mention— 170 — — — — — 170 
Substandard— — 137 — — 28 — 165 
Total$8,206 $4,581 $14,466 $7,346 $12,948 $31,343 $— $78,890 
Total loans by risk category$409,552 $99,029 $152,105 $242,447 $360,687 $445,502 $— $1,709,322 
Loans evaluated by performance category are as follows:
Term Loans by Origination Year
(dollars in thousands)Prior20182019202020212022Revolving LoansTotal
Residential First Mortgages
Performing$37,428 $3,584 $19,411 $8,523 $5,235 $5,691 $— $79,872 
Non-performing— — — — — — — — 
Total$37,428 $3,584 $19,411 $8,523 $5,235 $5,691 $— $79,872 
Home Equity and Second Mortgages
Performing$14,319 $1,622 $1,041 $1,441 $3,812 $3,161 $— $25,396 
Non-performing206 — — — — — — 206 
Total$14,525 $1,622 $1,041 $1,441 $3,812 $3,161 $— $25,602 
Consumer Loans
Performing$49 $2 $96 $118 $618 $881 $4,508 $6,272 
Non-performing— — — — — — — — 
Total$49 $2 $96 $118 $618 $881 $4,508 $6,272 
U.S. SBA PPP Loans
Performing$— $— $— $— $339 $— $— $339 
Non-performing— — — — — — — — 
Total$— $— $— $— $339 $— $— $339 
Total loans evaluated by performing status$52,002 $5,208 $20,548 $10,082 $10,004 $9,733 $4,508 $112,085 
Total Recorded Investment$461,554 $104,237 $172,653 $252,529 $370,691 $455,235 $4,508 $1,821,407 
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 BEFD modifications 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 BEFD modifications 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.
BEFD modifications included in the individually assessed loan schedules above, as of March 31, 2023 and December 31, 2022 were as follows:
 March 31, 2023December 31, 2022
(dollars in thousands)Number of LoansRecorded InvestmentsNumber of LoansRecorded Investments
Commercial equipment1$27 2$457 
Total BEFD modifications (1)
1$27 2$457 
Less: BEFD modifications included in non-accrual loans127 128 
Total accrual BEFD modifications loans—$— 1$429 
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(1)On January 1, 2023, the Company adopted ASU 2022-02 – Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminated the TDR recognition and measurement guidance. As such, loans designated as TDRs prior to January 1, 2023 and are currently performing are no longer reported as a BEFD loan in the quarter ending March 31, 2023, while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The Company had a $27,000 specific reserve on one BEFD modification at March 31, 2023 and had a $28,000 specific reserve for one BEFD of $28,000 at December 31, 2022. During the year ended December 31, 2022, there were no BEFD modifications disposals, which included payoffs and refinancing. BEFD modification loan principal curtailment was $1,000 for the three months ended March 31, 2023, and $18,000 for the year ended December 31, 2022. There were no BEFD modifications added during the three months ended March 31, 2023, and one BEFD of $28,000 added during the year ended December 31, 2022. At March 31, 2023, the BEFD modification was current for all principal and interest payments.