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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-K

(Mark One)


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

For the fiscal year ended December 31, ~~2021~~2022


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

For the transition period from _________ to ________

Commission File No. 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)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

TCFC

The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 (Section 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 the 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

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

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $~~178~~186.7 million based on the closing price $3436.5088 per share at which the common stock was sold on the last business day of the Company’s most recently completed second fiscal quarter. For purposes of this calculation only, the shares held by directors, executive officers and the Company’s Employee Stock Ownership Plan of the registrant are deemed to be shares held by affiliates.

The number of shares of Registrant's Common Stock outstanding as of February 28, ~~2022~~2023 was 5,~~689~~657,~~405~~581.

DOCUMENTS INCORPORATED BY REFERENCE

~~Portions of the Proxy Statement for the 2022 Annual Meeting of Stockholders~~None. ~~(Part III)~~

TABLE OF CONTENTS

Table of Contents

Page

Forward-Looking Statements

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

3029

Item 2.

Properties

3130

Item 3.

Legal Proceedings

3130

Item 4.

Mine Safety Disclosures

3130

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

3231

Item 6.

Reserved

3433

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

3534

Item 7A.

Quantitative and Qualitative Disclosure about Market Risk

6663

Item 8.

Financial Statements and Supplementary Data

6865

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

~~121~~117

Item 9A.

Controls and Procedures

~~121~~117

Item 9B.

Other Information

~~121~~117

Item 9C.

Disclosure Regarding Jurisdictions that Prevent Inspections

~~121~~117

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

~~122~~118

Item 11.

Executive Compensation

~~122~~118

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

~~122~~118

Item 13.

Certain Relationships, Related Transactions and Director Independence

~~122~~118

Item 14.

Principal Accounting Fees and Services

~~122~~118

PART IV

Item 15.

Exhibits and Financial Statement Schedules

~~123~~119

Item 16.

Form 10-K Summary

~~126~~121

Signatures

~~127~~122

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,” "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,:(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; (ii) any statements of the plans, objectives, or expected benefits associated with the proposed merger of the Company with and into Shores Bancshares, Inc.; (iii) 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 undertaken or that we undertake in the future; (iv) plans and cost savings regarding branch closings or consolidation; (v) projections related to certain financial metrics, including with respect to the quarterly expense run rate; (vi) expected benefits of programs we introduce, including residential mortgage programs and retail and commercial credit card programs; and (vii) 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) our proposed merger with Shores Bancshares, Inc. may not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all, or are obtained subject to conditions that are not anticipated; (vi) the synergies and other expected financial benefits from any acquisition that we have undertaken or may undertake in the future; (including our proposed merger with Shore Bancshares, Inc.), may or may not be realized within the expected time frames or at all; (vii) the impact of our adoption of the CECL standard; (viii) limitations on our ability to declare and pay dividends or engage in share repurchases; (ix) changes in the Company's or the Bank's strategy, costs or difficulties related to integration matters might be greater than expected; (x) availability of and costs associated with obtaining adequate and timely sources of liquidity; (xi) the ability to maintain credit quality; (xii) general economic trends and conditions, including inflation and its impacts; (xiii) changes in interest rates; (xiv) loss of deposits and loan demand to other financial institutions; (xv) substantial changes in financial markets; (xvi) changes in real estate value and the real estate market; (xvii) regulatory changes; (xviii) the impact of government shutdowns or sequestration; (xix) the possibility of unforeseen events affecting the industry generally; (xx) the uncertainties associated with newly developed or acquired operations; (xxi) the outcome of pending or threatened litigation, including litigation pertaining to the proposed merger with Shore Bancshares, Inc., or of matters before regulatory agencies, whether currently existing or commencing in the future; (xxii) market disruptions and other effects of terrorist activities; and (xxiii) the matters described in “Item 1A Risk Factors” in this Annual Report on Form 10-K for the Year Ended December 31, ~~2021~~2022, and in the Company’s 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 wethe ~~undertake~~Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date of this Report.

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PART I

Item 1. Business

Business

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 a variety of 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.

The Company is a bank holding company organized in 1989 under the laws of the State of Maryland. It owns all the outstanding shares of capital stock of the Bank, a Maryland-chartered commercial bank. The Bank was organized in 1950 as Tri-County Building and Loan Association of Waldorf, a mutual savings and loan association, and in 1986 converted to a federal stock savings bank and adopted the name Tri-County Federal Savings Bank. In 1997, the Bank converted to a Maryland-chartered commercial bank and adopted the name Community Bank of Tri-County. Effective October 18, 2013, Community Bank changed its name to become Community Bank of the Chesapeake. The Company engages in no significant activity other than holding the stock of the Bank and operating the business of the Bank. Accordingly, the information set forth in this 10-K, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

On December 14, 2022, the Company entered into a definitive agreement to undertake a merger of equals pursuant to which the Company and Bank will merge into Shore Bancshares, Inc. (NASDAQ: SHBI) ("Shore") in an all-stock transaction. The combined company will have total assets of approximately $6.0 billion on a pro forma basis. Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies and which remains subject to shareholder and regulatory approval, as well as the satisfaction of customary closing conditions, holders of TCFC common stock will have the right to receive 2.3287 shares of Shore Bancshares, Inc. common stock. The merger is expected to close in the late second quarter or early third quarter of 2023. James M. Burke, The Community Financial Corporation's current President and Chief Executive Officer, will serve as President and Chief Executive Officer of the combined company.

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

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.

We also serve our customers through our website: www.cbtc.com. In addition to providing our customers with 24-hour access to their accounts, and information regarding our products and services, hours of service, and locations, the website provides information about the Company for the investment community. Our filings with the SEC (including our annual report on Form 10-K; our quarterly reports on Form 10-Q; and our current reports on Form 8-K), and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available without charge, and are posted to the Investor Relations portion of our website. The website also provides information regarding our Board of Directors and management team, as well as Board Committee charters and our corporate governance policies. The content of our website is not incorporated by reference into this Annual Report.

The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the States of Maryland and Virginia and applicable federal regulations, including the acceptance of deposits, and the origination of loans. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s primary regulator.

Market Area

The Bank considers its principal lending and deposit market area to consist of the tri-county area in Southern Maryland and the greater Fredericksburg area in Virginia. As a result of the Bank’s expansion into the greater Fredericksburg market in 2013, Stafford and Spotsylvania Counties have become part of the Bank’s principal lending and deposit market area. Our market area is one of the fastest growing regions in the country and is home to a mix of federal facilities and industrial and high-tech businesses. The Bank’s primary market areas boast a strong median household income, low unemployment and projected population growth better than national averages. Based on information from the U.S. Bureau of Labor Statistics, unemployment rates in the Company’s footprint have historically remained ~~well below the national average.~~

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~~George~~well ~~County.~~below In addition, there are several major federal facilities located in adjoining markets including Andrews Air Force Base and Defense Intelligence Agency & Defense Intelligence Analysis Center in Prince Georges County, Maryland and the ~~U.S.~~national ~~Marine Base Quantico, Drug Enforcement Administration Quantico facility and Federal Bureau of Investigation Quantico facility in Prince William County, Virginia~~average. These facilities directly employ thousands of local employees and serve as an important contributor to the region’s overall economic health. The economic health of the region, while stabilized by the influence of the federal government, is not solely dependent on this sector.

The presence of several major federal facilities located within the Bank’s footprint and in adjoining counties contribute to economic activity. Major federal facilities include the Patuxent River Naval Air Station in St. Mary’s County, the Indian Head Division, Naval Surface Warfare Center in Charles County and the Naval Surface Warfare–Naval Support Facility in King George County. In addition, there are several major federal facilities located in adjoining markets including Andrews Air Force Base and Defense Intelligence Agency & Defense Intelligence Analysis Center in Prince Georges County, Maryland and the U.S. Marine Base Quantico, Drug Enforcement Administration Quantico facility and Federal Bureau of Investigation Quantico facility in Prince William County, Virginia. These facilities directly employ thousands of local employees and serve as an important contributor to the region’s overall economic health. The economic health of the region, while stabilized by the influence of the federal government, is not solely dependent on this sector.

Competition

The Bank faces strong competition for deposits and loans primarily from other banks and credit unions located in its market area. There are more than 20 FDIC-insured depository institutions as well as several large credit unions operating in the Bank’s footprint including several large regional and national banks. The Bank also faces significant competition for deposits from mutual funds, brokerage firms, online Banks, and other financial service companies. The Bank competes for loans by providing competitive rates, flexible terms and personal service, including customer access to senior decision makers. It competes for deposits by offering depositors a variety of account types, convenient office locations and competitive rates. Other services offered include tax deferred retirement programs, brokerage services through an affiliation with Community Wealth Advisors, cash management services and safe deposit boxes. The Bank has used personal solicitation of lending and deposit employees, advertising, social media and community outreach to increase its market share of deposits, loans and other services in its market area. It provides ongoing training for its staff to provide high-quality service.

Economy

Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including the Bank. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in our market areas.

The ~~local~~COVID-19 ~~economy~~pandemic ~~strengthened~~caused ~~and~~significant ~~expanded~~economic dislocation in ~~2019~~the United States. Although the domestic and inglobal ~~early~~economies ~~2020.~~have ~~Economic~~begun ~~improvement~~to ~~had~~recover ~~resulted~~from inthe COVID-19 pandemic as many ~~positive~~health ~~economic~~and ~~trends~~safety ~~such~~restrictions ashave ~~low~~been ~~unemployment~~lifted and vaccine distribution has increased, ~~high~~certain ~~consumer~~adverse ~~confidence~~consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, ~~increased~~including ~~housing~~labor ~~development~~shortages and ~~stable~~disruptions ~~housing~~of ~~prices~~global supply chains. ~~Beginning~~The growth in economic activity and in the ~~second~~demand ~~quarter~~for ofgoods ~~2020~~and services, ~~and~~coupled ~~for~~with ~~the~~labor ~~balance~~shortages ofand ~~that~~supply ~~year~~chain disruptions, ~~the~~has ~~COVID-19~~also ~~pandemic~~contributed ~~created~~to ~~uncertainty~~rising ~~around~~inflationary ~~sustainable~~pressures ~~employment,~~and the ~~effects~~risk of arecession. ~~remote~~In ~~workplace~~efforts to fight inflation, the ~~impact~~Federal Open Market Committee increased the federal funds rate from a target range of ~~government~~0% ~~stimulus,~~to ~~wage~~0.25% ~~growth~~to ~~and~~a ~~the~~target ~~strength~~range of ~~the~~4.25 ~~dollar~~– 4.50% ~~Financial~~during ~~markets~~2022. ~~have~~The ~~reacted~~sharp ~~with~~increase ~~increased~~in ~~volatility~~interest ~~caused~~rates byin ~~heightened~~2022 ~~uncertainty.~~not Inonly ~~2021,~~increased yields earned on floating-rate commercial ~~activity~~loans and ~~GDP~~liquid ~~growth~~interest-earning ~~have~~assets, ~~been~~but ~~and~~also ~~continue~~increased torates bepaid ~~constrained~~on interest bearing demand deposits. ~~The~~In ~~Company's~~2022, ~~results~~due ofto ~~operations~~interest-earning ~~and~~asset ~~financial~~rates ~~condition~~and ~~have~~repricing ~~been~~slightly ~~impacted~~outpacing byrate ~~the~~increases ~~COVID~~on interest-19bearing ~~pandemic~~liabilities and an increase in the ~~impact~~average balances of the ~~pandemic~~higher ~~could~~yielding ~~adversely~~commercial ~~affect~~real estate loan portfolio, the Company's ~~future~~net ~~performance~~interest margin increased from 3.34% for the year ended December 31, 2021 to 3.38% for the year ended December 31, 2022.

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% during 2020. The sharp decline in interest rates in 2020 not only reduced interest income on floating-rate commercial loans and liquid interest-earning assets, but also reduced competitive pressures and depositor expectations concerning deposit interest rates. In 2021, due to interest-earning asset rates and repricing declining at a faster rate than interest-bearing liabilities and an increase in the average balance of lower yielding investments, the Company's net interest margin decreased from 3.36% for the year ended December 31, 2020 to 3.34% for the year ended December 31, 2021.

Prior to the COVID-19 pandemic and currently, the region’s unemployment rate has remained below the national average. The presence of federal government agencies, as well as significant government facilities, and the related private sector support for these entities, has led to lower unemployment compared to the nation as a whole. These facilities directly employ thousands of local employees and serve as an important player in the region’s overall economic health. In addition, the Bank’s proximity to Washington DC, Annapolis, Northern Virginia and Prince George County has provided the Bank with additional loan and deposit opportunities. These opportunities have positively impacted the Bank’s organic growth.

The impact of government shutdowns or sequestration is more acutely felt in the Bank’s footprint than in the rest of the United States. In addition to the temporary economic impact to government employees, the Bank’s business customers, which include government contractors that directly support the federal government and small businesses that indirectly support the government and its employees, can be impacted with permanent losses of revenue. A prolonged shutdown or a lack of confidence in the federal government’s ability to fund its operations could have an impact to spending and investments in the Company’s footprint.

Overall, management is encouraged by the strength of our local economy.

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Lending Activities

General

The Bank offers a variety of commercial and consumer loans. The Bank’s lending activities include commercial real estate loans, loans secured by residential rental property, construction loans, land acquisition and development loans, equipment financing, commercial and consumer loans. Most of the Bank’s customers are residents of or businesses located in the Bank’s market area. The Bank’s primary targets for commercial loans consist of small and medium-sized businesses as well as not-for-profits in Southern Maryland, the Annapolis and Prince George's County areas of Maryland and the greater Fredericksburg area of Virginia. The Bank’s target customers for consumer loans are people who live or work in these areas. For a description of the risk characteristics of the Bank's loan portfolio segments refer to Note 3 of the Consolidated Financial Statements.

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secured by residential rental property, construction loans, land acquisition and development loans, equipment financing, commercial and consumer loans. Most of the Bank’s customers are residents of or businesses located in the Bank’s market area. The Bank’s primary targets for commercial loans consist of small and medium-sized businesses as well as not-for-profits in Southern Maryland, the Annapolis and Prince George's County areas of Maryland and the greater Fredericksburg area of Virginia. The Bank’s target customers for consumer loans are people who live or work in these areas. For a description of the risk characteristics of the Bank's loan portfolio segments refer to Note 3 of the Consolidated Financial Statements.

Commercial Real Estate ("CRE") and Other Non-Residential Real Estate Loans

The permanent financing of commercial and other improved real estate projects, including office, medical and professional buildings, retail locations, churches, and other special purpose buildings, is the largest component of the Bank’s loan portfolio. The CRE portfolio includes commercial construction that converts after the completion of construction to permanent financing.

Commercial real estate loans are secured by real property and the leases or businesses that produce income for the real property. The Bank generally limits its exposure to a single borrower to 15% of the Bank’s capital and participates with other lenders on larger projects. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price and have an initial contractual loan amortization period ranging from three to 20 years. Interest rates and payments on these loans typically adjust after an initial fixed-rate period, which is generally between three and ten years. Interest rates and payments on adjustable-rate loans are adjusted to a rate based on the United States Treasury Bill Index, London Interbank Offered Rate ("LIBOR") or other indices. The Company began ~~plans to begin~~ transitioning loans referenced to LIBOR to the Secured Overnight Financing Rate ("SOFR") ~~during~~in 2022. The great majority of the Bank’s commercial real estate loans are secured by real estate located in the Bank’s primary market area.

Payments on loans secured by commercial real estate are often dependent on the successful operation of the business or management of the properties. Repayment of such loans may be subject to conditions in the real estate market or the economy. To monitor cash flows on income properties, the Bank requires borrowers and loan guarantors to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property, as well as the borrower’s global cash flows. If a determination is made that there is a potential environmental hazard, the Bank will complete an Environmental Assessment Checklist. If this checklist or the appraisal indicates potential issues, a Phase 1 environmental survey will generally be required.

Residential First Mortgage Loans

Residential first mortgage loans are long-term loans, amortized on a monthly or bi-weekly basis, with principal and interest due each payment. These loans are secured by owner-occupied single-family homes. The initial contractual loan payment period for residential loans typically ranges from 10 to 30 years. Residential real estate loans typically remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty.

Residential first mortgage loans with loan-to-value ratios in excess of 80% carry private mortgage insurance to lower the Bank’s exposure to approximately 80% of the value of the property. The Bank had fewer than 50 loans with private mortgage insurance at December 31, ~~2021~~2022 and ~~2020~~2021. All improved real estate that serves as security for a loan made by the Bank must be insured.

Longer-term fixed-rate and adjustable-rate residential mortgage loans are subject to interest-rate risk due to their long-term nature and limitations on interest rate adjustments. Adjustable mortgages are generally adjustable on one-, three-, five-, and seven-year terms with limitations on upward adjustments per re-pricing period and an upward cap over the life of the loan. The risk of default on adjustable-rate mortgage loans may increase during periods of rising interest rates due to the increasing interest costs to the borrower.

Residential Rentals

Residential rental mortgage loans are amortizing, with principal and interest due each month. These loans are non-owner-occupied and secured by income-producing 1-4 family units and apartments. The Bank originates both fixed-rate and adjustable-rate residential rental first mortgages. 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 initial contractual loan payments period ranging from three to 20 years. The primary securities on a residential rental loan are the property and the leases that produce income.

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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 a greater extent to adverse conditions in the rental real estate market or the economy than similar owner-occupied properties.

Construction and Land Development Loans

The Bank offers loans to home builders 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. Draws are made upon satisfactory completion of predefined stages of construction. The Bank will typically lend up to 80% of the lower of appraised value or the contract purchase price of the homes to be constructed. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building by individuals. Bank policy requires that zoning and permits must be in place prior to making development loans. The Bank typically lends up to the lower of 75% of the appraised value or cost. The Bank’s ability to originate residential construction and development loans is heavily dependent on the continued demand for single-family housing in the Bank’s market area.

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construction as well as by guarantees of the principals involved. Draws are made upon satisfactory completion of predefined stages of construction. The Bank will typically lend up to 80% of the lower of appraised value or the contract purchase price of the homes to be constructed. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building by individuals. Bank policy requires that zoning and permits must be in place prior to making development loans. The Bank typically lends up to the lower of 75% of the appraised value or cost. The Bank’s ability to originate residential construction and development loans is heavily dependent on the continued demand for single-family housing in the Bank’s market area.

The Bank’s investment in these loans has declined in recent years as the Bank has deemphasized this product line.

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.

Home Equity and Second Mortgage Loans

The Bank has a portfolio of home equity and second mortgage loans. Home equity loans are lines of credit and have terms of up to 20 years, variable rates based on Wall Street Journal prime rate, and require an 80% or 90% loan-to-value ratio (including any prior liens). Second mortgage loans are fixed or variable-rate loans that have original terms between five and 15 years. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage must be paid off prior to collection of the second mortgage.

Commercial Loans

The Bank offers its customers commercial loan products including term loans, demand loans, and lines of credit. Loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable or 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. Consumer loans entail greater risk from other loan types due to being secured by rapidly depreciating assets or the reliance on the borrower’s continuing financial stability.

Commercial Equipment Loans

The Bank has an amortizing commercial equipment loan portfolio. 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 collateral. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk than commercial real estate loans. These loans are dependent on the success of the underlying business or the strength of the guarantor.

Small Business Administration Payment Protection Program ("SBA PPP")

The U.S. SBA PPP loan was created to address economic hardships resulting from the COVID-19 pandemic. U.S. SBA PPP loans carry a two-or five-year term at a 1% annual interest rate until the loan is either forgiven or paid and are fully guaranteed by the Small Business Administration. The Bank's ~~ALLL~~ACL does not include an allowance for U.S. SBA PPP loans. Management believes all PPP loans were underwritten in accordance with the program's guidelines. The U.S. SBA PPP guidelines indicate that lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guidelines further specify that lenders will be held harmless for a borrowers’ failure to comply with program criteria.

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provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guidelines further specify that lenders will be held harmless for a borrowers’ failure to comply with program criteria.

Loan Originations, Purchases and Sales

The Bank solicits loan applications through marketing by commercial loan officers, its branch network, and referrals from customers. Loans are processed and approved according to Bank guidelines. Loan processing functions are generally centralized except for small consumer loans.

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). The Company sold $51.2 8 million of residential mortgage loans under this program for the year ended December 31, ~~2021~~2022 compared to ~~none~~$5.2 million in the year ended December 31, ~~2020~~2021.

To comply with internal and regulatory limits on loans to one borrower, the Bank may sell portions of commercial, commercial real estate and commercial construction loans to other lenders. The Bank may also buy loans or portions of loans from other lenders. The Bank only purchases loans or portions of loans after reviewing loan documents, underwriting support, and completing other procedures. Purchased participation loans are subject to the same regulatory and internal policy requirements as other loans in the Bank’s portfolio.

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and commercial construction loans to other lenders. The Bank may also buy loans or portions of loans from other lenders. The Bank only purchases loans or portions of loans after reviewing loan documents, underwriting support, and completing other procedures. Purchased participation loans are subject to the same regulatory and internal policy requirements as other loans in the Bank’s portfolio.

Loan Approvals, Procedures and Authority

Loan approval authority is established by Board policy.

All loans and loan relationships that exceed the Bank’s in-house lending limit are required to be approved by at least three (3) members of the Bank’s Credit Risk Committee ("CRC"). In addition, the Board of Directors or the CRC approve all loans required to be approved by regulation, such as Regulation O loans or commercial loans to employees. The in-house lending guideline is approved by the Board and is less than the Bank’s legal lending limit.

The Officer’s Loan Committee ("OLC") consists of the following members of the Bank’s executive management; the Chief Executive Officer (“CEO”), and President, Chief Business ~~Officers~~Officer, ofChief ~~the~~Lending ~~Virginia~~Officer and ~~Maryland markets and~~ the Senior Credit Officer ("SCO"). Three members of the OLC must approve all loans that meet the OLC threshold. Loans that fall below the OLC threshold are approved by the appropriate level of line and credit.

Loans to One Borrower

Under Maryland law, the maximum amount that the Bank is permitted to lend to any one borrower and his or her related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus, which is defined to include the Bank’s capital, surplus, retained earnings and 100% of its reserve for possible ~~loan~~credit losses. Under this authority, the Bank would have been permitted to lend up to $2326.60 million to any one borrower at December 31, ~~2021~~2022. By interpretive ruling of the Maryland Commissioner, Maryland banks have the option of lending up to the amount that would be permissible for a national bank, which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital). Under this formula, the Bank would have been permitted to lend up to $3640.87 million to any one borrower at December 31, ~~2021~~2022. At December 31, ~~2021~~2022, the largest amount outstanding and committed to any one borrower and borrower’s related interests was $2729.54 million.

Loan Commitments

The Bank negotiates standby commitments for the construction and purchase of real estate. It has been the Bank’s experience that few commitments expire unfunded. Refer to Note 18 "Commitments and Contingencies" in the consolidated financial statements for more information.

Maturity of Loan Portfolio

See Management's Discussion and Analysis ("MD&A") for information regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity as of December 31, ~~2021~~2022.

Asset Classification

Federal regulations require use of an internal asset classification system to report on asset quality. We use an internal asset classification system, consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the ~~current~~sound ~~net~~ worth ~~and~~or paying capacity of the ~~obligor~~borrower or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic 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. Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of these categories but possess weaknesses are required to be designated “special mention.”

Assets classified as “substandard” or “doubtful,” require a specific valuation allowance for credit losses be established in an amount deemed prudent by management. Assets classified as “loss,” require either a specific allowance or charge-off for losses equal to 100% of the amount of the asset. For additional information regarding the Company's credit quality indicators and risk grading scale refer to Notes 1 and 3 of the Consolidated Financial Statements and the discussion in the MD&A.

Delinquencies

The Bank’s collection procedures provide that when a loan is 15 days delinquent, the borrower is contacted, and payment is requested. If the delinquency continues, efforts will be made to contact the delinquent borrower and obtain payment. If these efforts prove unsuccessful, the Bank will pursue appropriate legal action including repossession of the collateral. In certain instances, the Bank will attempt to modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize borrower’s financial affairs. For an analysis

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~~weaknesses~~of ~~inherent~~past indue ~~those~~loans ~~classified~~as ~~“substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis~~ of ~~currently existing facts~~December 31, ~~conditions,~~2022 and ~~values~~2021, ~~“highly~~respectively, ~~questionable~~refer and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not currently expose the insured institution to ~~sufficient~~Note ~~risk~~3 ~~to warrant classification~~ in ~~one~~the ofConsolidated ~~these~~Financial ~~categories but possess weaknesses are required to be designated “special mention~~Statements.”

~~Assets~~Individually ~~classified~~Assessed asLoans “substandard” or “doubtful,” require a specific valuation allowance for loan losses be established in an amount deemed prudent by management. Assets classified as “loss,” require either a specific allowance or charge-off for losses equal to 100% of the amount of the asset. For additional information regarding the Company's credit quality indicators and risk grading scale refer to Notes 1 and 3 of the Consolidated Financial Statements and the discussion in the MD&A.

~~Delinquencies~~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. For additional information regarding the Company's specific reserve methodology as well as the allowance for credit losses refer to Notes 1 and 3 of the Consolidated Financial Statements and the discussion in the MD&A under Critical Accounting Policies and Asset Quality.

Impaired Loans

A loan is considered impaired when it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The Bank individually evaluates substandard classified loans to determine whether a loan is impaired. Classified doubtful and loss loans, loans delinquent 90 days or greater, non-accrual loans and troubled debt restructures (“TDRs”) are generally considered impaired. For additional information regarding the Company's impairment methodology as well as the allowance for loans losses refer to Notes 1 and 3 of the Consolidated Financial Statements and the discussion in the MD&A under Critical Accounting Policies and Asset Quality.

Non-performing Assets

The Bank’s non-performing assets include other real estate owned, non-accrual loans and TDRs. Both non-accrual and TDR loans include loans that are paid current and are performing in accordance with the term of their original or modified contract terms. For a detailed discussion on asset quality see the MD&A.

Investment Activities

The Bank maintains a portfolio of investment securities to provide liquidity as well as a source of earnings. The Bank’s investment securities portfolio consists of asset-backed mortgage-backed (“MBS”) and collateralized mortgage obligations (“CMOs”) and other securities issued by U.S. government agencies and government-sponsored enterprises (“GSEs”), including FNMA and FHLMC. The Bank also has holdings of privately issued mortgage-backed securities, U.S. Treasury obligations, municipal bonds and other equity and debt securities. The Bank is required to maintain investments in the Federal Home Loan Bank based upon levels of borrowings.

The Bank’s investment policy provides that securities that will be held for indefinite periods of time, including securities that will be used as part of the Bank’s asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors are classified as AFS and accounted for at fair value. In December 2019, the Company reclassified the HTM investment portfolio to the AFS investment portfolio. The Bank's primary reasons for the reclassification were to better manage interest rate risks and provide additional on-balance sheet liquidity. Management determined that it no longer had the positive intent to hold its investment in securities classified as HTM until maturity and does not intend to hold HTM securities in the future. There were no HTM investments securities at December 31, ~~2021~~2022 and ~~2020~~2021. Certain of the Company’s asset-backed securities are issued by private issuers (defined as an issuer that is not a government or a government-sponsored entity). The Company had no investments in any private issuer’s securities that aggregate to more than 10% of the Company’s equity. For a discussion of investments see the MD&A and Notes 1 and 2 in the Consolidated Financial Statements.

Deposits and Other Sources of Funds

General

The funds needed by the Bank to make loans are primarily generated by deposit accounts solicited from its market area. The Company has lines of credit and brokered deposits available to supplement loan funding and for asset-liability management purposes. Reciprocal deposits are used to maximize FDIC insurance available to our customers. During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and are not considered brokered deposits unless they exceed 20% of a bank’s liabilities or $5.0 billion.

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purposes. Reciprocal deposits are used to maximize FDIC insurance available to our customers. During 2018, revisions to the Federal Deposit Insurance Act determined that reciprocal deposits are core deposits and are not considered brokered deposits unless they exceed 20% of a bank’s liabilities or $5.0 billion.

Deposits

The Bank’s deposit products include savings, money market, demand deposit and time deposit accounts. Products and services for deposit customers include safe deposit boxes, night depositories, cash vaults, automated clearinghouse transactions, wire transfers, ATMs, online and telephone banking, retail and business mobile banking, remote deposit capture, FDIC insured reciprocal deposits, merchant card services, credit monitoring, investment services, positive pay, payroll services, account reconciliation, bill pay, credit cards and lockbox. The Bank is a member of ACCEL, Master Card, ~~Cirrus,~~ Allpoint and Star ATM networks as well as the Bazing online membership discount program. As of December 31, ~~2021~~2022, the Bank operated 1412 automated teller machines ("ATM") which includes ~~two~~one stand-alone ~~locations~~location, and three interactive teller machines ("ITM") at the Fredericksburg-Harrison Crossing location.

For a discussion of deposits, see the MD&A and Notes 1 and 7 in the Consolidated Financial Statements.

Borrowings

Deposits are the primary source of funds for the Bank’s lending and investment activities and for its general business purposes. The Bank uses advances from the FHLB of Atlanta to supplement the supply of funds it may lend and to meet deposit withdrawal requirements. 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. Further, short-term credit facilities are available at the Federal Reserve Bank of Richmond and commercial banks. Long-term debt consists of adjustable-rate advances with rates based upon LIBOR (or SOFR), fixed-rate advances, and convertible advances. ~~In addition, during 2020 the Bank added the Federal Reserve Bank's Paycheck Protection Program Liquidity Facility ("PPPLF") to provide liquidity support, if needed, to fund U.S. SBA PPP loans.~~

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For a discussion of borrowing, see the MD&A and Notes 1, 8, 9 and 10 in the Consolidated Financial Statements.

Subsidiary Activities

The Company has two direct subsidiaries other than the Bank. In July 2004, Tri-County Capital Trust I was established as a statutory trust under Delaware law as a wholly-owned subsidiary of the Company to issue trust preferred securities. Tri-County Capital Trust I issued $7.0 million of trust preferred securities on July 22, 2004. In June 2005, Tri-County Capital Trust II was also established as a statutory trust under Delaware law as a wholly-owned subsidiary of the Company to issue trust preferred securities. Tri-County Capital Trust II issued $5.0 million of trust preferred securities on June 15, 2005. For more information regarding these entities, see Note 9 in the Consolidated Financial Statements.

Human Capital

Our Mission and Culture

Community Bank’s mission is to exceed the expectations of our community, today and tomorrow. The Bank’s corporate culture is defined by core values which include integrity, accountability, professionalism, diversity, community-focused and communicative. We value our employees by investing in competitive compensation and benefit packages and fostering a team environment centered on professional service and open communication. Attracting, retaining and developing qualified, engaged employees who embody these values are crucial to the success of the Bank and Company. We believe that relations with our employees are good.

Employee Demographics

As of December 31, ~~2021~~2022, Community Bank employed ~~191~~198 full and part time employees (~~186~~196 full time equivalent employees) of which approximately 7673% were women. In addition, for those employees identifying as such, approximately 2230% of our workforce have diverse ethnic backgrounds. The Bank’s employees were not represented by a collective bargaining agreement.

The Company has no employees and reimburses the Bank for estimated expenses, including an allocation of salaries and benefits.

Diversity and Inclusion

We are committed to building a diverse workforce and an inclusive work environment which are supported by our culture and values. We strive to attract and retain employees with diverse characteristics, backgrounds and perspectives, which inspires our team to achieve more creative and innovative solutions for our customers. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. Our commitment to equal employment opportunities is demonstrated through an affirmative action plan which includes annual compensation analyses, ongoing reviews of our selection and hiring practices and an annual review of our plan to ensure we build and maintain a diverse workforce.

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team to achieve more creative and innovative solutions for our customers. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the differences between people. Our commitment to equal employment opportunities is demonstrated through an affirmative action plan which includes annual compensation analyses, ongoing reviews of our selection and hiring practices and an annual review of our plan to ensure we build and maintain a diverse workforce.

Compensation and Benefits

The Bank’s compensation and benefits package is designed to attract and retain a talented workforce. The Bank’s minimum wage for entry level positions is $1520.00 per hour. ~~Beginning in January 2022, the Bank increased it's minimum wage for entry level positions by $2.00 per hour to $17.00 per hour.~~ In addition to salaries, benefits include a 401(k) plan with an employer matching contribution, an employee stock ownership plan, medical insurance benefits, paid short-term and long-term disability and life insurance, flexible spending accounts, tuition reimbursement, wellness benefits, paid time off, family leave and an employee assistance program.

Professional Development

The Bank invests in the growth of its employees by providing access to professional development and continuing education courses and seminars that are relevant to the banking industry and their job function within the Company. We offer our employees the opportunity to participate in various professional and leadership development programs. On-demand training opportunities include a variety of industry, technical, professional, business development, leadership and regulatory topics. Training to communicate the Bank’s culture, behavioral standards and expectations to employees is an important part of our training program.

Employee Health and Safety

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented unique challenges to maintain employee safety while continuing successful operations. To support our employees and customers during this time the Bank developed a pandemic response plan which established a phased approach for operating in the pandemic environment. The Bank greatly expanded remote work, established employee engagement and feedback initiatives to understand and respond to employee needs and concerns, broadened benefit offerings and established safety protocols regarding cleaning, personal hygiene and physical distancing to minimize the spread of illness in our work environments. The Bank did not furlough or lay-off any employees as a result of the pandemic.

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Supervision and Regulation

Regulation of the Company

General

As a bank holding company, 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”), and the regulations of the Federal Reserve Board. The Federal Reserve Board also has enforcement authority over bank holding companies, including the ability to assess civil money penalties, to issue cease and desist or removal orders, and to require that a bank holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

The following discussion summarizes certain of the regulations applicable to the Company but does not purport to be a complete description of such regulations and is qualified in its entirety by reference to the actual laws and regulations involved.

Acquisition of Control

A bank holding company, with certain exceptions, must obtain Federal Reserve Board approval before (1) acquiring ownership or control of another bank or bank holding company if it would own or control more than 5% of the voting shares of such bank or bank holding company (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging with another bank holding company. In evaluating such application, the Federal Reserve Board considers factors such as the financial condition and managerial resources of the companies involved, the convenience and needs of the communities to be served and competitive factors. Federal law provides that no person may acquire “control” of a bank holding company or insured bank without the approval of the appropriate federal regulator. Control is defined to mean direct or indirect ownership, control of 25% or more of any class of voting stock, control of the election of a majority of the bank’s directors or a determination by the Federal Reserve Board that the acquirer has or would have the power to exercise a controlling influence over the management or policies of the institution.

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The Maryland Financial Institutions Code additionally prohibits any person from acquiring more than 10% of the outstanding shares of any class of securities of a bank or bank holding company or electing a majority of the directors or directing the management or policies of any such entity, without the prior approval of the Commissioner. The Commissioner may deny approval of the acquisition if the Commissioner determines it to be anti-competitive or to threaten the safety or soundness of a banking institution.

Permissible Activities

A bank holding company is limited in its activities to banking, managing or controlling banks, or providing services for its subsidiaries. Other permitted non-bank activities have been identified as closely related to banking. Bank holding companies that are “well capitalized” and “well managed” and whose financial institution subsidiaries have satisfactory Community Reinvestment Act records can elect to become “financial holding companies,” which are permitted to engage in a broader range of financial activities than are permitted to bank holding companies. The Company has not opted to become a financial holding company.

The Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

The Maryland Financial Institutions Code provides that no bank holding company may acquire a Maryland bank holding company or a Maryland bank without the approval of the Commissioner. The Commissioner may deny approval of an application if the acquisition may (1) be detrimental to the safety and soundness of the Maryland bank holding company or Maryland bank to be acquired or (2) result in undue concentration of resources or a substantial reduction of competition in the state.

The Maryland Financial Institutions Code additionally prohibits any person from acquiring more than 25% of the outstanding voting shares of any class of securities of a Maryland bank or Maryland bank holding company, or directing the management or policies of any such entity, without the prior approval of the Commissioner. The Commissioner may deny approval of the acquisition if the Commissioner determines it to be anti-competitive or to threaten the safety or soundness of a banking institution.

Dividend

The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems or that has inadequate capital to borrow funds to pay dividends. Under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See ~~“Regulation of the Bank – Capital Adequacy.”~~

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“Regulation of the Bank – Capital Adequacy.”

Sources of Strength

The Dodd-Frank Act codified the source of strength doctrine requiring bank holding companies to serve as a source of strength for their depository subsidiaries, by providing capital, liquidity and other support in times of financial stress.

Stock Repurchases

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption. This requirement does not apply to bank holding companies that are “well capitalized,” “well-managed” and are not the subject of any unresolved supervisory issues.

Capital Requirement

The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks apply to bank holding companies; as is the case with institutions themselves, the capital conservation buffer was phased in between 2016 and 2019. However, the Federal Reserve Board has provided a “small bank holding company” exception to its consolidated capital requirements, and legislation and the related issuance of regulations by the Federal Reserve Board has increased the threshold for the exception to $3.0 billion. As a result, the Company will not be subject to the capital requirement until such time as its consolidated assets exceed $3.0 billion.

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applicable to institutions themselves. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks apply to bank holding companies; as is the case with institutions themselves, the capital conservation buffer was phased in between 2016 and 2019. However, the Federal Reserve Board has provided a “small bank holding company” exception to its consolidated capital requirements, and legislation and the related issuance of regulations by the Federal Reserve Board has increased the threshold for the exception to $3.0 billion. As a result, the Company will not be subject to the capital requirement until such time as its consolidated assets exceed $3.0 billion.

Regulation of the Bank

General

The Bank is a Maryland commercial bank and its deposit accounts are insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to supervision, examination and regulation by the Commissioner of Financial Regulation of the State of Maryland (the “Commissioner”) and the FDIC.

The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) as an independent bureau of the Federal Reserve System. The CFPB assumed responsibility for implementing federal consumer financial protection and fair lending laws and regulations, a function formerly handled by federal bank regulatory agencies. However, institutions of less than $10 billion, such as the Bank, will continue to be examined for compliance with consumer protection or fair lending laws and regulations by, and be subject to enforcement authority of their primary federal regulators.

The following discussion summarizes regulations applicable to the Bank but does not purport to be a complete description of such regulations and is qualified in its entirety by reference to the actual laws and regulations involved.

Capital Adequacy

Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6%, a total capital to risk-based assets ratio of 8%, and a Tier 1 capital to average assets leverage ratio of 4%.

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital contains capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of accumulated other comprehensive income “AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). The Bank exercised the opt-out and therefore does not include AOCI in its regulatory capital determinations. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (such as recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset ~~categories believed to present greater risk.~~

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At December 31, 2021, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.12

The Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018 required the federal banking agencies, including the Federal Deposit Insurance Corporation, to establish for banks with assets of less than $10 billion of assets a community bank leverage ratio (the ratio of a bank’s tangible equity capital to average total consolidated assets). The community bank leverage ratio was 8.5% for calendar year 2021 and 9% thereafter. The Bank has not elected to utilize the community bank leverage ratio alternative reporting framework.

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categories believed to present greater risk.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. At December 31, 2022, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

Prompt Corrective Regulatory Action

Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For such purposes, the law establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a common equity Tier 1 risk-based capital ratio of 6.5% or greater, and a leverage capital ratio of 5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater and generally a leverage capital ratio of 4% or greater. An institution is deemed to be “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a common equity Tier 1 risk-based capital ratio of less than 4.5% or generally a leverage capital ratio of less than 4%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a common equity Tier 1 risk-based capital ratio of less than 3% or a leverage capital ratio of less than 3%. An institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

“Undercapitalized” institutions are subject to growth, capital distribution (including dividend), and other limitations, and are required to submit a capital restoration plan. An institution’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the bank’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” Significantly undercapitalized institutions are subject to one or more additional restrictions including, but not limited to, a regulatory order requiring them to sell sufficient voting stock to become adequately capitalized; requirements to reduce total assets, cease receipt of deposits from correspondent banks, or dismiss directors or officers; and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions by the parent holding company.

Beginning 60 days after becoming “critically undercapitalized,” critically undercapitalized institutions also may not make any payment of principal or interest on certain subordinated debt, extend credit for a highly leveraged transaction, or enter into any material transaction outside the ordinary course of business. In addition, subject to a narrow exception, the appointment of a receiver is required for a critically undercapitalized institution within 270 days after it obtains such status.

Branching

Maryland law provides that, with the approval of the Commissioner, Maryland banks may establish branches within Maryland and may establish branches in other states by any means permitted by the laws of such state or by federal law. The FDIC may approve interstate branching by merger in any state that did not opt out and de novo in states that specifically allow for such branching.

Dividend Limitations

Maryland banks may only pay cash dividends from undivided profits or, with the prior approval of the Commissioner, their surplus in excess of 100% of required capital stock. Maryland banks may not declare a stock dividend unless their surplus, after the increase in capital stock, is equal to at least 20% of the outstanding capital stock as increased. If the surplus of the bank, after the increase in capital stock, is less than 100% of its capital stock as increased, the commercial bank must annually transfer to surplus at least 10% of its net earnings until the surplus is 100% of its capital stock as increased.

Without the approval of the FDIC, a Federal Reserve nonmember bank may not declare or pay a dividend if the total of all dividends declared during the year exceeds its net income during the current calendar year and retained net income for the prior two years. The Bank is further prohibited from making a capital distribution if it would not be adequately capitalized thereafter.

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Insurance of Deposit Accounts

The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the FDIC. The deposit insurance per account owner is currently $250,000.

Under the FDIC risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and other factors, with less risky institutions paying lower assessments. The initial base assessment rate ranges from three to 30 basis points. The rate schedules automatically adjust when the Deposit Insurance Fund reaches certain milestones. No institution may pay a dividend if in default of the federal deposit insurance assessment.

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Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or its prudential banking regulator. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

The Bank is required to monitor large deposit relationships and concentration risks in accordance with FDIC policy. This includes monitoring deposit concentrations and maintaining fund management policies and strategies that take into account potentially volatile concentrations and significant deposits that mature simultaneously. The FDIC defines a large depositor as a customer or entity that owns or controls 2% or more of the Bank’s total deposits.

Reserve Requirements

The Federal Reserve Board historically required depository institutions to maintain non-interest earning reserves against transaction accounts. However, the Federal Reserve Board reduced the reserve requirement to 0% as of March 26, 2020 for all depository institutions.

Transactions with Affiliates

The Bank, as a state nonmember bank, is limited in the amount of “covered transactions” with any affiliate. Covered transactions must also be on terms substantially the same, or at least as favorable, to the Bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Certain covered transactions, such as loans to affiliates, must meet collateral requirements. At December 31, ~~2021~~2022, we had no covered transactions with affiliates.

Loans to directors, executive officers and principal stockholders of a state nonmember bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the bank. Loans to any executive officer, director and principal stockholder together with all other outstanding loans to such person and affiliated interests generally may not exceed 15% of the Bank’s unimpaired capital and surplus and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $25,000 or 5% of capital and surplus, or any loans cumulatively aggregating $500,000 or more, must be approved in advance by a majority of the board of directors of the Bank with any “interested” director not participating in the voting. State nonmember banks are prohibited from paying the overdrafts of any of their executive officers or directors unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or transfer of funds from another account at the Bank. In addition, loans to executive officers may not be made on terms more favorable than those afforded other borrowers and are restricted as to type, amount and terms of credit.

Enforcement

The Commissioner has enforcement authority over Maryland banks. This includes the ability to issue cease and desist orders and civil money penalties and to remove directors or officers. The Commissioner may also take possession of a Maryland bank whose capital is impaired and seek to have a receiver appointed by a court. The FDIC has primary federal enforcement responsibility over state banks under its jurisdiction, including the authority to bring enforcement action against all “institution-related parties,” including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action may range from the assessment of civil money penalties (or criminal penalties, in cases of financial institution crimes), the issuance of capital directive or a cease-and-desist order for the removal of officers and/or directors, receivership, conservatorship or termination of deposit insurance.

Additionally, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for violations of Title X of the Dodd-Frank Act or CFPB regulations under Title X, and to seek the kind of cease and desist orders applicable to entities subject to the CFPB’s supervisory authority (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). In May 2022, the CFPB issued an Interpretive Rule to clarify the authority of states to enforce federal consumer financial protections laws under the Consumer Financial Protection Act of 2010 (“CFPA”). Specifically, the CFPB confirmed that: (1) states can enforce the CFPA, including the provision making it unlawful for covered persons or service providers to violate any provision of federal consumer financial protection law; (2) the enforcement authority of states under section 1042 of the CFPA is generally not subject to

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certain limits applicable to the CFPB’s enforcement authority, such that States may be able to bring actions against a broader cross-section of companies than the CFPB; and (3) state attorneys general and regulators may bring (or continue to pursue) actions under their CFPA authority even if the CFPB is pursuing a concurrent action against the same entity.

State Regulation and Licensing Requirements

The Bank’s operations generally must satisfy the laws and standards of each individual U.S. state in which it operates. This means that when individual states differ in how they allow consumer financial products and services to be provided and used, the Bank must operate consistently in accordance with the most comprehensive requirements. Many states have consumer protection laws analogous to, or in addition to, the federal laws listed below, such as usury laws, state debt collection practices laws, and requirements regarding loan disclosures and terms, credit discrimination, credit reporting, money transmission, recordkeeping, and unfair or deceptive business practices.

Certain states have adopted laws regulating and requiring licensing, registration, notice filing, or other approval for parties that engage in certain activity regarding consumer finance transactions. Furthermore, certain states and localities have adopted laws requiring licensing, registration, notice filing, or other approval for consumer debt collection or servicing, and/or purchasing or selling consumer loans. The licensing statutes vary from state to state and prescribe different requirements, including but not limited to: restrictions on loan origination and servicing practices (including limits on the type, amount, and manner of fees), interest rate limits, disclosure requirements, periodic examination requirements, surety bond and minimum specified net worth requirements, periodic financial reporting requirements, notification requirements for changes in principal officers, stock ownership or corporate control, restrictions on advertising, and requirements that loan forms be submitted for review. The Bank may also be subject to supervision and examination by applicable state regulatory authorities in the jurisdictions in which it may offer consumer financial products or services.

Supervision and Regulation of Mortgage Banking Operations

The Bank’s mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans’ Administration (“VA”) and the Federal National Mortgage Association (“Fannie Mae”) with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders are required annually to submit audited financial statements to Fannie Mae, FHA and VA. Each of these regulatory entities has its own financial requirements. The Bank is also subject to examination by Fannie Mae, FHA and VA to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, the Federal Truth-in-Lending Act, the Fair Housing Act, the Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. The Bank’s mortgage banking operations are also affected by various state and local laws and regulations and the requirements of various private mortgage investors.

Other Regulations

The Bank’s operations are also subject to federal laws applicable to credit transactions, and their implementing regulations, including the:

•Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;

•Real Estate Settlement Procedures Act and Regulation X, requiring that borrowers for mortgage loans for 1-4 family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

•~~Bank~~Home ~~Secrecy~~Mortgage Disclosure Act of ~~1970~~1975 and Regulation C, requiring financial institutions to ~~assist~~provide ~~U.S.~~information ~~government~~to ~~agencies~~enable tothe ~~detect~~public and ~~prevent~~public ~~money~~officials ~~laundering~~to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

•~~Home~~Equal ~~Mortgage~~Credit ~~Disclosure~~Opportunity Act ofand ~~1975~~Regulation B, ~~requiring~~prohibiting ~~financial~~discrimination ~~institutions~~on ~~to provide information to enable~~ the ~~public~~basis ~~and~~of ~~public~~race, ~~officials~~creed toor ~~determine~~other ~~whether~~prohibited afactors ~~financial~~in ~~institution~~extending ~~is fulfilling its obligation to help meet the housing needs of the community it serves~~credit;

•Fair Credit Reporting Act of 1978 and Regulation V, governing the use and provision of information to credit reporting agencies;

•Fair Debt Collection Practices Act and Regulation F, and the Telephone Consumer Protection Act, each governing the manner in which consumer debts may be collected by collection agencies and certain creditors;

•Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, authorizing the creation of legally binding and enforceable agreements utilizing electronic records and signatures;

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•~~Equal~~Military ~~Credit~~Lending ~~Opportunity~~ Act, ~~prohibiting~~providing ~~discrimination~~disclosure onrequirements, ~~the~~interest ~~basis~~rate oflimitations, ~~race~~substantive conduct obligations, ~~creed~~and orprohibitions ~~other~~on ~~prohibited~~certain ~~factors~~behavior inrelating ~~extending~~to ~~credit~~loans made to covered borrowers, which include both servicemembers and their dependents;

•~~Fair~~Servicemembers ~~Credit~~Civil ~~Reporting~~Relief Act, ofsetting ~~1978,~~certain ~~governing~~interest ~~the~~rate ~~use~~limitations and ~~provision~~allowing ofactive ~~information~~duty military members to ~~credit~~suspend ~~reporting~~or ~~agencies~~postpone certain civil obligations so that the military member can devote his or her full attention to military duties; and

•~~Fair~~Other ~~Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and~~ rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of the Bank also are subject to laws such as the:

•Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

•Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

•Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

•Gramm-Leach-Bliley Act privacy statute which requires each depository institution to disclose its privacy policy, identify parties with whom certain nonpublic customer information is shared and provide customers with certain rights to “opt out” of disclosure to certain third parties;

•Bank Secrecy Act of 1970 (“BSA), requiring financial institutions to assist U.S. government agencies to detect and prevent money laundering. Under the BSA, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury;

•Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expands the responsibilities of financial institutions in preventing the use of the United States financial system to fund terrorist activities. Among other things, the USA PATRIOT Act and the related regulations requires banks operating in the United States to develop anti-money laundering compliance programs, due diligence policies and controls to facilitate the detection and reporting of money laundering;

•The Community Reinvestment Act (“CRA”), which provides that a financial institution has a continuing and affirmative obligation to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign a rating to the institution’s record of meeting the credit needs of the community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions;

•The Fair and Accurate Reporting Act of 2003, as an amendment to the Fair Credit Reporting Act, as noted previously, which includes provisions to help reduce identity theft by providing procedures for the identification, detection, and response to patterns, practices, or specific activities known as “red flags”; and

•Truth in Savings Act, which establishes the requirement for clear and uniform disclosure of terms and conditions regarding deposit interest and fees to help promote economic stability, competition between depository institutions, and allow the consumer to make informed decisions.

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Item 1A. Risk Factors

Risks

An investment in shares of our common stock involves various risks. Our business, financial condition and results of operations could be harmed by any of the following risks or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

Risks Related to the COVID-19 Pandemic

The ongoing COVID-19 pandemic and measures taken to limit its spread could adversely affect our business, financial condition, and results of operations.

The COVID-19 pandemic has negatively impacted economic and commercial activity and financial markets. Measures to contain the virus, such as stay-at-home orders, travel restrictions, closure of non-essential businesses, occupancy limitations and social distancing requirements, resulted in significant business and operational disruptions, including business closures, and mass layoffs and furloughs. Though most restrictions have been lifted or eased and consumer and business spending and unemployment levels have improved significantly, the economic recovery has been uneven, with industries such as travel, entertainment, hospitality and food service lagging, and, as of December 31, 2021, many companies have not returned workers to their offices. Supply chain disruptions precipitated by the abrupt economic slowdown have contributed to increased costs, lost revenue, and inflationary pressures for many segments of the economy. Further, a significant number of workers left their jobs during the COVID-19 pandemic, leading to wage inflation in many industries as businesses attempt to fill vacant positions.

The extent to which the COVID-19 pandemic will ultimately affect our business is unknown and will depend, among other things, on the duration of the pandemic, the actions undertaken by national, state and local governments and health officials to contain the virus or mitigate its effects, the safety and effectiveness of the vaccines that have been developed and the extent to which they are accepted by the public, the development of effective therapies, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume.

The continuation of the COVID-19 pandemic and the efforts to contain the virus, including effects of economic stimulus, and the exhaustion or expiration of stimulus benefits, could:

•reduce the demand for loans and other financial services;

•result in increases in loan delinquencies, problem assets, and foreclosures;

•cause the value of collateral for loans, especially real estate, to decline in value;

•reduce the availability and productivity of our employees;

•cause our vendors and counterparties to be unable to meet existing obligations to us;

•negatively impact the business and operations of third-party service providers that perform critical services for our business;

•cause the value of our securities portfolio to decline; and

•cause the net worth and liquidity of loan guarantors to decline, impairing their ability to honor commitments to us.

Any one or a combination of the above events could have a material, adverse effect on our business, financial condition, and results of operations.

Increased credit risk resultant of the COVID-19 pandemic could adversely impact our profitability.

We are exposed to the risk that loans will not be paid timely or at all or that the value of collateral supporting a loan will be insufficient. We are also exposed to risks resulting from changes in economic and industry conditions. Material economic disruption due to the COVID-19 pandemic have caused and may cause our borrowers to have difficulties in repaying their loans. Governmental actions providing payment relief to borrowers affected by COVID-19 could preclude our ability to initiate foreclosure proceedings and, as a result, the collateral we hold may decrease in value or become illiquid, and the level of our nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for loan losses. Additional factors related to the credit quality of certain commercial real estate and multifamily residential loans include the duration of state and local moratoriums on evictions for non-payment of rent or other fees. The payment on these loans that are secured by income producing properties are typically dependent on the successful operation of the related real estate property and may subject us to risks from adverse conditions in the real estate market or the economy.

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Bank regulatory agencies and various governmental authorities are urging financial institutions to work with borrowers who are unable to meet their payment obligations because of the effects of COVID-19. We have been working to support our borrowers to mitigate the impact of the COVID-19 pandemic on them and on our loan portfolio, including through loan modifications that defer payments for those who experienced a hardship as a result of COVID-19. Although regulatory guidance provides that such loan modifications are exempt from the calculation and reporting of troubled debt restructurings and loan delinquencies, we cannot predict whether such loan modifications may ultimately have an adverse impact on our profitability in future periods. Our inability to successfully manage the increased credit risk caused by the COVID-19 pandemic could have a material adverse effect on our business, financial condition and results of operations.

Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the FRB lowered the target range for the federal funds rate to a range from 0 to 0.25 percent. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of interest income and expense and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, and financial condition.

We may experience losses, additional expense and reputational harm arising out of our origination of PPP loans.

We originated $201.3 million of PPP loans to over 1,532 borrowers. The vast majority of our PPP loans were made to existing borrowers or deposit customers, and we have not recorded an allowance for loan losses on these loans due to the guarantee of the SBA. We may incur losses on some of our PPP loans if the loans are not forgiven, the borrowers default and the SBA does not honor its guarantee due to an error made by us in making the loan. In addition, we may experience reputational harm arising out of our origination of PPP loans due to reports of borrower fraud, concerns about whether small businesses sufficiently benefited from the program, and government administration of the loan forgiveness process. Further, there have been lawsuits against other banks alleging that various PPP lenders improperly prioritized existing customers when those lenders approved PPP loans and that various PPP lenders failed to pay required agency fees to third parties who allegedly assisted businesses with PPP loan applications. We may experience additional expense and reputational harm arising out of our origination of PPP loans if we become subject to a similar lawsuit.

Credit Risks

Our increased emphasis on commercial lending may expose us to increased credit risks.

At December 31, ~~2021~~2022 and ~~2020~~2021, our loan portfolio included $1,~~115~~232.58 million, or 7067.7%, and $1,~~049~~113.18 million, or 6970.85%, respectively, of commercial real estate loans, $~~195~~338.03 million, or 1218.46%, and $~~139~~194.19 million, or 912.24%, respectively, of residential rental loans, $5042.61 million, or 3.2.3% and $5250.95 million, or 3.52%, respectively of commercial business loans and $6278.59 million, or 4.03% and $6162.7 million, or 4.10%, respectively, of commercial equipment loans. We intend to maintain our emphasis on these types of loans. These types of loans generally expose a lender to greater risk of non-payment and loss and require a commensurately higher loan loss allowance than owner-occupied 1-4 family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances compared to 1-4 family residential mortgage loans. Commercial business and equipment loans expose us to additional risks since they typically are made on the basis of the borrower’s ability to make repayments from the cash flows of the borrower’s business and are secured by non-real estate collateral that may depreciate over time. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one commercial loan or credit relationship can expose us to a significantly greater risk of loss compared to a 1-4 family residential mortgage loan. At December 31, ~~2021~~2022 and ~~2020~~2021, $6.5.9 million, or 8696.16% and $166.95 million, or 9285.95%, respectively, of our non-accrual loans of $7.6.1 million and $187.26 million, respectively, consisted of commercial loans.

Imposition of limits by the bank regulators on commercial real estate lending activities could curtail the Company’s growth and adversely affect its earnings.

In 2006, the federal banking regulators issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices,” referred to as the CRE Guidance. Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory inquiry where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. In December 2015, the federal banking regulators released a new statement on prudent risk management for commercial real estate lending, that indicated the intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, the Bank’s primary federal regulator, were to impose restrictions on the amount of commercial real estate loans the Bank can hold in its portfolio, the Company’s earnings could be adversely affected. At December 31, 2022, the Bank’s total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans represented 380.94% of the Bank’s total risk-based capital. Management has established a CRE lending framework to monitor specific exposures and limits by types within the CRE portfolio and takes appropriate actions, as necessary.

18We may be required to make further increases in our provision for credit losses and to charge-off additional loans in the future. Further, our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.

For the years ended December 31, 2022 and 2021, we recorded a provision for credit losses of $2.4 million and $0.6 million, respectively. We recorded net loan charge-offs of $0.5 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively. Our non-accrual loans, OREO and accruing TDRs totaled $6.5 million, or 0.27% of total assets and $8.1 million, or 0.35% of total assets, respectively, at December 31, 2022 and 2021. Loans that were classified as special mention and substandard were $10.5 million and $5.2 million, respectively, at December 31, 2022 and 2021. We had no loans classified as doubtful or loss at December 31, 2022 and 2021. If the economy and/or the real estate market weakens, more of our classified loans may become non-performing and we may be required to take additional provisions to increase our allowance for credit losses for these assets as the value of the collateral may be insufficient to pay any remaining net loan balance, which would have a negative effect on our results of operations. We maintain an allowance for credit losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our allowance for credit losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date.

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~~the~~losses ~~outstanding~~and ~~balance~~may ofrequire ~~the~~us ~~commercial~~to ~~real~~increase ~~estate~~our ~~loan~~allowance ~~portfolio~~for ~~has~~credit ~~increased~~losses by ~~50%~~recognizing oradditional ~~more~~provisions ~~during the preceding 36 months. In December 2015, the federal banking regulators released a new statement on prudent risk management~~ for ~~commercial~~credit ~~real~~losses ~~estate~~charged ~~lending, that indicated the intent~~ to ~~continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC~~expense, ~~the~~or ~~Bank’s primary federal regulator, were~~ to ~~impose~~decrease ~~restrictions~~our onallowance ~~the~~for ~~amount~~credit oflosses ~~commercial~~by ~~real~~recognizing ~~estate~~loan ~~loans the Bank can hold in its portfolio, the Company’s earnings could be adversely affected~~charge-offs. AtAny ~~December 31,~~such ~~2021,~~additional ~~the~~provisions ~~Bank’s~~for ~~total~~credit ~~non-owner-occupied~~losses ~~commercial~~or ~~real estate loans~~charge-offs, ~~including~~could ~~loans~~have ~~secured~~a bymaterial ~~apartment~~adverse ~~buildings,~~effect ~~investor~~on ~~commercial~~our ~~real~~financial ~~estate,~~condition and ~~construction~~results ~~and land loans represented 331.40%~~ of ~~the Bank’s total risk-based capital~~operations. ~~Management has established a CRE lending framework to monitor specific exposures and limits by types within the CRE portfolio and takes appropriate actions, as necessary.~~

We may beexperience ~~required~~increased tolevels ~~make~~of ~~further~~non-performing ~~increases~~loans, incharge-offs ~~our~~and ~~provision~~delinquencies, ~~for~~which ~~loan~~would ~~losses~~require ~~and to charge-off~~ additional ~~loans~~increases in ~~the future. Further,~~ our ~~allowance~~provision for ~~loan~~credit losses ~~may prove to be insufficient to absorb losses in our loan portfolio~~.

~~For~~Credit ~~the~~risks ~~years~~are ~~ended~~inherent ~~December 31,~~in ~~2021~~making ~~and~~any ~~2020~~loan, weincluding ~~recorded~~risks ainherent ~~provision~~in ~~for~~dealing ~~loan~~with ~~losses~~individual ~~of $0.6 million and $10.7 million~~borrowers, ~~respectively.~~risks ~~We recorded net loan charge-offs~~ of ~~$1.6 million and $2.2 million for the years ended December 31, 2021 and 2020, respectively. Our~~ non-~~accrual loans~~payment, ~~OREO~~risks ~~and~~resulting ~~accruing~~from ~~TDRs~~uncertainties ~~totaled~~as ~~$8.1~~to ~~million,~~the orfuture ~~0.35%~~value of ~~total~~collateral ~~assets~~ and ~~$21.9~~cash ~~million,~~flows oravailable ~~1.08%~~to ofservice ~~total~~debt ~~assets, respectively, at December 31, 2021~~ and ~~2020.~~risks ~~Loans~~resulting ~~that~~from ~~were~~changes ~~classified~~in aseconomic ~~special mention~~ and ~~substandard~~market ~~were $5~~conditions.2 ~~million~~Our ~~and~~credit ~~$26.9~~risk ~~million,~~approval ~~respectively, at December 31, 2021~~ and ~~2020.~~monitoring Weprocedures ~~had~~may nonot ~~loans~~mitigate ~~classified~~these ascredit ~~doubtful or loss at December 31~~risks, ~~2021~~ and ~~2020.~~they Ifcannot ~~the economy and/or the real estate market weakens, more of our classified loans may become non-performing and we may~~ be ~~required~~expected to ~~take~~completely ~~additional~~eliminate ~~provisions to increase~~ our ~~allowance~~credit ~~for~~risks. ~~loan~~If ~~losses for these assets as~~ the ~~value~~overall ofeconomic ~~the~~climate ~~collateral~~fails ~~may be insufficient~~ to ~~pay any remaining net loan balance~~improve, ~~which~~or ~~would~~even ~~have~~if ait ~~negative~~does ~~effect~~improve, on our ~~results~~borrowers ofmay ~~operations.~~experience Wedifficulties ~~maintain~~in anrepaying ~~allowance~~their ~~for~~loans, ~~loan~~and ~~losses~~the tolevel ~~provide~~of ~~for~~non-performing loans, incharge-offs ~~our~~and ~~portfolio~~delinquencies ~~that~~could ~~may~~rise ~~not~~and berequire ~~repaid~~further increases in ~~their~~the ~~entirety.~~provision ~~We believe that our allowance~~ for ~~loan~~credit losses, iswhich ~~maintained~~would atcause ~~a level adequate to absorb probable losses inherent in~~ our ~~loan~~net ~~portfolio~~income asand ofreturn ~~the~~on ~~corresponding~~equity ~~balance~~to ~~sheet date~~decrease.

However, our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates. Additionally, our regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by recognizing loan charge-offs. Any such additional provisions for loan losses or charge-offs, could have a material adverse effect on our financial condition and results of operations.

We may experience increased levels of non-performing loans, charge-offs and delinquencies, which would require additional increases in our provision for loan losses.

Credit risks are inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of non-payment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. Our credit risk approval and monitoring procedures may not mitigate these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate fails to improve, or even if it does improve, our borrowers may experience difficulties in repaying their loans, and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income and return on equity to decrease.

Non-performing and classified assets could take significant time to resolve and adversely affect our results of operations and financial condition and could result in further losses in the future.

At December 31, ~~2021~~2022 and ~~2020~~2021, our non-accrual loans totaled $7.6.1 million, or 0.4834% of our loan portfolio and $187.26 million, or 10.2148% of our loan portfolio, respectively. At December 31, ~~2021~~2022 and ~~2020~~2021, our non-accrual loans, OREO and accruing TDRs totaled $86.15 million, or 0.3527% of total assets and $218.91 million, or 10.0835% of total assets, respectively. Our non-performing assets adversely affect our net income in various ways. We do not accrue interest income on non-accrual loans or foreclosed properties, thereby adversely affecting our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its fair market value less estimated selling costs, which may result in a loss. These non-performing loans and foreclosed properties also increase our risk profile and the amount of capital our regulators believe is appropriate to maintain. The resolution of non-performing assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in non-performing loans and non-performing assets, our net interest income will be negatively impacted, and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

19At December 31, 2022 and 2021 our total classified assets were $6.1 million and $5.2 million, respectively. While we continue to accrue interest income on classified loans that are performing, classified loans and other classified assets may negatively impact profitability by requiring additional management attention and regular monitoring. Increased monitoring of these assets by management may impact our ability to focus on opportunistic growth, potentially adversely impacting future profitability.

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At December 31, 2021 and 2020 our total classified assets were $5.2 million and $22.4 million, respectively. While we continue to accrue interest income on classified loans that are performing, classified loans and other classified assets may negatively impact profitability by requiring additional management attention and regular monitoring. Increased monitoring of these assets by management may impact our ability to focus on opportunistic growth, potentially adversely impacting future profitability.

Our residential mortgage loans and home equity loans expose us to a risk of loss due to declining real estate values.

At December 31, ~~2021~~2022 and ~~2020~~2021, $9179.19 million, or 54.84%, of our total loan portfolio, and $~~133~~92.87 million, or 85.9%, of our total loan portfolio, respectively, consisted of owner-occupied 1-4 family residential mortgage loans. At December 31, ~~2021~~2022 and ~~2020~~2021, $25.6 million, or 1.64%, of our total loan portfolio and $2925.17 million, or 1.96%, of our total loan portfolio, respectively, consisted of home equity loans and lines of credit. A decline in real estate values in our area could cause some of our mortgage and home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

Any delays in our ability to foreclose on delinquent mortgage loans may negatively impact our business.

The origination of mortgage loans occurs with the expectation that, if the borrower defaults, the ultimate loss would be mitigated by the value of the collateral that secures the mortgage loan. The ability to mitigate the losses on defaulted loans depends upon the ability to promptly foreclose upon the collateral after an appropriate cure period. The length of the foreclosure process depends on state law and other factors, such as the volume of foreclosures and actions taken by the borrower to stop the foreclosure. Any delay in the foreclosure process will adversely affect us by increasing the expenses related to carrying such assets, such as taxes, insurance, and other carrying costs, and exposes us to losses as a result of potential additional declines in the value of such collateral.

Our asset valuation methodologies, estimations and assumptions may be subject to differing interpretations and could result in changes to asset valuations that materially adversely affect our results of operations or financial condition.

We must use estimates, assumptions, and judgments when financial assets and liabilities are measured and reported at fair value. Assets and liabilities carried at fair value inherently result in a higher degree of financial statement volatility. Fair values and the information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices and/or other observable inputs provided by independent third-party sources, when available. When such third-party information is not available, we estimate fair value primarily by using cash flows and other financial modeling techniques utilizing assumptions such as credit quality, liquidity, interest rates and other relevant inputs. Changes in underlying factors, assumptions, or estimates in any of these areas could materially impact our future financial condition and results of operations.

During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value some of our assets if trading becomes less frequent and market data becomes less observable. There may be asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In such cases, asset valuation may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation.

~~We may be adversely affected by economic conditions in our market area, which is significantly dependent on federal government and military employment and programs.~~18

Our marketplace is primarily in the counties of Charles, Calvert, St. Mary’s and Anne Arundel, Maryland and neighboring communities, and the Fredericksburg area of Virginia. Many, if not most, of our customers live and/or work in those counties or in the greater Washington, DC metropolitan area. A significant portion of the population in our market area is affiliated with or employed by the federal government or at military facilities located in the area which contribute to the local economy. Because our services are concentrated in this market, we are affected by the general economic conditions in the greater Washington, DC area. Additionally, changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A significant decline in economic conditions caused by inflation, recession, unemployment, a reduction in federal government or military employment or programs or other factors could decrease the demand for banking products and services generally and/or impair the ability of existing borrowers to repay their loans, which could negatively affect our financial condition and performance. Declines in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to our allowance for loan losses through increased provisions for loan losses, which would hurt our profits. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans.

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illiquidity, it may be difficult to value some of our assets if trading becomes less frequent and market data becomes less observable. There may be asset classes that were in active markets with significant observable data that become illiquid due to the financial environment. In such cases, asset valuation may require more subjectivity and management judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation.

We may be adversely affected by economic conditions in our market area, which is significantly dependent on federal government and military employment and programs.

Our marketplace is primarily in the counties of Charles, Calvert, St. Mary’s and Anne Arundel, Maryland and neighboring communities, and the Fredericksburg area of Virginia. Many, if not most, of our customers live and/or work in those counties or in the greater Washington, DC metropolitan area. A significant portion of the population in our market area is affiliated with or employed by the federal government or at military facilities located in the area which contribute to the local economy. Because our services are concentrated in this market, we are affected by the general economic conditions in the greater Washington, DC area. Additionally, changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing. A significant decline in economic conditions caused by inflation, recession, unemployment, a reduction in federal government or military employment or programs or other factors could decrease the demand for banking products and services generally and/or impair the ability of existing borrowers to repay their loans, which could negatively affect our financial condition and performance. Declines in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans. Additionally, a decrease in asset quality could require additions to our allowance for credit losses through increased provisions for credit losses, which would hurt our profits. A decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans.

Interest Rate Risks

Changes in interest rates could reduce our net interest income and earnings.

Our largest component of earnings is net interest income, which could be negatively affected by changes in interest rates. Changing interest rates impact customer actions and may limit the options available to us to maximize earnings or increase the costs to minimize risk. Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is net interest income divided by average interest-earning assets. Changes in interest rates could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to increase or decrease. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. Changes in the slope of the “yield curve” or the spread between short-term and long-term interest rates could also reduce our net interest margin. Our procedures for managing exposure to falling net interest income involve modeling possible scenarios of interest rate increases and decreases to interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect: (1) our ability to originate loans; (2) the value of our interest-earning assets; (3) our ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay their loans, particularly adjustable or variable rate loans.

Changes in market interest rates are affected by many factors, including inflation, unemployment, money supply, fiscal policies of the U.S. government, domestic and international events, and events in U.S. and other financial markets. We attempt to manage its risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or decrease in interest rates could have an adverse effect on our net interest margin and results of operations. Changes in the market interest rates for types of products and services in various markets also may vary significantly and over time based upon competition and local or regional economic factors.

Inflation can have an adverse impact on our business and on our customers.

In 2022, the United States experienced the highest rates of inflation since the 1980s. In an effort to reduce inflation, the Federal Reserve increased the federal funds target rate seven times in 2022 from 0 - 0.25% at the beginning of the year to 4.25 – 4.50% as of December 31, 2022. Market interest rates increased in response over the course of the year. Inflation generally increases the cost of goods and services we use in our business operations, as well as labor costs. We may find that we need to give higher than normal raises to employees and start new employees at a higher wage. Furthermore, our clients are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us. As market interest rates rise, the value of our investment securities generally decreases, although this effect can be less pronounced for floating rate instruments. Higher interest rates reduce the demand for loans and increase the attractiveness of alternative investment and savings products, like U.S. Treasury securities and money market funds, which can make it difficult to attract and retain deposits.

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Changes to and replacement of the London InterBank Offered Rate ("LIBOR") Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations.

We have certain loans, investment securities and debt obligations whose interest rate is indexed to LIBOR. LIBOR is the reference rate used for many of our transactions, including our lending and borrowing and our purchase and sale of securities that we use to manage risk related to such transactions. However, a reduced volume of interbank unsecured term borrowing coupled with recent legal and regulatory proceedings related to rate manipulation by certain financial institutions has led to international reconsideration of LIBOR as a financial benchmark. The United Kingdom Financial Conduct Authority (“FCA”), which regulates the process for establishing LIBOR, announced in July 2017 that the sustainability of LIBOR cannot be guaranteed. The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR. In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny.

We have not yet determined which alternative rate is most applicable, and there can be no assurances on which benchmark rate(s) may replace LIBOR or how LIBOR will be determined for purposes of financial instruments that are currently referencing LIBOR when it ceases to exist. The discontinuance of LIBOR may result in uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments and may also increase operational and other risks to us and the industry.

The market transition away from LIBOR to an alternative reference rate is complex and could have a range of adverse effects on our business, financial condition, and results of operations. In particular, any such transition could:

•adversely affect the interest rates paid or received on, and the revenue and expenses associated with, our floating rate obligations, loans, deposits and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;

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•adversely affect the value of our floating rate obligations, loans, deposits and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;

•prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate;

•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities; and

•require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark.

In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate these expected costs.

Risks Related to the COVID-19 Pandemic

The economic impact of the COVID-19 pandemic or of another health emergency or pandemic could adversely affect our financial condition and results of operations.

The COVID-19 pandemic caused significant economic dislocation in the United States. Although the domestic and global economies have begun to recover from the COVID-19 pandemic as many health and safety restrictions have been lifted and vaccine distribution has increased, certain adverse consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains. The growth in economic activity and in the demand for goods and services, coupled with labor shortages and supply chain disruptions, has also contributed to rising inflationary pressures and the risk of recession. As a result of the COVID-19 pandemic or of the emergence of another health emergency, epidemic, or pandemic, and the related adverse economic consequences from such a pandemic, we could be subject to the following risks, among others, any of which individually or in combination with others could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.

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•demand for our products and services may decline, making it difficult to grow assets and income;

•if we have high levels of unemployment for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•limitations may be placed on our ability to foreclose on properties we hold as collateral;

•our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•our cybersecurity risks are increased if employees work remotely;

•we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on us; and

•Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Liquidity Risks

We are subject to liquidity risks.

Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on debt obligations and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Core deposits and FHLB advances are our primary source of funding. A significant decrease in core deposits, an inability to renew FHLB advances, an inability to obtain alternative funding to core deposits or FHLB advances, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business, financial condition and results of operations.

Our deposit concentrations may subject us to additional liquidity and pricing risk.

Significant variations in deposit concentrations and pricing could have a material adverse effect on our business, financial condition and results of operations. We manage portfolio diversification through our asset/liability committee process. We occasionally accept larger deposit customers, and our typical deposit customers might occasionally carry larger balances. The aggregate amount of our top 25 deposit relationships were $~~499~~628.70 million, or 2427.70%, of our total assets at December 31, ~~2020~~2021 and $~~628~~662.09 million, or 27.05% of our total assets at December 31, ~~2021~~2022. The FDIC’s examination policies require that we monitor all customer deposit concentrations at or above 2% of total deposits. At December 31, ~~2021~~2022, the Bank had two local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $~~335~~346.64 million which represented 16.36% of total deposits of $2,~~056~~088.25 million. At December 31, ~~2020~~2021, there were two municipal customer deposit relationships that exceeded 2% of total deposits, totaling $~~238~~335.86 million which represented 1316.73% of total deposits of $12,~~745~~056.62 million.

The replacement of deposit concentrations with wholesale funding could cause our overall cost of funds to increase, which would reduce our net interest income and results of operations. A decline in interest-earning assets would also lower our net interest income and results of operations.

The Company is a bank holding company and its sources of funds necessary to meet its obligations are limited.

The Company is a bank holding company, and its operations are primarily conducted by the Bank, which is subject to significant federal and state regulation. Cash available to pay dividends to our stockholders, pay our obligations and meet our debt service requirements is derived from dividends received from the Bank. Future dividend payments by the Bank to the Company will require generation of earnings by the Bank and are subject to regulatory guidelines. If the Bank is unable to pay dividends to the Company, the Company may not have the resources or cash flow to pay or meet all of its obligations.

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Operational Risks

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet, mobile applications, and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. We provide our customers with the ability to bank remotely, including over the Internet, mobile applications and the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Despite instituted safeguards and monitoring, our network could be vulnerable to unauthorized access, attacks by hackers, or breached due to employee error, malfeasance or other disruptions computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, physical and cyber security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in significant costs to us, which may include fines and penalties, potential liabilities from governmental or third party investigations, proceedings or litigation, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation and remediation actions, and the negative impact on our reputation and loss of confidence of our customers and others, any of which could have a material adverse impact on our business, revenues, financial condition and competitive position.

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our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet, mobile applications, and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. We provide our customers with the ability to bank remotely, including over the Internet, mobile applications and the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Despite instituted safeguards and monitoring, our network could be vulnerable to unauthorized access, attacks by hackers, or breached due to employee error, malfeasance or other disruptions computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, physical and cyber security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in significant costs to us, which may include fines and penalties, potential liabilities from governmental or third party investigations, proceedings or litigation, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation and remediation actions, and the negative impact on our reputation and loss of confidence of our customers and others, any of which could have a material adverse impact on our business, revenues, financial condition and competitive position.

Failure to maintain effective internal control over financial reporting could have a material adverse effect on our business and stock price.

As a public company, we are required to maintain effective internal control over financial reporting. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. Sarbanes-Oxley requires our management to evaluate our disclosure controls and procedures and our internal control over financial reporting. We are required to disclose, in our annual report on Form 10-K, the existence of any “material weaknesses” in our internal controls. We cannot assure that we will not identify one or more material weaknesses as of the end of any given quarter or year, nor can we predict the effect on our stock price of disclosure of a material weakness. Matters impacting our internal control over financial reporting may cause us to be unable to report our financial information on a timely basis or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we report a material weakness in the effectiveness of our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our stock price and impairing our ability to raise capital.

Our internal control systems are inherently limited.

Our systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited. The inherent limitations of our system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error or mistakes; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on our business, results of operations or financial condition. Additionally, any plans of remediation for any identified limitations may be ineffective in improving our internal controls.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as core data processing systems, internet, mobile applications, connections, network access and fund distribution. While we have selected these third-party vendors carefully, we cannot control their actions. Any problems caused by these third parties, including those which result from their failure to provide services for any reason or their poor performance of services, could adversely affect our ability to deliver products and services to its customers and otherwise to conduct its business. Replacing these third-party vendors could also entail significant delay and expense.

We depend on information technology and telecommunications systems and third-party servicers, and systems failures, ~~interruptions or breaches of security could have a material adverse effect on us.~~

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Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. ~~If significant, sustained~~ or ~~repeated,~~breaches ~~a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss~~ of ~~customer~~security ~~business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which~~ could have a material adverse effect on us.

Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity, or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.

The high volume of transactions we process exposes us to significant operational risks.

We rely on our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or outside persons, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control system and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulations, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. A breakdown in our internal control system, improper operation of systems or improper employee actions could result in material financial loss, the imposition of regulatory action, and damage to our reputation.

If our information technology is unable to keep pace with industry developments, our business and results of operations may be adversely affected.

Financial products and services have become increasingly technology driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.

Exiting or entering new lines of business or new products and services may subject us to additional risk.

We may exit an existing line of business or implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts. When exiting a line of business or product we may have difficulty replacing the revenue stream and may have to take certain actions to make up for the line of business or product. If those sources are not available or the cost for such purchases increases our results of operations may be adversely affected. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. We also may face increased credit risk for new or certain loan products. Furthermore, any new line of business or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business and, our financial condition and results of operations.

Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, based upon the size, scope, and complexity of the Company.

As a financial institution, we are subject to interest rate, credit, liquidity, legal/compliance, market, strategic, operational, and reputational risks. Our enterprise risk management (“ERM”) framework is designed to minimize the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diverse set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited because they cannot anticipate the existence or development of risks that are currently unknown and unanticipated. For example, economic and market conditions, heightened legislative and regulatory scrutiny of the financial services industry, and increases in the overall complexity of our operations, among other developments, have resulted in the creation of a variety of risks that were previously unknown and unanticipated, highlighting the intrinsic limitations of our risk monitoring and mitigation techniques. As a result, the further development of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations. Furthermore, an ineffective ERM framework, as well as other risk factors, could result in a material increase in our FDIC insurance premiums.

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results of operations. Furthermore, an ineffective ERM framework, as well as other risk factors, could result in a material increase in our FDIC insurance premiums.

The adoption of flexible work from home arrangements poses a number of operational risks that could adversely affect our business, financial condition and results of operations.

As a result of the COVID-19 pandemic, in March 2020, we transitioned to a remote working environment, with a peak of 30% of employees working remotely. While we have since brought employees back to the office, we have adopted more flexible work arrangements that permit some employees to work from home full or part time. Having employees conduct their daily work in our offices helps to ensure a level of productivity and operational security that may not be achieved when working remotely for an extended period. Remote work arrangements could strain our technology resources and introduce operational risks, including heightened cybersecurity risk, as remote working environments can be less secure. Over time, remote work arrangements may decrease the ability to maintain our culture, which is integral to our success. Additionally, a remote working environment may impede our ability to undertake new business projects and foster a creative environment. As remote work arrangements become more flexible and commonplace, our ability to compete for qualified employees could be challenged. The prevalence of remote work arrangements will expand competition among employers and may put us at a disadvantage if it is unable or unwilling to offer the same level of flexibility. Failure to attract and retain the desired workforce could have a negative effect on our business, financial condition and results of operations.

Risks Related to the Company’s Financial Statements

Changes in accounting standards or interpretation of new or existing standards may affect how the Company report its financial condition and results of operations.

From time to time the Financial Accounting Standards Board and the SEC change accounting regulations and reporting standards that govern the preparation of the Company’s financial statements. In addition, the FASB, SEC, bank regulators and outside independent auditors may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These changes can be difficult to predict and can materially impact how to record and report the Company’s financial condition and results of operations. In some cases, there could be a requirement to apply a new or revised accounting standard retroactively, resulting in the restatement of prior period financial statements.

The implementation of the Current Expected Credit Loss (“CECL”) accounting standard could require us to increase our allowance for ~~loan~~credit losses and may have a material adverse effect on financial condition and results of operations.

FASB has adopted an accounting standard ~~that~~which ~~will~~the beCompany ~~effective~~elected ~~for~~to ~~the~~adopt ~~Company’s~~in ~~first~~January ~~fiscal~~2022. ~~year~~The ~~after~~impact ~~December~~at ~~15,~~adoption ~~2022~~was ~~unless~~an increase to the ~~Company~~allowance ~~chooses~~for ~~early~~credit ~~adoption~~losses ~~which~~of $2.5 million, the ~~Company~~recording ~~elected~~of toa doreserve for unfunded commitments of $0.2 million, an increase in ~~January~~deferred ~~2022~~taxes of $0.7 million, and a decrease in retained earnings of $2.0 million. This standard, referred to as Current Expected Credit Loss, or CECL, requires earlier recognition of expected credit losses on loans and certain other instruments, compared to the incurred loss model. CECL requires advanced modeling techniques, heavy reliance on assumptions, and dependence on historical data that may not accurately forecast losses. The adoption of CECL can result in greater volatility in the level of the allowance for credit losses, depending on various factors and assumptions applied in the model, such as the forecasted economic conditions in the foreseeable future and loan payment behaviors. Any increase in the allowance for credit losses, or expenses incurred to determine the appropriate level of the allowance for credit losses, can have an adverse effect on the Company’s financial condition and results of operations.

We may be adversely affected by changes in U.S. tax laws and regulations.

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that could continue to have an impact on the banking industry, borrowers and the market for single family residential and multi-family residential real estate. Changes resultant of this legislation included: lower limits on the deductibility of mortgage interest on single family residential mortgages; the elimination of interest deductions for home equity loans; a limitation on deductibility of business interest expense; and a limitation on the deductibility of property taxes and state and local income taxes. Such changes in the tax laws may have an adverse effect on the market for, and valuation of, single family residential properties and multifamily residential properties, and on the demand for such loans in the future. In addition, these changes may have a disproportionate effect on taxpayers in states with high residential home prices and high state and local taxes. If home ownership or multifamily residential property ownership becomes less attractive, demand for mortgage loans would decrease. The value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of home ownership and multifamily residential ownership, which could require an increase in our provision for ~~loan~~credit losses. Additionally, certain borrowers could become less able to service their debts as a result of higher tax obligations. These changes could have a material adverse effect on our business, financial condition and results of operations.

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Additionally, local, state or federal tax authorities may interpret laws and regulations differently from our and challenge tax positions that we have taken on its tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest, penalties or litigation costs that could have a material adverse effect on our operating results.

Impairment in the carrying value of goodwill and other intangible assets could negatively impact our financial condition and results of operations.

At December 31, ~~2021~~2022, goodwill and other intangible assets totaled $11.95 million. Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. The estimated fair values of the acquired assets and assumed liabilities may be subject to refinement as additional information relative to closing date fair values becomes available and may result in adjustments to goodwill within the first 12 months following the closing date of the acquisition. Goodwill is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. A significant decline in expected future cash flows, a material change in interest rates, a significant adverse change in the business climate, slower growth rates or a significant or sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of goodwill and other intangible assets. The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations.

Our accounting estimates, and risk management processes rely on analytical and forecasting models.

The processes that we use to estimate its allowance for ~~loan~~credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on its financial condition and results of operations, depend upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models that we use for determining its allowance for loan losses are inadequate, the allowance may not be sufficient to support future charge-offs. If the models that we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on its business, financial condition and results of operations.

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particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models that we use for determining its allowance for credit losses are inadequate, the allowance may not be sufficient to support future charge-offs. If the models that we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical or forecasting models could have a material adverse effect on its business, financial condition and results of operations.

Regulatory Risks

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination as noted in the “Supervision and Regulation” section of this report. The regulation and supervision by the Maryland Commissioner, the Federal Reserve and the FDIC are not intended to protect the interests of investors in our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and sound financial condition, permissible types, amounts and terms of loans and investments, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments. These and other restrictions limit the manner in which we may conduct business and obtain financing. ~~The~~While ~~laws,~~we ~~rules,~~have ~~regulations,~~developed ~~and~~policies ~~supervisory guidance~~ and ~~policies~~procedures ~~applicable~~designed to usassist ~~and~~in ~~the~~compliance ~~Bank~~with ~~are~~these ~~subject~~laws ~~to regular modification~~ and ~~change. Such changes may~~regulations, ~~among~~no ~~other~~assurance ~~things,~~is ~~increase~~given ~~the~~that ~~cost~~our ofcompliance ~~doing~~policies ~~business,~~and ~~limit~~procedures ~~the~~will ~~types~~be ofeffective. ~~financial~~Failure ~~services~~to ~~and~~comply ~~products we may offer,~~ (or ~~affect~~to ~~the~~ensure ~~competitive~~that ~~balance~~our ~~between~~agents ~~banks~~ and ~~other~~third-party ~~financial~~service ~~institutions.~~providers ~~Failure to~~ comply) with laws, regulations, or policies could result in enforcement actions or sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, or results of operations. Penalties for such violations may also include: revocation of licenses; fines and other monetary penalties; civil and criminal liability; substantially reduced payments by borrowers; modification of the original terms of loans, permanent forgiveness of debt, or inability to, directly or indirectly, collect all or a part of the principal of or interest on loans provided by the Bank. The burdens imposed by federal and state regulations put banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies.

The laws, rules, regulations, and supervisory guidance and policies applicable to us and the Bank are subject to regular modification and change, as are the interpretation, implementation, and enforcement of such laws, rules, regulations, guidance and policies. Such changes may, among other things, increase the cost of doing business, limit the types of financial services and products we may offer, or affect the competitive balance between banks and other financial institutions. Compliance with laws and regulations requires us to invest significant portions of our resources in compliance planning and training, monitoring tools, and personnel, and requires the time and attention of management. These costs can divert capital and focus away from efforts intended to maintain and grow our business. If we do not successfully comply with laws, regulations, or policies, we could be subject to fines, penalties, lawsuits, or judgments, our compliance costs could increase, our operations could be limited, and we may suffer damage to our reputation. If more restrictive laws, rules, and regulations are enacted or more restrictive judicial and administrative interpretations of current laws are issued, compliance with the laws could become more expensive or difficult. Furthermore, changes in these laws and regulations could require changes in the way we conduct our business, and we cannot predict the impact such changes would have on our profitability.

We are subject to periodic examination and scrutiny by a number of banking agencies and, depending upon the findings and determinations of these agencies, we may be required to make adjustments to our business that could adversely affect us.

Federal and state banking agencies periodically conduct examinations of our business, including compliance with applicable laws and regulations. If, as a result of an examination, a federal banking agency were to determine that the financial condition, capital resources, asset quality, asset concentration, earnings prospects, management, liquidity, sensitivity to market risk or other aspects of any of our operations has become unsatisfactory, or that we or our management is in violation of any law or regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.

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regulation, it could take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to change the asset composition of our portfolio or balance sheet, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, our business, results of operations and reputation may be negatively impacted.

Our ability to pay dividends is limited by law.

Our ability to pay dividends is governed by the policies and regulations of the Federal Reserve Board, which prohibits the payment of dividends under certain circumstances dependent on our financial condition and capital adequacy. Our ability to pay dividends is also dependent on the receipt of dividends from the Bank. Federal regulations impose limitations on the payment of dividends and other capital distributions by the Bank. The Bank’s ability to pay dividends is governed by the Maryland Financial Institutions Code and the regulations of the FDIC. Under the Maryland Financial Institutions Code, a Maryland bank (1) may only pay dividends from undivided profits or, with prior regulatory approval, its surplus in excess of 100% of required capital stock and, (2) may not declare dividends on its common stock until its surplus funds equals the amount of required capital stock, or if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings. Without the approval of the FDIC, Bank may not declare or pay a dividend if the total of all dividends declared during the year exceeds its net income during the current calendar year and retained net income for the prior two years.

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prior regulatory approval, its surplus in excess of 100% of required capital stock and, (2) may not declare dividends on its common stock until its surplus funds equals the amount of required capital stock, or if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings. Without the approval of the FDIC, Bank may not declare or pay a dividend if the total of all dividends declared during the year exceeds its net income during the current calendar year and retained net income for the prior two years.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. In recent years, various significant economic and monetary stimulus measures were implemented by the U.S. Congress and the Federal Reserve pursued a highly accommodative monetary policy aimed at keeping interest rates at historically low levels. U.S. economic activity has significantly improved, but there can be no assurance that this progress will continue or will not reverse.

An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal and state bank regulators also have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act (“CRA”) and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

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The CRA requires the Federal Reserve to assess the Bank’s performance in meeting the credit needs of the communities it serves, including low and moderate-income neighborhoods. If the Federal Reserve determines that the Bank needs to improve its performance or is in substantial non-compliance with CRA requirements, various adverse regulatory consequences may ensue. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial products or services, or the offering of a consumer financial product or service. The ongoing broad rule making powers of the CFPB have potential to significantly impact the operations of financial institutions offering consumer financial products or services.

A successful regulatory challenge to an institution’s performance under the CRA, fair lending laws or regulations, or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions expansion activities, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.

Additionally, state attorneys general have indicated that they intend to take a more active role in enforcing consumer protection laws, including through use of Dodd-Frank Act provisions that authorize state attorneys general to enforce certain provisions of federal consumer financial laws and penalties and other relief. In conducting an investigation, the CFPB or state attorneys general may issue a civil investigative demand requiring a target company to prepare and submit, among other items, documents, written reports, answers to interrogatories, and deposition testimony. If we or the Bank become subject to such investigation, the required response could result in substantial costs and a diversion of the attention and resources of our management.

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Our use of vendors and our third-party business relationships are subject to increasing regulatory requirements and attention.

We may use vendors and subcontractors as part of our business, and we may depend on ongoing business relationships with other third-parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and oversight by federal bank regulators (such as the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation) and the CFPB. The CFPB has enforcement authority with respect to the conduct of third-parties that provide services to financial institutions, and the CFPB has indicated that it expects financial institutions and non-bank entities to maintain an effective process for managing risks associated with vendor relationships, including compliance-related risks. In connection with this vendor risk management process, we may be expected to perform due diligence reviews of potential vendors, review their policies and procedures and internal training materials to confirm compliance-related focus, include enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements, and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations.

It is expected that regulators will hold us responsible for deficiencies in our oversight and control of third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over vendors and subcontractors or other ongoing third-party business relationships or that such third-parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for consumer remediation.

Market Risks

The market price and liquidity of our common stock could be adversely affected if the economy were to weaken or the capital markets were to experience volatility.

The market price of our common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding our operations or business prospects. Among other factors, these risks may be affected by:

•Operating results that vary from the expectations of our management or of securities analysts and investors;

•Developments in our business or in the financial services sector generally;

•Regulatory or legislative changes affecting our industry generally or our business and operations;

•Operating and securities price performance of companies that investors consider to be comparable to us;

•Changes in estimates or recommendations by securities analysts or rating agencies;

•Announcements of strategic developments, acquisitions, dispositions, financings, and other material events by us or our competitors;

•Changes or volatility in global financial markets and economies, general market conditions, interest or foreign exchange rates, stock, commodity, credit, or asset valuations; and

•Significant fluctuations in the capital markets.

Economic or market turmoil could occur in the near or long term, which could negatively affect our business, our financial condition, and our results of operations, as well as volatility in the price and trading volume of our common stock.

We may issue additional common stock or other securities in the future which could dilute the ownership interest of existing shareholders or impact shareholder returns.

In order to maintain our capital at desired or regulatory-required levels, or to fund future growth including through acquisitions of other financial institutions, our board of directors may decide from time to time to issue additional shares of common or preferred stock, or securities convertible into, exchangeable for or representing rights to acquire shares of our common or preferred stock. The sale of these shares may significantly dilute your ownership interest as a shareholder. New investors in the future may also have rights, preferences and privileges senior to our current shareholders which may adversely impact our current shareholders. In addition, the issuance of certain debt that qualifies as regulatory capital could increase interest expense and impact profitability.

~~Strategic Risks~~27

~~Our~~Table ~~financial condition and results~~ of ~~operations could be negatively affected if we fail to timely and effectively execute or manage our strategic plan, particularly if we grow through acquisitions of other financial institutions.~~ Contents

~~Among~~Risks ~~other~~Relating ~~things,~~to ~~our strategic plan currently calls for reducing~~ the ~~amount~~Proposed Merger of ~~our~~Equals non-performing assets, growing assets through commercial lending and generating transaction deposit accounts to reduce our funding costs and improve our net interest margin. Our ability to increase profitability in accordance with ~~this~~Shore ~~plan will depend on a variety of factors including the identification of desirable business opportunities~~Bancshares, ~~competitive responses from financial institutions in our market area and our ability to manage liquidity and funding sources~~Inc. While we believe we have the management resources and internal systems in place to successfully manage our strategic plan, opportunities may not be available and that the strategic plan may not be successful or effectively managed.

The failure to receive the necessary regulatory or shareholder approvals for the Company's merger with Shore Bancshares, Inc. in a timely manner, would have a material negative impact on our financial results, operations, and reputation.

On December 14, 2022, the Company entered into a definitive merger agreement under which it will merge with Shore Bancshares, Inc. (“SHBI”) in a 100% stock transaction. Completion of the proposed merger remains subject to the receipt of required approvals from the OCC, the FRB, and the Maryland Commissioner of Financial Regulation, as well as the approval of the Company’s shareholders and the shareholders of Shore Bancshares, Inc.

While both companies are committed to continuing to seek all such approvals, the aforementioned regulatory approvals could be delayed or not obtained at all, including due to: an adverse development in either company's regulatory standing or in any other factors considered by regulators when granting such approvals, including factors not known at the present time.

If the merger is not completed for any reason, there may be various adverse consequences and the Company may experience negative reactions from the financial markets and from its customers and employees. The Company could also be subject to litigation related to any failure to complete the merger.

Because the market price of Shore Bancshares, Inc. common stock may fluctuate, the Company’s shareholders cannot be certain of the market value of the merger consideration they will receive.

In the merger, each share of Company common stock that is issued and outstanding immediately prior to the effective time (except for certain excluded shares) will be converted into 2.3287 shares of SHBI common stock (NASDAQ: SHBI). This exchange ratio is fixed and will not be adjusted for changes in the market price of either SHBI common stock or Company common stock. Changes in the price of SHBI common stock between now and the time of the merger will affect the value that the Company’s shareholders will receive in the merger. However, neither SHBI nor the Company is permitted to terminate the merger agreement as a result of any increase or decrease in the market price of SHBI common stock or Company common stock.

Stock price changes may result from a variety of factors, including general market and economic conditions, changes in SHBI’s and the Company’s businesses, operations and prospects, volatility in the prices of securities in global financial markets, including market prices for the common stock of other banking companies, the effects of the COVID-19 pandemic, and changes in laws and regulations, many of which are beyond SHBI’s and the Company’s control. Accordingly, at the time of the special meeting of shareholders of the Company to vote on the merger agreement, shareholders will not know the market value of the consideration that they will receive at the effective time of the merger.

The Company will be subject to business uncertainties and contractual restrictions while the merger with Shore Bancshares, Inc. is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. In addition, subject to certain exceptions, the Company has agreed to operate its business in the ordinary course in all material respects and to refrain from taking certain actions that may adversely affect its ability to consummate the transactions contemplated by the merger agreement on a timely basis without the consent of SHBI. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

The Company has incurred and is expected to incur substantial costs related to the merger and integration.

The Company has incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transaction completed by the merger agreement, as well as the costs and expenses incurred in connection with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, retention, severance and employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs, closing, integration and other related costs. If the merger is not completed, the Company would have incurred these expenses without realizing the expected benefits of the merger.

Stockholder litigation related to the merger could prevent or delay the completion of the merger, result in the payment of damages or otherwise negatively impact the business and operations of the Company.

Stockholders may bring claims in connection with the proposed merger and, among other remedies, may seek damages or an injunction preventing the merger from closing. If any plaintiff were successful in obtaining an injunction prohibiting the Company or SHBI from completing the merger or any other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in costs to the Company, including costs in connection with the defense or settlement of any stockholder lawsuits filed in connection with the merger. Furthermore, such lawsuits and the defense or settlement of any such lawsuits may have an adverse effect on the financial condition and results of operations of the Company.

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Combining acquired businesses may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of acquisitions may not be realized.

In implementing our strategic plan, we may expand into additional communities or attempt to strengthen our position in our current markets through opportunistic acquisitions of whole banks or branch locations. The success of any mergers and acquisitions we undertake, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine and integrate the acquired business in a manner that permits growth opportunities and does not materially disrupt existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors, employees and other constituents or to achieve the anticipated benefits and cost savings of the transaction. The loss of key employees could adversely affect our to successfully conduct our business, which could have an adverse effect on our financial results and the value of our common stock. If we experience difficulties with the integration process, the anticipated benefits of a transaction may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause us to lose customers or cause customers to remove their accounts and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on us during this transition period and for an undetermined period after completion of a transaction. It is possible that the potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on the ability to combine the businesses in a manner that permits those cost savings to be realized.

Provisions of our articles of incorporation, bylaws and Maryland law, as well as state and federal banking regulations, could delay or prevent a takeover of us by a third party.

Provisions in our articles of incorporation and bylaws and Maryland corporate law could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our shareholders, or otherwise adversely affect the price of our common stock. These provisions include: super majority voting requirements for certain business combinations; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to our board of directors and for proposing matters that shareholders may act on at shareholder meetings. In addition, we are subject to Maryland laws, including one that prohibits us from engaging in a business combination with any interested shareholder for a period of five years from the date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors other than the candidates nominated by our Board.

General Risk Factors

Strong competition within our market area could hurt our profits and slow growth.

Our profitability depends upon our continued ability to compete successfully in our market area. We face intense competition both in making loans and attracting deposits. Our competition for loans and deposits includes banks, savings institutions, mortgage banking companies, credit unions and non-banking financial institutions. We compete with regional and national financial institutions that have a substantial presence in our market area, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition and more resources than we do. Furthermore, tax-exempt credit unions operate in our market area and aggressively price their products and services to a large portion of the market. This competition may make it more difficult for us to originate new loans and may force us to offer higher deposit rates than we currently offer. Price competition for loans and deposits might result in lower interest rates earned on our loans and higher interest rates paid on our deposits, which would reduce net interest income.

We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.

As a community bank, our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be adversely affected.

Changes in U.S. or regional economic conditions could have an adverse effect on the Company’s business, financial condition and results of operations.

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Our business activities and earnings are affected by general business conditions in the United States and in our local market area. These conditions include short-term and long-term interest rates, inflation, unemployment levels, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and, in particular, our market area. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; pandemics; natural disasters; or a combination of these or other factors. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and savings habits. Elevated levels of unemployment, declines in the values of real estate, extended federal government shutdowns, or other events that affect household and/or corporate incomes could impair the ability of our borrowers to repay their loans in accordance with their terms and reduce demand for banking products and services.

Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Investors, consumers and businesses also may change their behavior on their own as a result of these concerns. The Company and its customers will need to respond to new laws and regulations as well as investor, consumer and business preferences resulting from climate change concerns. The Company and its customers may face cost increases, asset value reductions, operating process changes, among other impacts. The impact on the Company’s customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. In addition, the Company could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Investors could determine not to invest in the Company’s stock due to various climate change related considerations. The Company’s efforts to take these risks into account in making lending and other decisions may not be effective in protecting the Company from the impacts of new laws and regulations or changes in investor, consumer or business behavior.

Item 1B. Unresolved Staff Comments

Not applicable.

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Item 2. Properties

Our headquarters are located in Waldorf, MD. As of December 31, ~~2021~~2022, the Bank operates 1112 full services branches. See Note 5, "Premises and Equipment" in the Notes to the Consolidated Financial Statements for additional information.

The net book value of premises, which included land, building and improvements, totaled $19.8 million and $18.8 million, respectively, at December 31, ~~2021~~2022 and ~~2020~~2021.

Branch Location

Address

Description

Owned or Leased

Bryans Road

8010 Matthews RoadBryans Road, MD 20616

Full service branch with drive-thru

Owned

Charlotte Hall

30165 Three Notch RdCharlotte Hall, MD 20622

Full service branch with drive-thru

Owned

Charlottesville

1430 Rolkin Court, Suite 103Charlottesville, VA 22911

Loan office

Leased

Dunkirk

10321 Southern Maryland BlvdDunkirk, MD 20754

Full service branch with drive-thru

Leased

Fredericksburg

10 Chatham Heights Road, Suite 104Fredericksburg, VA 22405

Loan office and operations center

Leased

Fredericksburg - Downtown

425 William StreetFredericksburg, VA 22401

Full service branch with drive-thru

Owned

Fredericksburg - Harrison Crossing

5831 Plank RoadFredericksburg, VA 22407

Full service branch with interactive teller machines

Owned

La Plata

101 Drury DrLa Plata, MD 20646

Full service branch with drive-thru

Owned

La Plata - Downtown

202 Centennial StLa Plata, MD 20646

Full service branch with drive-thru and ~~loan~~operations ~~office~~center

Owned

Leonardtown

25395 Point Lookout RdLeonardtown, MD 20650

Full service branch with drive-thru and ~~loan~~operations ~~office~~center

Owned

Lexington Park

22730 Three Notch RdCalifornia, MD 20619

Full service branch with drive-thru

Owned

Lusby

11725 Rousby Hall RoadLusby, MD 20657

Full service branch with drive-thru

Land LeasedBuilding Owned

Prince Frederick

200 Market Square DrPrince Frederick, MD 20678

Full service branch with drive-thru

Land LeasedBuilding Owned

Prince Frederick

995 N Prince Frederick Blvd, Suite 105Prince Frederick, MD 20678

Loan office

Leased

Waldorf (Main Office)

3035 Leonardtown RdWaldorf, MD 20601

Full service branch with drive-thru and operations center

Owned

Item 3. Legal Proceedings

Neither the Company, the Bank, nor any subsidiary is engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is a party to legal proceedings in the ordinary course of business.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The common stock of the Company is traded on the NASDAQ Stock Exchange (Symbol: TCFC).

Holders

The number of stockholders of record of the Company at February 28, ~~2022~~2023 was ~~744~~755.

Dividends

During ~~2021~~2022, the Company declared and paid ~~one~~four ~~quarterly dividend of $0.125 per share and three~~ quarters of dividends at $0.~~150~~175 per share. The Board of Directors considers on a quarterly basis the feasibility of paying a cash dividend to its stockholders. Under the Company’s general practice, dividends, if declared during the quarter, are paid prior to the end of the subsequent quarter. On November 30, ~~2021~~2022, the Company’s Board of Directors approved a dividend of $0.175 per share, payable during the first quarter of ~~2022~~2023 to shareholders of record as of January 10, ~~2022~~2023.

The Company’s ability to pay dividends is governed by the policies and regulations of the Federal Reserve Board (the “FRB”), which prohibits the payment of dividends under certain circumstances dependent on the Company’s financial condition and capital adequacy. The Company’s ability to pay dividends is also dependent on the receipt of dividends from the Bank. For further discussion of limitations on the Company paying dividends see the discussion above under “Regulation of the Company”.

Federal regulations impose limitations on the payment of dividends and other capital distributions by the Bank. The Bank’s ability to pay dividends is governed by the Maryland Financial Institutions Code and the regulations of the Federal Deposit Insurance Corporation (“FDIC”). For further discussion of limitations on the Bank paying dividends see the discussion above under “Regulation of the Bank”.

32The transfer agent for the Company’s common stock is:

Broadridge Corporate Issuer Solutions, Inc.

51 Mercedes Way

Edgewood, NY 11717

Investor Relations: +1 (800) 353-0103

E-mail for investor inquiries: shareholder@broadridge.com

www.broadridge.com

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Stock Performance Graph

The following graph and table show the cumulative total return on the common stock of the Company over the last five years, compared with the cumulative total return of a broad stock market index (the NASDAQ Capital Market Composite), and a narrower index of the NASDAQ Bank Index. Cumulative total return on the stock or the index equals the total increase in value since December 31, ~~2016~~2017 assuming reinvestment of all dividends paid into the stock or the index.

The graph and table were prepared assuming that $100 was invested on December 31, ~~2016~~2017, in the common stock and the securities included in the indexes.

Source: Bloomberg

Year Ended

Index

12/31/~~2016~~2017

12/31/~~2017~~2018

12/31/~~2018~~2019

12/31/~~2019~~2020

12/31/~~2020~~2021

12/31/~~2021~~2022

The Community Financial Corporation

100.00

~~133~~77.6420

~~103~~95.1743

~~127~~72.5354

96109.9556

~~146~~113.4230

NASDAQ Bank Index

100.00

~~105~~83.4683

88104.4026

~~109~~96.9544

~~101~~137.7082

~~145~~115.3438

NASDAQ Capital Market Composite

100.00

~~116~~84.8567

98100.9472

~~117~~151.6728

~~176~~137.7754

~~160~~76.7256

Recent Sales of Unregistered Securities

Not applicable.

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Equity Compensation Plans

The following table presents the number of shares available for issuance under the Company’s equity compensation plans at December 31, ~~2021~~2022.

Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)

Equity compensation plans approved by security holders

n/a

Equity compensation plans not approved by security holders

n/a

Total

n/a

Purchases of Equity Securities by the Issuer

On October 20, 2020, 184,863 shares were available to be repurchased under the 2015 repurchase plan, and, on that date, the Board of Directors approved an expansion to the 2015 repurchase plan (the "2020 repurchase plan") that allows the Company to repurchase up to 300,000 of the Company’s outstanding shares of common stock using up to $7.0 million of the proceeds the Company raised in its $20.0 million subordinated debt offering completed in October 2020. The Company may repurchase the 99,450 shares remaining under the October 2020 stock repurchase plan using up to $4.0 million in the aggregate and up to $1.5 million in the aggregate on a quarterly basis. During 2022 and 2021, the Company repurchased 90,713 and 199,324 shares, respectively, at an average price of $39.19 and $35.35 per share., ~~The 2020 repurchase plan will continue until it is completed or terminated by the Company’s Board of Directors~~respectively. As of December 31, ~~2021~~2022, ~~90,713~~the ~~shares~~Company ~~were~~had no remaining shares available to be repurchased under the 2020 repurchase plan. The following schedule shows the repurchases during the three months ended December 31, ~~2021~~2022.

Period

(a)Total Number of Shares Purchased

(b)Average Price Paid per Share

(c)Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d)Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

October 1-31, 2021

—

~~99,450~~—

November 1-30, 2021

—

~~99,450~~—

December 1-31, 2021

~~8,737~~—

~~38.34~~—

~~8,737~~—

~~90,713~~—

Total

~~8,737~~—

~~38.34~~—

~~8,737~~—

~~90,713~~—

Item 6. Reserved

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties and could potentially result in materially different results under different assumptions and conditions. The Company considers its determination of the allowance for ~~loan~~credit losses, goodwill impairment, and the valuation of deferred tax assets to be critical accounting policies.

The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America and the general practices of the United States banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.

Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When these sources are not available, management makes estimates based upon what it considers to be the best available information.

Allowance for ~~Loan~~Credit Losses

~~The~~On ~~allowance~~January ~~for~~1, ~~loan~~2022, ~~losses~~the isCompany anadopted ~~estimate~~ASU of2016-13 Financial ~~the~~Instruments - ~~losses~~Credit ~~that~~Losses ~~exist~~(Topic in326) - ~~the~~Measurement ~~loan~~of ~~portfolio.~~Credit ~~The~~Losses ~~allowance~~on isFinancial ~~based~~Instruments, onwhich ~~two~~replaced ~~principles~~the ofincurred ~~accounting:~~loss ~~(1)~~methodology ~~FASB~~for ~~ASC~~determining ~~Topic~~the ~~450~~ACL ~~“Contingencies,”~~with ~~which~~the ~~requires~~CECL ~~that~~methodology. The measurement of expected credit losses beunder ~~accrued~~the ~~when~~CECL ~~they~~methodology ~~are~~applies ~~probable~~to offinancial ~~occurring~~assets ~~and~~subject ~~are~~to ~~estimable~~credit losses and ~~(2)~~measured ~~FASB~~at ~~ASC~~amortized ~~310 “Receivables~~cost,” ~~which~~and certain ~~requires~~off-balance ~~that~~sheet ~~losses~~credit beexposures. ~~accrued~~This ~~when~~includes, itbut is ~~probable~~not ~~that~~limited ~~the~~to, ~~Company~~loans, ~~will~~leases, ~~not~~held-to-maturity ~~collect~~securities, ~~all~~loan ~~principal~~commitments, and ~~interest~~financial ~~payments~~guarantees. ~~according~~In addition, ASU 2016-13 made changes to the ~~contractual~~accounting ~~terms~~for ofavailable-for-sale ~~the~~("AFS") ~~loan~~debt securities. ~~The~~Credit-related ~~loss,~~impairments ifof ~~any,~~AFS isdebt ~~determined~~securities byare ~~the~~now ~~difference~~recognized ~~between~~through ~~the~~an ~~loan~~allowance ~~balance~~for ~~and~~credit ~~the~~loss ~~value~~rather ofthan ~~collateral,~~a write-down of the ~~present~~securities' ~~value~~amortized ofcost ~~expected~~basis ~~future~~when ~~cash~~management ~~flows~~does not intend to sell or ~~values~~believes ~~observable~~that init is not likely that they will be required to sell the ~~secondary~~securities ~~markets~~prior to recovery of the securities amortized cost basis.

~~The~~Allowance ~~allowance~~ for ~~loan~~Credit ~~losses~~Losses is an estimate based upon management’s evaluation of the loan portfolio. The allowance includes a specific and a general component. The specific component consists of management’s evaluation of impaired loans. Impairment is measured on a loan-~~by-loan~~ basis using one of three acceptable methods: the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral dependent. Management assesses the ability of the borrower to repay the loan based upon all information available. Loans are examined to determine a specific allowance based upon the borrower’s payment history, economic conditions specific to the loan or borrower and other factors that would impact the borrower’s ability to repay the loan on its contractual basis. Depending on the assessment of the borrower’s ability to pay and the type, condition and value of collateral, management will establish an allowance amount specific to the loan.

~~Management~~The ~~uses~~allowance afor ~~risk~~credit ~~scale~~losses to("ACL") ~~assign~~is ~~grades~~an toestimate ~~commercial~~of ~~relationships,~~the ~~which~~expected ~~include~~credit ~~commercial~~losses ~~real~~for ~~estate,~~loans ~~residential~~held ~~rentals,~~for ~~construction~~investment and ~~land~~off-balance ~~development,~~sheet ~~commercial loans and commercial equipment loans~~exposures. ~~All~~ASU ~~commercial~~2016-13 ~~loan~~replaced ~~relationships~~the ~~are~~incurred ~~graded~~loss atmodel ~~inceptions~~that ~~and~~recognized at a ~~minimum~~loss ~~annually.~~when ~~Prior~~it tobecame ~~and~~probable atthat ~~December~~a ~~31,~~credit ~~2020,~~loss ~~only~~had ~~commercial~~occurred, ~~loan relationships~~ with ana ~~aggregate~~model ~~exposure~~that toimmediately recognizes the ~~Bank~~credit ofloss ~~$1,000,000~~expected orto ~~greater~~occur ~~were~~over ~~risk~~the ~~rated.~~lifetime Residential first mortgages, home equity and second mortgages and consumer loans are monitored on an ongoing basis based on borrower payment history. Consumer loans and residential real estate loans are classified as unrated unless they are part of a ~~larger~~financial ~~commercial~~asset ~~relationship~~whether ~~that~~originated ~~requires grading~~ or ~~are troubled debt restructures or nonperforming loans with an Other Assets Especially Mentioned or higher risk rating due to a delinquent payment history~~purchased.

The ~~Company’s~~ACL ~~commercial~~includes ~~loan~~quantitative ~~portfolio~~estimates of losses for collectively and individually evaluated loans. Qualitative adjustments to the quantitative estimate may be made using information not considered in the quantitative model. The ACL is ~~periodically~~measured ~~reviewed~~on a collective basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by ~~regulators~~loan type code or product type codes and ~~independent~~assigned ~~consultants~~to ~~engaged~~a bycorresponding ~~management~~portfolio segment.

35The Bank uses 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. Quantitative and qualitative 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, inflation, 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.

Loans that do not share 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 using one of three acceptable methods: the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Management assesses the ability of the borrower to repay the loan based upon all information available. Loans are examined to determine a specific allowance based upon the borrower’s payment history, economic conditions specific to the loan or borrower and other factors that would impact the borrower’s ability to repay the loan on its contractual basis. Depending on the assessment of the borrower’s ability to pay and the type, condition and value of collateral, management will establish an allowance amount specific to the loan.

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InManagement ~~establishing~~uses ~~the~~a ~~general~~risk ~~component~~scale ofto ~~the~~assign ~~allowance~~grades to commercial relationships, ~~management~~which ~~analyzes~~include ~~non-impaired~~commercial ~~loans~~real inestate, ~~the~~residential ~~portfolio~~rentals, ~~including~~construction ~~changes~~and inland ~~the~~development, ~~amount~~commercial loans and ~~type~~commercial ofequipment loans. ~~This~~All ~~analysis~~commercial ~~includes~~loan ~~trends~~relationships byare ~~portfolio~~graded ~~segment~~at ininceptions ~~charge-offs,~~and ~~delinquency,~~at ~~classified~~a ~~loans,~~minimum ~~loan~~annually. ~~concentrations~~Residential ~~and~~first ~~the~~mortgages, ~~rate~~home ofequity ~~portfolio~~and ~~segment~~second ~~growth.~~mortgages ~~Qualitative~~and ~~factors~~consumer ~~also~~loans ~~include~~are anmonitored ~~assessment~~on ofan ~~the~~ongoing ~~current~~basis ~~regulatory~~based ~~environment,~~on ~~the~~borrower ~~quality~~payment ofhistory. ~~credit~~Consumer ~~administration~~loans and ~~loan~~residential ~~portfolio~~real ~~management~~estate ~~and~~loans ~~national~~are ~~and~~classified ~~local~~as ~~economic~~unrated ~~trends.~~unless ~~Based~~they ~~upon~~are ~~this~~part ~~analysis~~of a ~~loss~~larger ~~factor~~commercial isrelationship ~~applied~~that torequires ~~each~~grading ~~loan~~or ~~category~~are ~~and~~troubled ~~the~~debt ~~Bank~~restructures ~~adjusts~~or ~~the~~nonperforming ~~loan~~loans ~~loss~~with ~~allowance~~an byOther ~~increasing~~Assets Especially Mentioned or ~~decreasing~~higher ~~the~~risk ~~provision~~rating ~~for~~due ~~loan~~to ~~losses~~a delinquent payment history.

~~Management~~The ~~has significant discretion in making the judgments inherent in the determination of the allowance for loan losses, including the valuation of collateral, assessing a borrower~~Company’s ~~prospects~~commercial ofloan repayment and in establishing loss factors on the general component of the allowance. Changes in loss factors have a direct impact on the amount of the provision and on net income. Errors in management’s assessment of the global factors and their impact on the portfolio ~~could~~is ~~result~~periodically inreviewed ~~the~~by ~~allowance~~regulators ~~not being adequate to cover losses in the portfolio~~ and ~~may~~independent ~~result~~consultants inengaged ~~additional~~by ~~provisions~~management.

~~For~~Management ~~additional~~has ~~information~~significant ~~regarding~~discretion in making the judgments inherent in the determination of the allowance for ~~loan~~credit losses, ~~refer~~including tothe ~~Notes~~valuation 1of collateral, assessing a borrower’s prospects of repayment and 3in establishing loss factors on the general component of the ~~Consolidated~~allowance. ~~Financial~~Changes ~~Statements~~in loss factors have a direct impact on the amount of the provision and on net income. Errors in management’s assessment of the ~~discussion~~global factors and their impact on the portfolio could result in ~~this~~the ~~MD&A~~ACL not being adequate to cover losses in the portfolio and may result in additional provisions.

For additional information regarding the allowance for credit losses, refer to Notes 1 and 3 of the Consolidated Financial Statements and the discussion in this MD&A.

Allowance for Credit Losses - AFS Debt securities

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. 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. 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.

The Company’s allowance for credit losses and the resulting provision for credit losses involves a significant amount of management judgment and are based on the best information available at the time.

For additional information regarding the allowance for credit losses, refer to Notes 1 and 2 of the Consolidated Financial Statements and the discussion in this MD&A.

Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of the net assets acquired. Goodwill is assigned to reporting units and tested for impairment at least annually in the fourth quarter or on an interim basis if an event occurs or circumstances changed that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Bank is the only reporting unit of the Company with intangible assets.

InAs ~~the~~there ~~third~~were ~~quarter~~no ~~of 2020, management determined that the COVID-19 pandemic and its impact on the banking industry was deemed a~~ triggering ~~event~~events ~~that~~in ~~required~~2022, anno interim ~~impairment test for~~ goodwill. ~~Management~~impairment ~~engaged~~tests anwere ~~independent~~required ~~consultant~~and ~~to assist~~ management ~~with~~performed aan ~~quantitative~~annual ~~goodwill impairment~~ analysis asduring ~~of September 15, 2020 ("~~the ~~measurement~~fourth ~~date").~~quarter The impairment analysis used both market and income approaches. The market approach used transaction and control premium analyses and compared resulting valuations both individually and to a selected peer group. The income approach analyzed discounted cash flows. The results of ~~the methods were weighted to determine an overall value~~2022. ~~The~~As ~~calculation~~ of ~~the~~December 31, ~~goodwill~~2022, ~~impairment involves significant estimates and subjective assumptions which require a high degree of~~ management ~~judgment.~~concluded ~~Significant~~that ~~estimates~~goodwill ~~and~~was ~~assumptions included, but were~~ not ~~limited~~impaired ~~to,~~as ~~projected~~there ~~profitability~~were ~~ratios,~~no ~~discount~~market ~~rates,~~or ~~cash~~financial ~~flows~~conditions ~~projections,~~that ~~selection~~would ~~and~~indicate ~~evaluation~~that ofit ~~control~~was ~~premiums~~more inlikely ~~appropriate~~than ~~market~~not ~~transactions~~that ~~and~~goodwill ~~selection~~was ~~of peers~~impaired.

Management concluded that goodwill was not impaired as of the measurement date. Management performed an annual analysis during the fourth quarter of 2020, as there were no changes in the Company's financial statements or operations that would indicate that it was more likely than not that goodwill was impaired subsequent to the measurement date, management concluded that goodwill was not impaired as of December 31, 2020.

During the year ended December 31, 2021, the banking industry and the Company's stock price rebounded from the prior year's impact of the COVID-19 pandemic. As there were no triggering events in 2021, no interim goodwill impairment tests were required and management performed an annual analysis during the fourth quarter of 2021. As of December 31, 2021, management concluded that goodwill was not impaired as there were no market or financial conditions that would indicate that it was more likely than not that goodwill was impaired.

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

For additional information regarding goodwill, refer to Notes 1 and 4 of the Consolidated Financial Statements.

Deferred Tax Assets

The Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes,” 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. FASB ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or the entire deferred tax asset will not be realized.35

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Management periodically evaluates the ability of the Company to realize the value of its deferred tax assets. If management were to determine that it would not be more likely than not that the Company would realize the full amount of the deferred tax assets, it would establish a valuation allowance to reduce the carrying value of the deferred tax asset to the amount it believes would be realized. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax-planning strategies that could be implemented to realize the net deferred tax assets.

Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets. Factors that may affect the Company’s ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: increased competition, a decline in net interest margin, a loss of market share, decreased demand for financial services and national and regional economic conditions.

The Company’s provision for income taxes and the determination of the resulting deferred tax assets and liabilities involves a significant amount of management judgment and are based on the best information available at the time. The Company operates within federal and state taxing jurisdictions and is subject to audit in these jurisdictions.

For additional information regarding income taxes and deferred tax assets, refer to Notes 1 and 14 of the Consolidated Financial Statements.

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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

Reconciliation of US 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.

The Company's management discussion and analysis contains financial information determined by methods other than in accordance with generally accepted accounting principles, or 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.

	For the Year Ended
	For the Years Ended
(dollars in thousands, except per share amounts)	December 31, ~~2021~~2022			December 31, ~~2020~~2021
Total assets	$	2,~~327~~410,~~306~~017		$	2,~~026~~327,~~439~~306
Less: intangible assets
Goodwill	10,835			10,835
Core deposit intangible	~~1,032~~634			1,~~527~~032
Total intangible assets	11,~~867~~469			1211,~~362~~867
Tangible assets	$	2,~~315~~398,~~439~~548		$	2,~~014~~315,~~077~~439
Total common equity	$	~~208~~187,~~133~~011		$	~~198~~208,~~013~~133
Less: intangible assets	11,~~867~~469			1211,~~362~~867
Tangible common equity	$	~~196~~175,~~266~~542		$	~~185~~196,~~651~~266
Common shares outstanding at end of period	5,~~718~~648,~~528~~435			5,~~903~~718,~~613~~528
GAAP common equity to assets	87.9476		%	98.7794		%
Non-GAAP tangible common equity to tangible assets	87.4832		%	98.2248		%
GAAP common book value per share	$	3633.4011		$	3336.5440
Non-GAAP tangible common book value per share	$	3431.3208		$	3134.4532

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RECONCILIATION OF ~~GAAP AND~~ NON-GAAP MEASURES

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.

For the Year Ended

For the Years Ended

(dollars in thousands)

December 31, 2021

December 31, 2020

(dollars in thousands, except per share amounts)

December 31, 2022

December 31, 2021

Net income (as reported)

2528,~~886~~317

1625,~~136~~886

ROACE

1214.6576

812.4665

Average equity

~~204~~191,~~643~~872

~~190~~204,~~720~~643

Return on Average Tangible Common Equity ("ROATCE")

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

For the Year Ended

For the Years Ended

(dollars in thousands)

December 31, ~~2021~~2022

December 31, ~~2020~~2021

Net income (as reported)

2528,~~886~~317

1625,~~136~~886

Core deposit intangible amortization (net of tax)

~~370~~297

~~462~~370

Net earnings applicable to common shareholders

2628,~~256~~614

1626,~~598~~256

ROATCE

1315.6488

913.3264

Average tangible common equity

~~192~~180,~~518~~197

~~178~~192,~~048~~518

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COMPARISON OF RESULTS OF OPERATIONS

A comparison of the results of operations for the years ended December 31, ~~2021,~~2022 and December 31, ~~2020~~2021 is presented below.

	At or for the Years Ended
(dollars in thousands, except per share amounts)	December 31, ~~2021~~2022		December 31, ~~2020~~2021
OPERATING DATA
Interest and dividend income	$	7082,~~559~~707	$	7170,~~073~~559
Interest expenses	49,~~125~~182		104,~~156~~125
Net interest income ("NII")	6673,~~434~~525		6066,~~917~~434
Provision for loan losses	586		10,700
Provision for credit losses	2,437		586
NII after provision for loan losses	65,848		50,217
Provision for unfunded commitments	146		—
Noninterest income	7,906		8,416
NII after provision for credit losses	70,942		65,848
Noninterest expenses	39,152		38,003
Noninterest income	6,393		7,906
Income before income taxes	34,602		20,630
Noninterest expenses	39,434		39,152
Income taxes	8,716		4,494
Income before income taxes	37,901		34,602
Net income	25,886		16,136
Income taxes	9,584		8,716
Preferred stock dividends declared	—		—
Net income	28,317		25,886
Income available to common shares	$	2528,~~886~~317	$	1625,~~136~~886

(dollars in thousands, except per share amounts)	At or for the Years Ended
	At or for the Years Ended
	December 31, 2021		December 31, 2020
(dollars in thousands, except per share amounts)	December 31, 2022		December 31, 2021
KEY OPERATING RATIOS
Return on average assets ("ROAA")	1.1922	%	01.8119	%
Return on average common equity ("ROACE")	1214.6576		812.4665
Return on Average Tangible Common Equity ("ROATCE")	13.64		9.32
Return on Average Tangible Common Equity ("ROATCE")**	15.88		13.64
Average total equity to average total assets	98.4424		9.6144
Interest rate spread	3.2818		3.2228
Net interest margin	3.3438		3.3634
Efficiency ratio (1)	5249.6734		5452.8167
Non-interest expense to average assets	1.81		1.91
Non-interest income to average assets	0.27		0.36
Net operating expense to average assets (2)	1.44		1.49
Non-interest expense to average assets	1.69		1.81
Net operating expense to average assets (2)	1.42		1.44
Average interest-earning assets to average interest-bearing liabilities	147.05		130.61
Net charge-offs to average portfolio loans	0.03		0.11

_______________________________________

(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.

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

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Summary Financial Results

In ~~2021~~2022, profitability increased from aincreases ~~lower~~in ~~loan loss provision,~~ interest-earning asset ~~growth,~~yields and expense control, ~~and~~partially aoffset ~~stable~~by ~~net~~increased interest ~~margin~~expense ~~due~~from ~~primarily~~higher ~~to improved~~ funding costs, ~~and~~lower ~~growth in noninterest~~non-~~bearing~~interest income and ~~low~~higher ~~cost~~provision ~~transaction~~for ~~deposits.~~credit Welosses ~~continued~~as tothe ~~help~~Bank ~~our~~transitioned ~~community~~from ~~and~~an ~~customers~~incurred ~~navigate~~loss ~~economic~~model ~~uncertainty~~to byan ~~originating~~expected aloss ~~third~~model ~~round~~following ofthe ~~U.S.~~adoption ~~Small~~of ~~Business~~CECL ~~Administration~~in ~~Paycheck Protection Program loans ("SBA PPP")~~2022. Although, the COVID-19 pandemic continued to present both economic and operational challenges in ~~2021~~2022, there were no customers with COVID-19 deferrals at December 31, ~~2021~~2022. The Company improved credit quality by resolving multiple non-accrual loans ~~and OREO assets~~, reducing nonperforming assets to 0.3527% of total assets at December 31, ~~2021~~2022 compared to 10.0835% at December 31, ~~2020~~2021. ~~Management's focus on credit quality and resolution of long-standing classified assets has reduced classified assets to $5.2 million, their lowest level since before 2008.~~

During 2022, the Company delivered record earnings. We have solidified our market share and improved our deposit franchise in Southern Maryland, establishing a strong foothold in and around Fredericksburg, Virginia, had solid portfolio loan growth and added new technology initiatives in both markets. Net income for the year ended December 31, 2022 was $28.3 million or $5.00 per diluted share compared to net income of $25.9 million or $4.47 per diluted share for the year ended December 31, 2021. The Company’s ROAA and ROACE were 1.22% and 14.76% for the year ended December 31, 2022 compared to 1.19% and 12.65% for the year ended December 31, 2021. The $2.4 million increase to net income in 2022 compared to 2021 included increased net interest income of $7.1 million for the comparable periods. This addition to net income was partially offset by increased loan loss provision of $1.9 million, decreased noninterest income of $1.5 million, increased income tax expense of $0.9 million, and increased noninterest expense of $0.3 million for the comparable periods.

Net interest income increased in 2022 primarily due to growth in loans and increases in investment and loan yields partially offset by increased interest expense from higher funding costs. The loan loss provision increased due to loan portfolio growth and higher reserve percentages following the Company's adoption of CECL. Noninterest income decreased primarily due to the lack of gains on the sale of investment securities and reduced interest rate protection referral fee income, partially offset by a $0.7 million gain on the sale of the Bank's equity investment in Infinex. The increase in noninterest expense for the comparable periods was primarily due to increased expenses for occupancy, merger and acquisition costs, data processing and professional fees. These increases to noninterest expense were partially offset by decreased compensation, fraud losses and OREO expenses. The increase in income tax expense was due to higher pre-tax income.

The Company’s efficiency ratio improved (decreased) from 52.67% for the year ended December 31, 2021 to 49.34% for the year ended December 31, 2022, as a result of expense control and increased net interest income. Management believes it is important to continue to focus on creating operating leverage. We believe our continued focus on new products and services will increase non-interest income as a percentage of revenues over time. Controlling expense growth and increasing noninterest income will better prepare the Company for changes in interest rates and credit cycles.

Over the last several years, the Bank's technology strategy was instrumental in slowing the growth of expenses, expanding our customer base, and increasing profitability. Our technology goals include: protecting the data integrity of our platforms and customer information; enhancing operating efficiency; permitting management to quickly respond to unforeseen technology opportunities and challenges, and providing an improved experience for our digital customers.

Balance sheet financial highlights for 2022 include:

•On December 14, 2022, the Company entered into a definitive agreement to undertake a merger of equals pursuant to which the Company and Bank will merge into Shore Bancshares, Inc. (NASDAQ: SHBI) ("Shore") in an all-stock transaction. The combined company will have total assets of approximately $6.0 billion on a pro forma basis. Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, and which remains subject to shareholder and regulatory approval, as well as the satisfaction of customary closing conditions, holders of TCFC common stock will have the right to receive 2.3287 shares of Shore Bancshares, Inc. common stock. The merger is expected to close in the late second quarter or early third quarter of 2023. James M. Burke, The Community Financial Corporation's current President and Chief Executive Officer, will serve as President and Chief Executive Officer of the combined company.

•Gross portfolio loans increased 15.3% or $242.1 million to $1.82 billion at December 31, 2022. The increase was driven by $117.3 million and $143.3 million of growth in our commercial real estate loan portfolio and residential rental loan portfolio, respectively. The increase was partially offset by a $18.3 million decrease in our construction and land development portfolio.

•The Bank’s expansion into Virginia has significantly contributed to our growth over the last five years. Fredericksburg, Spotsylvania and surrounding areas provide substantial opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology. At December 31, 2022, loans in the greater Fredericksburg, Virginia area accounted for approximately 49% of the Bank's outstanding portfolio loans. In addition, Fredericksburg branch deposits were $103.7 million with an average cost of deposits of 46 basis points.

•Non-performing assets improved in 2022 comparing December 31, 2022 to December 31, 2021:

◦Classified assets as a percentage of assets decreased 3 basis points to 0.25%.

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~~During~~◦Non-accrual ~~2021~~loans, ~~the~~OREO ~~Company delivered record earnings. We have solidified our market share~~ and ~~improved~~TDRs our deposit franchise in Southern Maryland, establishing a strong foothold in and around Fredericksburg, Virginia, and added new products and technology initiatives in both markets. Net income for the year ended December 31, 2021 was $25.9 million or $4.47 per diluted share compared to ~~net~~total ~~income~~assets ofdecreased ~~$16.1~~8 ~~million~~basis orpoints ~~$2.74 per diluted share for the year ended December 31, 2020. The Company’s ROAA and ROACE were 1.19% and 12.65% for the year ended December 31, 2021 compared~~ to 0.8127% ~~and 8~~.46% for the year ended December 31, 2020. The $9.8 million increase to net income in 2021 compared to 2020 included decreased loan loss provision of $10.1 million for the comparable periods and increased net interest income of $5.5 million. These additions to net income were partially offset by increased income tax expense of $4.2 million, decreased noninterest income of $0.5 million and increased noninterest expense of $1.1 million for the comparable periods.

~~Net~~•Total ~~interest~~deposits ~~income~~ increased in$32.3 ~~2021~~million ~~primarily~~or ~~due~~1.6% to ~~decreased~~$2.1 ~~funding~~billion ~~costs~~at ~~and~~December 31, ~~increased~~2022. ~~interest~~In ~~income~~2021 ~~from larger loan~~ and ~~investment~~2022, ~~average~~market ~~balances~~disruptions ~~that~~caused ~~outweighed~~by ~~the~~both ~~negative impacts of lower yields earned on loan and investment balances. Because~~ the ~~economic uncertainty of the~~ COVID-19 pandemic ~~continued~~and ~~throughout~~industry ~~2021,~~consolidation ~~loan~~assisted ~~loss~~with ~~reserves~~organic ~~were~~growth ~~not~~and ~~released~~we inbelieve ~~2021,~~industry ~~but~~consolidation ~~the~~will ~~total~~provide ~~reserve~~similar ~~balance~~opportunities ~~decreased~~in as2023. ~~management's~~The ~~efforts~~Company expects to ~~resolve~~service ~~classified~~a ~~and~~wider ~~impaired~~customer ~~loan~~base ~~balances~~through ~~led~~the toaddition aof ~~$1.1 million~~the ~~decrease~~Bank's insecond ~~specific~~full-service ~~reserves.~~branch ~~The increase~~ in ~~noninterest~~Virginia ~~expense~~that ~~was~~opened ~~primarily attributable to the $1.2 million wire fraud loss reported~~ in the ~~first~~second quarter ~~and~~of ~~increases~~2022. inNon-interest-bearing ~~compensation~~accounts and ~~benefits,~~transaction ~~which~~accounts were 30.2% ~~partially~~and ~~offset by decreased OREO expenses~~83.4% ~~Noninterest~~of ~~income~~deposits ~~decreased~~at ~~primarily~~December 31, ~~due~~2022 toand ~~smaller~~21.7% ~~gains on the sale of investment securities~~ and ~~reduced interest rate protection referral fee income~~84.1% ~~The~~at ~~increase~~December 31, ~~in income tax expense was due to a change in the Company's state tax apportionment approach that was implemented in the first quarter of 2020 as well as higher pre-tax income~~2021.

~~The~~•On ~~Company’s~~December 9, ~~efficiency~~2021, ~~ratio~~the ~~improved~~Company ~~from~~announced ~~54.81%~~its ~~for~~Board ~~the~~of ~~year~~Directors ~~ended~~approved ~~December 31,~~the ~~2020~~resumption toof ~~52.67%~~repurchases ~~for~~allowed under the ~~year~~stock ~~ended~~repurchase ~~December 31,~~plan ~~2021,~~originally asadopted ain ~~result~~October of2020 ~~expense~~(the ~~control~~"2020 ~~and~~Repurchase ~~increased~~Plan"). ~~net~~The ~~interest~~Company ~~income.~~was ~~Management~~permitted ~~believes~~to itrepurchase isup ~~important~~ to ~~continue~~the to99,450 ~~focus~~shares onremaining ~~creating~~under ~~operating~~the ~~leverage.~~2020 WeRepurchase ~~believe~~Plan ~~our~~using ~~continued~~up ~~focus~~to on$4.0 million ~~new~~in ~~products~~the aggregate and ~~services~~up ~~will~~to ~~increase~~$1.5 million ~~non-interest~~in ~~income~~the asaggregate on a ~~percentage~~quarterly ofbasis. ~~revenues~~During ~~over~~2022, ~~time.~~the ~~Controlling~~Company ~~expense~~repurchased ~~growth~~90,713 ~~and~~shares ~~increasing~~at ~~noninterest~~an ~~income~~average ~~will~~price ~~better~~of ~~prepare~~$39.19 ~~the~~per ~~Company~~share ~~for~~and ~~changes~~completed inits ~~interest~~authorization ~~rates~~under ~~and~~the ~~credit~~2020 ~~cycles~~Repurchase Plan.

During the second quarter of 2021, the Bank introduced a new residential mortgage program and a retail and commercial credit card program that merge the technology and expertise of two proven FinTech firms with our business development team's capabilities. The Company expects these programs to improve non-interest income and interest income beginning in 2022-2023. The Bank's credit card program balances increased from approximately $50,000 at June 30, 2021 to just over $1.6 million at December 31, 2021.

Balance sheet financial highlights for 2021 include:

•The Company's on-balance sheet liquidity improved in 2021. Total assets increased $300.9 million or 14.8% in 2021 to $2.33 billion at December 31, 2021. Cash and cash equivalents increased $62.6 million, or 81.22%, to $139.7 million or 6.0% of the total assets and investments increased $251.7 million, or 100.19%, to $502.8 million or 21.6% of total assets.

•Gross portfolio loans increased 5.0% or $74.7 million to $1.58 billion at December 31, 2021. The increase was driven by $66.3 million and $56.0 million of growth in our commercial real estate loan portfolio and residential rental loan portfolio, respectively. The increase was partially offset by a $42.7 million decrease in our residential first mortgage portfolio.

•The Bank’s expansion into Virginia has significantly contributed to our growth over the last five years. Fredericksburg, Spotsylvania and surrounding areas provide significant opportunities for continued organic growth supported by our efficient operating model and ability to leverage technology. At December 31, 2021, loans in the greater Fredericksburg, Virginia area accounted for approximately 49% of the Bank's outstanding portfolio loans. In addition, Fredericksburg branch deposits were $93.2 million with an average cost of deposits of four basis points.

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•Non-performing assets improved in 2021 comparing December 31, 2021 to December 31, 2020:

◦Classified assets as a percentage of assets decreased 88 basis points to 0.22%.

◦Non-accrual loans, OREO and TDRs to total assets decreased 73 basis points to 0.35%.

~~◦The~~•Total ~~Company~~deposits ~~had~~increased no$310.6 ~~COVID~~million or 17.8% to $2.06 billion at December 31, 2021. Non-19interest-bearing ~~deferred~~accounts ~~loans~~and astransaction accounts increased to 21.7% and 84.1% of deposits at December 31, 2021 from 20.7% and 79.7% at December 31, 2020.

•Total deposits increased $310.6 million or 17.8% to $2.06 billion at December 31, 2021. In 2021, market disruptions caused by both the COVID-19 pandemic and industry consolidation assisted with organic growth and we believe industry consolidation will provide similar opportunities in 2022. The Company expects to service a wider customer base through the addition of the Bank's second full-service branch in Virginia that is expected to open in the second quarter of 2022. Non-interest-bearing accounts and transaction accounts increased to 21.7% and 84.1% of deposits at December 31, 2021 from 20.7% and 79.7% at December 31, 2020.

•On December 9, 2021, the Company announced its Board of Directors approved the resumption of repurchases allowed under the 2020 Stock Purchase Plan. The Company may repurchase the 99,450 shares remaining under the October 2020 stock repurchase plan using up to $4.0 million in the aggregate and up to $1.5 million in the aggregate on a quarterly basis.

•On November 30, 2021, the Company announced a 17% increase of its quarterly per share dividend from $0.15 to $0.175 for the fourth quarter dividend that was paid in the first quarter of 2022.

Balance sheet financial highlights for 2020 include:

•The Company redeemed and issued subordinated notes:

◦On February 15, 2020, the Company redeemed $23.0 million of 6.25% fixed-to-floating rate subordinated notes.

◦On October 14, 2020, the Company issued and sold $20.0 million 4.75% Fixed to Floating Rate Subordinated Notes due 2030. The Company contributed $10.0 million of the net proceeds to the Bank as Tier 1 Capital and used the remaining net proceeds to repurchase shares in 2021 and for general corporate purposes.

Net Interest Income

The primary component of the Company’s net income is its net interest income, which 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.

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Average Balances and Yields:

The following tables set forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effects thereof were 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. There was $0.42 million and $0.64 million of accretion interest during the years ended December 31, ~~2021~~2022 and ~~2020~~2021, respectively.

	For the Years Ended December 31,
	2021						2020
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Assets
Commercial real estate	$	1,~~085~~179,~~823~~776	$	4350,~~536~~706	4.0130	%	$	~~993~~1,~~478~~085,823	$	43,~~239~~536	4.3501	%
Residential first mortgages	~~107~~83,~~011~~485		32,~~250~~889		3.0446	%	~~159~~107,~~265~~011		53,~~229~~250		3.2804	%
Residential rentals	~~151~~234,~~606~~800		69,~~180~~509		4.0805	%	~~132~~151,~~524~~606		56,~~841~~180		4.4108	%
Construction and land development	3627,~~891~~947		1,~~658~~496		45.4935	%	3736,~~930~~891		1,~~795~~658		4.7349	%
Home equity and second mortgages	2825,~~051~~774		~~977~~1,298		35.4804	%	3328,~~458~~051		~~1334~~977		3.9948	%
Commercial loans	4642,~~390~~303		2,~~032~~708		46.3840	%	5646,~~793~~390		2,~~624~~032		4.6238	%
Commercial equipment loans	6071,~~845~~416		2,~~567~~937		4.2211	%	5760,~~093~~845		2,~~915~~567		54.1122	%
SBA PPP loans	828,~~901~~770		~~5,203~~960		610.2895	%	9082,~~345~~901		25,~~704~~203		26.9928	%
Consumer loans	14,~~783~~590		73235		45.0912	%	1,~~099~~783		5073		4.5509	%
Allowance for loan losses	(18,788)		—		—	%	(15,681)		—		—	%
Allowance for credit losses	(21,593)		—		—	%	(18,788)		—		—	%
Loan portfolio	1,~~582~~657,~~513~~268		6572,~~476~~738		4.1439	%	1,~~546~~582,~~304~~513		65,~~731~~476		4.2514	%
Taxable investment securities	~~336~~469,~~267~~393		49,~~623~~046		1.3793	%	~~214~~336,~~187~~267		4,~~832~~623		21.2637	%
Nontaxable investment securities	1720,~~515~~325		~~369~~442		2.1117	%	1417,~~214~~515		~~338~~369		2.3811	%
Interest-bearing deposits in other banks	3324,~~095~~844		70319		01.2128	%	1933,~~444~~095		~~110~~70		0.5721	%
Federal funds sold	206,~~916~~371		21162		02.1054	%	20,~~890~~916		6221		0.3010	%
Interest-Earning Assets ("IEAs")	12,~~990~~178,~~306~~201		7082,~~559~~707		3.5580	%	1,~~815~~990,~~039~~306		7170,~~073~~559		3.9255	%
Cash and cash equivalents	7843,~~849~~993						6878,~~651~~849
Goodwill	10,835						10,835
Core deposit intangible	~~1,290~~840						1,~~837~~290
Other assets	8694,~~579~~732						8886,~~913~~579
Total Assets	$	2,~~167~~328,~~859~~601					$	12,~~985~~167,~~275~~859

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Average Balances and Yields: (Continued)

	For the Years Ended December 31,
	2021						2020
	2022						2021
(dollars in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost
Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits	$	~~417~~634,~~935~~805	$	—	—	%	$	~~324~~417,~~597~~935	$	—	—	%
Interest-bearing deposits
Savings	~~108~~121,~~189~~975		5492		0.0508	%	84108,~~463~~189		8554		0.1005	%
Demand deposits	~~660~~621,~~330~~755		~~345~~5,133		0.0583	%	~~537~~660,~~043~~330		~~1,591~~345		0.3005	%
Money market deposits	~~358~~376,~~006~~039		~~397~~523		0.1114	%	~~312~~358,~~980~~006		~~795~~397		0.2511	%
Certificates of deposit	~~342~~313,~~755~~429		1,~~805~~463		0.5347	%	~~370~~342,~~743~~755		51,~~210~~805		10.4153	%
Total interest-bearing deposits	1,~~469~~433,~~280~~198		27,~~601~~211		0.1850	%	1,~~305~~469,~~229~~280		72,~~681~~601		0.5918	%
Total Deposits	12,~~887~~068,~~215~~003		27,~~601~~211		0.1435	%	1,~~629~~887,~~826~~215		72,~~681~~601		0.4714	%
Long-term debt	233,~~072~~848		~~219~~48		01.9525	%	5323,~~615~~072		~~1,373~~219		20.5695	%
Short-term borrowings	—12,696		—426		—3.36	%	~~8,156~~—		~~111~~—		~~1.36~~—	%
PPPLF advance	—		—		—	%	60,360		211		0.35	%
Subordinated notes	19,536		1,006		5.15	%	19,488		1,006		5.16	%
Subordinated notes	19,488		1,006		5.16	%	7,953		395		4.97	%
Guaranteed preferred beneficial interest in junior subordinated debentures	12,000		491		4.09	%	12,000		299		2.49	%
Guaranteed preferred beneficial interest in junior subordinated debentures	12,000		299		2.49	%	12,000		385		3.21	%
Total Debt	48,080		1,971		4.10	%	54,560		1,524		2.79	%
Total Debt	54,560		1,524		2.79	%	142,084		2,475		1.74	%
Interest-Bearing Liabilities ("IBLs")	1,481,278		9,182		0.62	%	1,523,840		4,125		0.27	%
Interest-Bearing Liabilities ("IBLs")	1,523,840		4,125		0.27	%	1,447,313		10,156		0.70	%
Total funds	2,116,083		9,182		0.43	%	1,941,775		4,125		0.21	%
Total funds	1,941,775		4,125		0.21	%	1,771,910		10,156		0.57	%
Other liabilities	20,646						21,441
Other liabilities	21,441						22,645
Stockholders' equity	191,872						204,643
Stockholders' equity	204,643						190,720
Total Liabilities and Stockholders' Equity	$	2,328,601					$	2,167,859
Total Liabilities and Stockholders' Equity	$	2,167,859					$	1,985,275
Net interest income			$	73,525					$	66,434
Net interest income			$	66,434					$	60,917
Interest rate spread					3.18	%					3.28	%
Interest rate spread					3.28	%					3.22	%
Net yield on interest-earning assets					3.38	%					3.34	%
Net yield on interest-earning assets					3.34	%					3.36	%
Average loans to average deposits					80.14	%					83.85	%
Average loans to average deposits					83.85	%					94.88	%
Average transaction deposits to total average deposits **					84.84	%					81.84	%
Average transaction deposits to total average deposits **					81.84	%					77.25	%
Ratio of average IEAs to average IBLs					147.05	%					130.61	%
Ratio of average IEAs to average IBLs					130.61	%					125.41	%

_______________________________________

** Transaction deposits exclude time deposits.

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The tables below summarize 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.

Years Ended December 31, 2021 and December 31, 2020

Changes Due To

Years Ended December 31, 2022 and December 31, 2021

Changes Due To

(dollars in thousands)

Volume

Rate

Total

Interest income:

Loan portfolio

Commercial real estate

34,~~703~~040

(3,~~406)~~130

~~297~~7,170

Residential first mortgages

(~~1,589~~814)

~~(390)~~453

(~~1,979~~361)

Residential rentals

~~779~~3,369

(~~440~~40)

~~339~~3,329

Construction and land development

(47479)

~~(90)~~317

(~~137~~162)

Home equity and second mortgages

(~~188~~115)

~~(169)~~436

~~(357)~~321

Commercial loans

(~~456~~261)

~~(136)~~937

~~(592)~~676

Commercial equipment loans

~~158~~434

(~~506~~64)

~~(348)~~370

SBA PPP loans

(~~467~~8,117)

23,~~966~~874

2(4,~~499~~243)

Consumer loans

28144

~~(5)~~18

23162

Taxable investment securities

12,~~672~~569

(1,~~881)~~854

~~(209)~~4,423

Nontaxable investment securities

7061

~~(39)~~12

3173

Interest-bearing deposits in other banks

29(106)

~~(69)~~355

~~(40)~~249

Federal funds sold

—(369)

~~(41)~~510

~~(41)~~141

Total interest-earning assets

~~3,692~~356

(411,~~206)~~792

~~(514)~~12,148

Interest-bearing liabilities:

Savings

1211

~~(43)~~27

~~(31)~~38

Demand deposits

62(320)

(15,~~308)~~108

(14,~~246)~~788

Money market deposits

5025

~~(448)~~101

~~(398)~~126

Certificates of deposit

(~~148~~138)

(~~3,257~~204)

(~~3,405~~342)

Long-term debt

(~~290~~240)

~~(864)~~69

(~~1,154~~171)

Short-term borrowings

—427

(~~111~~1)

~~(111)~~426

PPPLF Advance

—

(211)

Subordinated notes

(2)

—

Subordinated notes

595

611

Guaranteed preferred beneficial interest in junior subordinated debentures

—

192

Guaranteed preferred beneficial interest in junior subordinated debentures

—

(86)

Total interest-bearing liabilities

(233)

5,290

5,057

Total interest-bearing liabilities

281

(6,312)

(6,031)

Net change in net interest income

589

6,502

7,091

Net change in net interest income

3,412

2,105

5,517

Net interest income totaled $6673.45 million for the year ended December 31, ~~2021~~2022, which represents a 910.17% increase from $6066.94 million for the year ended December 31, ~~2020~~2021. Net interest income increased during ~~2021~~2022 compared to the prior year as the positive impacts of ~~average~~higher ~~interest-earning~~yields ~~asset~~earned ~~growth,~~on ~~income~~loans ~~from~~and ~~U.S.~~investments ~~SBA PPP loans~~ and ~~decreased~~average ~~funding~~interest-earning ~~costs~~asset growth, outpaced the negative ~~impacts~~impact of ~~lower~~increased ~~yields~~funding ~~earned~~costs onand ~~loans~~decreased ~~and~~U.S. ~~investments~~SBA PPP loan income. The Bank ~~has~~continues ~~increased~~to ~~lower~~concentrate ~~cost~~our ~~transaction~~efforts ~~deposits~~to inexpand ~~every~~the ~~year~~number ~~over~~of ~~the~~lower ~~last~~cost ~~six~~transaction ~~years,~~deposits ~~including~~balances ~~during~~and ~~the pandemic~~relationships. Non-interest bearing accounts and transaction accounts ~~increased~~represented ~~to 21~~30.72% and 8483.14% of deposits at December 31, ~~2021~~2022 ~~from~~compared 20to 21.7% and 7984.71% at December 31, ~~2020~~2021.

45Net interest margin of 3.38% for the year ended December 31, 2022, was 4 basis points higher than the 3.34% for the year ended December 31, 2021. Increased net interest margin resulted primarily from the Company's interest earning asset yields (25 basis points) increasing at a slightly faster rate than overall funding costs (22 basis points). The sharp increase in interest rates in 2022 due to the Federal Open Market Committee("FOMC") actions resulted in increased interest income on floating-rate loans and liquid interest-earning assets and investments. The FOMC actions also enhanced competitive pressures and depositor expectations concerning deposit interest rates. Management expects that interest-bearing deposit accounts will reprice faster than loans and investments in the first six months of 2023 based on late fourth quarter 2022 trends. This expectation is primarily based on the assumption that the Federal Reserve will discontinue interest rate increases in the second half of 2022. Based on this assumption, margins could compress to between 3.10% and 3.40% in the first half of 2023 before stabilizing in the second half of 2023.

Average total earning assets increased 9.4%, for the year ended December 31, 2022 to $2.18 billion compared to $1.99 billion for the year

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~~Net interest margin of 3.34% for the year~~ ended December 31, 2021,. ~~was~~Average ~~two~~loans ~~basis~~increased ~~points~~a ~~lower than the 3~~$74.~~36%~~8 ~~for~~million ~~the~~with ~~year~~growth ~~ended~~in ~~December 31,~~commercial ~~2020.~~real ~~Decreased~~estate ~~net~~and ~~interest~~residential ~~margin~~rental ~~resulted~~loans, ~~primarily~~partially ~~from~~offset ~~the~~by ~~Company's~~reductions ~~interest~~in ~~earning~~U.S. ~~asset~~SBA ~~yields~~PPP ~~(37~~and ~~basis~~residential ~~points)~~first ~~decreasing~~mortgage atloans. aInterest ~~slightly~~income ~~faster~~increased ~~rate~~$12.1 ~~than~~million ~~overall~~for ~~funding~~the ~~costs~~year ~~(36~~ended ~~basis~~December 31, ~~points).~~2022 ~~The~~compared ~~sharp~~to ~~decline~~the insame ~~interest~~period ~~rates~~of in 2021. ~~not~~The ~~only~~increase ~~reduced~~in interest income onresulted ~~floating-rate~~from ~~loans~~higher ~~and liquid~~ interest~~-earning~~ ~~assets~~yields ~~and~~accounting ~~investments,~~for ~~but it also reduced competitive pressures and depositor expectations concerning deposit interest rates~~$11.8 ~~In addition~~million, ~~the continued improvement in the Bank's funding mix, replacing wholesale funding~~ and ~~time~~larger ~~deposits~~average ~~with~~balances ~~transaction~~of ~~accounts~~interest-earning ~~helped~~assets ~~margins~~contributing ~~not~~$0.4 ~~further compress in 2021~~million.

Average total ~~earning~~interest-bearing ~~assets~~liabilities ~~increased~~decreased 92.78%, for the year ended December 31, ~~2021~~2022 to $1.9948 billion compared to $1.8252 billion for the year ended December 31, ~~2020~~2021. ~~Average~~Interest ~~loans~~expense increased a $365.21 million ~~with growth in commercial real estate and residential rental loans, partially offset by reductions in residential first mortgage loans. Interest income decreased $0.5 million~~ for the year ended December 31, ~~2021~~2022 compared to the same period of ~~2020~~2021. ~~The~~Interest ~~decrease~~expense inincreased ~~interest~~$5.3 ~~income~~million ~~resulted~~due ~~from~~to ~~lower~~higher interest ~~yields~~rates, ~~accounting~~partially ~~for~~offset by $40.2 million, ~~partially~~reduction ~~offset~~from bydecreased ~~larger average~~ balances of interest-~~earning~~bearing ~~assets contributing $3~~liabilities.7 ~~million.~~

~~Average~~The ~~total~~Bank's ~~interest~~success at increasing transaction accounts, and in particular the increases in noninterest-bearing ~~liabilities~~accounts, ~~increased~~was 5an important factor in managing net interest margin in 2022.3% In addition, ~~for~~the decrease in time deposits positively impacted margins. During the year ended December 31, ~~2021~~2022, average noninterest-bearing demand deposits increased $216.9 million, or 51.9% to $1634.528 ~~billion~~million. ~~compared~~Average transaction accounts increased $210.1 million or 13.6% to $1.4575 billion from $1.54 billion for the year ended December 31, ~~2020~~2021. ~~Interest~~During ~~expense~~the same timeframe average time deposits decreased $29.3 million or 8.6%, to $313.04 million for the year ended December 31, ~~2021~~2022. ~~compared~~Funding tocosts ~~the~~increased ~~same~~at ~~period~~a faster rate as the percentage of ~~2020.~~funding ~~Interest~~coming ~~expense~~from ~~decreased~~transaction $6accounts increased from 79.35% ~~million~~for ~~due~~the toyear ~~lower~~ended ~~interest~~December 31, ~~rates~~2021 ~~and~~to $082.39% ~~million~~for ~~from~~the ~~increased~~year ~~balances~~ended ofDecember 31, ~~interest-bearing liabilities~~2022.

~~The~~Interest ~~Bank's~~income ~~success~~accretion aton ~~increasing~~acquired ~~transaction~~loans ~~accounts,~~contributed ~~and~~$0.2 inmillion ~~particular~~and ~~the~~$0.4 ~~increases~~million into ~~noninterest-bearing accounts, was an important factor in managing net~~ interest ~~margin~~income in ~~2021.~~2022 Inand ~~addition, the decrease in time deposits positively impacted margins. During the year ended December 31,~~ 2021, ~~average noninterest-bearing demand deposits increased $93~~respectively.3 ~~million, or 28~~U.~~8% to $417~~S.9 ~~million.~~SBA ~~Average~~PPP ~~transaction~~interest ~~accounts~~income ~~increased~~contributed $~~285~~1.40 million orin ~~22.7%~~2022 compared to $15.542 ~~billion~~million ~~from~~in $12021.26 ~~billion~~For ~~for~~ the year ended December 31, ~~2020.~~2022, ~~During~~net ~~the~~interest ~~same~~margin ~~timeframe~~increased ~~average~~four ~~time~~basis ~~deposits~~points ~~decreased~~as ~~$28.0~~a ~~million~~result orof ~~7.5%,~~net ~~to $342~~U.~~8 million for the year ended December 31, 2021~~S. ~~Funding~~SBA ~~costs~~PPP ~~decreased~~loan atinterest aincome ~~faster~~recognition ~~rate~~compared asto ~~the percentage of funding coming from transaction accounts~~ increased ~~from~~net ~~71.1%~~interest ~~for~~margin ~~the~~of ~~year~~13 ~~ended~~basis ~~December 31,~~points ~~2020 to 79.5%~~ for the year ended December 31, 2021.

~~Interest~~In ~~income~~the ~~accretion~~last onsix ~~acquired~~months ~~loans~~of ~~contributed $0.4 million and $0.6 million to interest income in~~ 2021 ~~and 2020~~, ~~respectively. U.S. SBA PPP~~ interest ~~income~~expense ~~contributed~~increased by $50.2 1 million indue ~~2021 compared~~ to ~~$2.7 million~~prepayment infees ~~2020.~~recognized ~~For~~on the ~~year~~early ~~ended~~repayment ~~December 31, 2021, net interest margin increased 13 basis points as a result~~ of ~~net U~~$15.S.0 ~~SBA~~million ~~PPP~~of ~~loan~~higher-rate ~~interest~~long-term ~~income~~FHLB ~~recognition~~advances. ~~compared~~There towere ~~decreased~~no ~~net~~comparable ~~interest~~transactions ~~margin~~in ~~of three basis points for the year ended December 31, 2020~~2022.

InInterest rates increased in 2022 as the ~~last~~FOMC ~~six~~worked ~~months~~to mitigate the impact of ~~2020,~~inflation on the ~~Company~~U.S. ~~prepaid $30~~economy.~~0 million~~ ~~FHLB~~The ~~advances~~FOMC ~~with~~increased athe ~~2.2%~~Fed ~~average~~Funds rate. ~~Prepayment~~from ~~fees~~0% ~~increased~~at ~~interest~~December ~~expense~~2021 ~~$0.6 million~~to ~~for~~ the ~~year~~current ~~ended~~rate ~~December 31,~~of ~~2020~~4.50% ~~Interest~~to ~~expense~~4.75% ~~increased~~in byMarch $02023.1 ~~million~~The ~~due~~below totable ~~prepayment~~illustrates ~~fees~~how ~~recognized on~~ the ~~early~~Company's ~~repayment~~average ofrates ~~$15.0~~responded ~~million~~during ofthe ~~higher-rate~~five ~~long-term~~quarters ~~FHLB~~ending ~~advances~~December 31, in2022 ~~the~~and ~~last~~provides ~~six~~a ~~months~~summary of ~~2021.~~the Company's margins throughout 2022:

Interest rates decreased in 2020 following the FOMC attempts to mitigate the impact of the COVID-19 pandemic on the U.S. economy. The FOMC reduced the Fed Funds rate from 1.75% at December 2019 to the current rate of 0.25% in March 2020. The below table illustrates how the Company's average rates responded during the five quarters ending December 31, 2021 and provides a summary of the Company's margins throughout 2021:


	Three Months Ended
	December 31, 2022		September 30, 2022		June 30, 2022		March 31, 2022		December 31, 2021
Interest rate spread	3.24	%	3.26	%	3.14	%	3.05	%	3.17	%
Net interest margin	3.64	%	3.47	%	3.25	%	3.12	%	3.22	%
Loan Yields	4.92	%	4.46	%	4.13	%	3.99	%	4.13	%
Cost of funds	0.89	%	0.43	%	0.23	%	0.17	%	0.17	%
Cost of deposits	0.77	%	0.36	%	0.16	%	0.10	%	0.11	%

	Three Months Ended
	December 31, 2021		September 30, 2021		June 30, 2021		March 31, 2021		December 31, 2020
Interest rate spread	3.17	%	3.22	%	3.30	%	3.43	%	3.29	%
Net interest margin	3.22	%	3.28	%	3.37	%	3.50	%	3.40	%
Loan Yields	4.13	%	4.16	%	4.09	%	4.17	%	4.25	%
Cost of funds	0.17	%	0.21	%	0.21	%	0.25	%	0.42	%
Cost of deposits	0.11	%	0.12	%	0.14	%	0.18	%	0.26	%

Provision for Credit Losses

46The following table shows the provision for credit losses for the periods presented.

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	Years Ended December 31,
(dollars in thousands)	2022		2021

Provision for credit losses	$	2,437	$	586

~~Provision~~The provision for ~~Loan~~credit ~~Losses~~losses is a function of the calculation of the allowance for 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.

The following table shows the provision for loan losses for the periods presented.

(dollars in thousands)	Years Ended December 31,
	2021		2020
Provision for loan losses	$	586	$	10,700

The provision for loan losses decreased by $10.1 million for the year ended December 31, 2021. Net charge-offs decreased from $2.2 million or 0.15% of average loans for the year ended December 31, 2020 to $1.6 million or 0.11% of average loans for the year ended December 31, 2021 as several relationships that were substandard prior to the pandemic were resolved in 2021.The decrease in the loan loss provision during 2021 was mostly attributable to moderate loan growth in 2021 and slight improvements in qualitative and quantitative factors used to calculate the allowance for loans losses. Management believes that the COVID-19 pandemic continues to impact incurred losses in the loan portfolio and did not release reserves in 2021.

See further discussion of the provision under the Asset Quality section in the Comparison of Financial Condition section of 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.

(dollars in thousands)	Years Ended December 31,
	2021		2020		$ Change		% Change
	2022		2021		$ Change		% Change
Noninterest Income
Loan appraisal, credit, and miscellaneous charges	$	~~528~~422	$	~~174~~528	$	~~354~~(106)	~~203~~(20.41)	%
Gain on sale of assets	68695		668		62627		~~1,033~~922.31	%
Net gains on sale of investment securities	~~586~~—		~~1,384~~586		(~~798~~586)		(57100.70)
Unrealized (loss) gain on equity securities	(~~139~~555)		~~101~~(139)		(~~240~~416)		~~(237~~299.6)3	%
Loss on premises and equipment held for sale	~~(25)~~—		—(25)		(25)		—(100.0)
Income from bank owned life insurance	~~871~~870		~~881~~871		(101)		(10.1)	%
Service charges	4,~~301~~379		34,~~490~~301		~~811~~78		231.28	%
Referral fee income	~~1,822~~375		21,~~380~~822		(~~558~~1,447)		(2379.4)
Net gain on sale of loans originated for sale	85		—		85		—
Net (loss) gain on sale of loans originated for sale	(2)		85		(87)		(102.4)
Loss on sale of loans	(191)		—		(191)		—
Gain (loss) on sale of loans	209		(191)		400		(209.4)
Total Noninterest Income	$	76,~~906~~393	$	87,~~416~~906	$	(~~510~~1,513)	(619.1)	%

Noninterest income for the year ended December 31, ~~2021~~2022 decreased compared to the year ended December 31, ~~2020~~2021 primarily due to gains on the sale of investment securities in 2021, decreased ~~realized~~referral ~~gains~~fee income and ~~increased~~ unrealized losses on securities ~~and~~invested ~~decreased~~in ~~referral~~a ~~fee~~Community ~~income~~Reinvestment Act mutual fund that was impacted by increases in interest rates. These reductions for the comparable periods were partially offset by ~~increased~~a ~~service~~$0.7 million ~~charge~~gain on the sale of the Bank's equity investment in Infinex, and ~~miscellaneous~~an increase in noninterest income related to the sale of impaired loans. Noninterest income decreased from 0.4236% of average assets in ~~2020~~2021 to 0.3627% of average assets in ~~2021~~2022.

~~During~~There were $11.9 million of securities sold during the year ended December 31, 2021, ~~the~~for ~~Company recognized~~ net gains of $0.6 million ~~on the sale of AFS securities with aggregate carrying values of $11~~.9 ~~million.~~ There were ~~$62.5 million~~no ofcomparable ~~securities~~sales ~~sold~~ during the year ended December 31, ~~2020 for net gains of $1~~2022.~~4 million.~~

The Bank refers customers to a third-party financial institution that offers interest rate protection for the length of a loan. This product has enabled the Bank to be more rate competitive with larger institutions in our market area without increasing interest rate risk. The ~~COVID-19~~rapid ~~crisis~~increase ~~decreased~~in ~~commercial~~interest ~~loan~~rates ~~volume~~during in2022 ~~2021, which~~ impacted interest rate protection agreement referral fee opportunities. As a result ~~of the reduced commercial loan volume~~, ~~2021~~ referral fee income decreased 2379% from ~~2020~~2021 to 2022.

~~During~~In the first quarter ~~ended~~of ~~March 31,~~ 2021, the Bank sold ~~classified and~~ non-accrual and classified commercial real estate and residential mortgage loans ~~with~~and anrecognized ~~aggregate~~a ~~amortized~~loss ~~cost,~~on ~~net~~the ofsale ~~charge-offs,~~ of $90.1 2 million, and ~~recognized~~in the second quarter of 2022, impaired loan sales resulted in a gain of $0.2 ~~million~~ ~~loss on the sale~~million.

4746

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Increased service charges of $0.8 million reflect increased fees from customer acquisition, new products as well as recognition of sign-on bonus fees associated with our Mastercard program.

Noninterest Expense

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

(dollars in thousands)	Years Ended December 31,
	2021		2020		$ Change		% Change
	2022		2021		$ Change		% Change
Noninterest Expense
Compensation and benefits	$	2120,~~035~~806	$	1921,~~553~~035	$	~~1,482~~(229)	7(1.61)	%
OREO valuation allowance and expenses	~~1,456~~6		31,~~200~~456		(1,~~744~~450)		(5499.56)	%
Sub-total	22,491		22,753		(262)		(1.2)	%
Merger and acquisition costs	1,004		—		1,004		—	%
Sub-total	21,816		22,491		(675)		(3.0)	%
Operating Expenses
Occupancy expense	23,~~836~~212		32,~~010~~836		~~(174)~~376		(513.8)3	%
Advertising	~~500~~549		~~525~~500		~~(25)~~49		(49.8)	%
Data processing expense	34,~~772~~126		3,~~671~~772		~~101~~354		29.84	%
Professional fees	23,~~857~~490		2,~~413~~857		~~444~~633		1822.42	%
Depreciation of premises and equipment	~~558~~657		~~605~~558		~~(47)~~99		(717.8)7	%
FDIC insurance	~~602~~701		~~939~~602		~~(337)~~99		~~(35~~16.9)4	%
Core deposit intangible amortization	~~495~~398		~~591~~495		(9697)		(1619.26)	%
Fraud losses	~~1,260~~286		791,260		~~1,181~~(974)		~~1,494~~(77.93)	%
Other expenses	34,~~781~~199		3,~~417~~781		~~364~~418		1011.71	%
Total Operating Expenses	$	1617,~~661~~618	$	1516,~~250~~661	$	~~1,411~~957	95.37	%
Total Noninterest Expense	$	39,~~152~~434	$	3839,~~003~~152	$	~~1,149~~282	3.0.7	%

The 3.0.7% increase in non-interest expense for the comparable periods was primarily due to increased ~~compensation~~expenses for merger and ~~benefits~~acquisition costs, ~~fraud losses~~occupancy, ~~professional~~data ~~fees~~processing and ~~data~~professional ~~processing costs~~fees. ~~The~~These increases to noninterest expense were partially offset by ~~decreases~~decreased ~~in OREO expenses~~compensation, ~~FDIC~~fraud ~~insurance~~losses and ~~occupancy~~OREO expenses.

Compensation and benefits ~~increased~~were lower for the ~~comparable~~comparative periods ~~primarily~~ due to ~~increases~~lower inhealth ~~base~~insurance claims, a lower average full time equivalent ("FTE") count than the prior year and ~~incentive~~decreases in certain compensation, ~~higher~~plan ~~2021~~accruals. ~~healthcare~~The ~~costs,~~decrease asattributed ~~well~~to asthe lower average FTE count was partially offset by the Company's decision toin ~~pay~~the ~~employees~~second ~~for~~quarter ~~unused~~of ~~vacation~~2022 into ~~December~~increase ~~2021~~base ~~that~~compensation ~~was~~by ~~not~~4% ~~available~~and toits ~~carry~~minimum ~~over~~starting ~~into~~wage ~~2022~~to $20.00 Inper ~~addition,~~hour ~~the~~for ~~deferral~~non-executive ofemployees ~~compensation~~to address local wage pressure caused by inflation and ~~benefits~~to ~~for~~attract ~~the~~and Uretain our employees.S. ~~SBA~~In ~~PPP~~addition, ~~loans~~compensation ~~originated~~and ~~were~~benefits ~~reduced~~expense ~~$0.28 million~~has inbenefited ~~2021~~from asthe ~~compared~~Company's toincreased ~~$0.48 million~~use ~~for~~of ~~2020~~technology. The Bank's overall full time equivalent ("FTE") head count fluctuated between ~~189~~190 and ~~196~~199 employees for the year ended December 31, ~~2021~~2022.

~~Fraud~~During ~~losses~~2022, ~~include~~data aprocessing, ~~$1.2 million~~professional ~~charge~~fees, ~~net~~and ofoccupancy acosts ~~partial~~increased ~~recovery,~~substantially ~~related~~compared to anthe ~~isolated~~prior ~~wire~~year ~~transfer~~due ~~fraud~~in ~~incident~~large ~~that~~part ~~occurred~~to in the ~~first~~increased ~~quarter~~cost of ~~2021.~~labor ~~Our~~and ~~investigation~~materials ofdue ~~the~~to ~~first~~inflation. ~~quarter~~Additionally, ~~2021~~the ~~wire~~occupancy ~~fraud~~costs ~~found~~increased noduring ~~evidence~~the ~~that~~second ~~information~~half ~~systems~~ of ~~the~~2022 ~~Bank~~with ~~were~~the ~~compromised~~opening orof ~~that~~a ~~employee~~new ~~fraud~~branch ~~was~~in ~~involved.~~Fredericksburg In- ~~the~~Harrison ~~second quarter of 2021~~Crossing, ~~the~~Virginia. ~~Company~~These ~~submitted~~increases anwere ~~insurance~~partially ~~claim.~~offset ~~Any~~by ~~recovery~~a decrease of ~~insurance~~$0.8 ~~proceeds~~million ~~would~~in beOREO expense recognized in the fourth quarter ~~received~~of 2021.

~~Data~~Fraud ~~processing~~losses ~~and~~in ~~professional~~2021 ~~fees~~include ~~have~~a ~~increased~~$1.2 million ~~due~~charge, tonet ~~the~~of ~~Bank's~~a ~~larger~~partial ~~balance sheet~~recovery, ~~more~~related ~~customer~~to ~~transaction~~an ~~activity~~isolated ~~and~~wire ~~investments~~transfer fraud incident that occurred in ~~technology,~~the ~~new~~first ~~products~~quarter ~~and~~of ~~services~~2021. ~~Occupancy~~Our ~~expense~~investigation ~~decreased~~found ~~primarily~~no ~~due~~evidence tothat ~~the~~information ~~closure~~systems of the ~~St.~~Bank ~~Patrick's~~were ~~Drive~~compromised ~~branch~~or inthat ~~March~~employee ~~2021.~~fraud ~~FDIC~~was ~~costs decreased due to improved credit trends~~involved.

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The following is a breakdown of OREO expense for the years ended December 31, 2022 and 2021:


(dollars in thousands)	Years Ended December 31,
	2022		2021		$ Change		% Change
Valuation allowance	$	—	$	1,387	$	(1,387)	(100.0)	%
Losses (gains) on dispositions	—		(17)		17		(100.0)	%
Operating expenses	6		86		(80)		(93.0)	%
	$	6	$	1,456	$	(1,450)	(99.6)	%

The decreased OREO expense during the year ended December 31, 2022 reflect management's actions in 2021 to timely resolve non-performing assets. OREO expenses have moderated in 2022 as the Bank had no OREO balances at December 31, 2021 and December 31, 2022.

For the year ended December 31, 2022 the efficiency ratio and net operating expense to average asset ratio were 49.34% and 1.42%, respectively compared to 52.67% and 1.44%, respectively, for the year ended December 31, 2021. Management remains committed to controlling expenses through leveraging technology to employ scalable solutions.

For the years ended December 31, 2022 and 2021, the Company recorded income tax expense of $9.6 million and $8.7 million, respectively. The Company's consolidated effective tax rate for 2022 was 25.3% compared to 25.2% for the year ended December 2021.

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~~The~~COMPARISON ~~following~~OF isFINANCIAL aCONDITION ~~breakdown~~AT ~~of OREO expense for the years ended December~~DECEMBER 31, ~~2021~~2022 ~~and~~AND ~~2020:~~2021

(dollars in thousands)	Years Ended December 31,
	2021		2020		$ Change		% Change
Valuation allowance	$	1,387	$	3,022	$	(1,635)	(54.1)	%
Losses (gains) on dispositions	(17)		9		(26)		(288.9)	%
Operating expenses	86		169		(83)		(49.1)	%
	$	1,456	$	3,200	$	(1,744)	(54.5)	%

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

The decreased OREO valuation allowance during the year ended December 31, 2021 reflect management's actions in 2020 to timely resolve non-performing assets. OREO expenses have moderated in 2021 as the Bank has reduced foreclosed assets from $3.1 million at December 31, 2020 to zero at December 31, 2021.


	At or for the Years Ended
(dollars in thousands, except per share amounts)	December 31, 2022		December 31, 2021
FINANCIAL CONDITION DATA
Total assets	$	2,410,017	$	2,327,306
Loans receivable, net	1,798,517		1,586,791
Investment securities	467,239		502,818
Goodwill	10,835		10,835
Core deposit intangible	634		1,032
Deposits	2,088,463		2,056,164
Borrowings	79,000		12,231
Junior subordinated debentures	12,000		12,000
Subordinated notes - 4.75%, net of debt issuance costs	19,566		19,510

Stockholders’ equity - common	187,011		208,133

For the year ended December 31, 2021 the efficiency ratio and net operating expense to average asset ratio were 52.67% and 1.44%, respectively compared to 54.81% and 1.49%, respectively, for the year ended December 31, 2020. Management remains committed to controlling expenses through leveraging technology to employ scalable solutions.


	At or for the Years Ended
(dollars in thousands, except per share amounts)	December 31, 2022			December 31, 2021
COMMON SHARE DATA
Basic earnings per common share	$	5.01		$	4.47
Diluted earnings per common share	5.00			4.47
Dividends declared per common share	0.70			0.58
Common dividend payout ratio	13.97			12.86
Book value per common share	33.11			36.40
Tangible book value per common share	31.08			34.32
Common shares outstanding at end of period	5,648,435			5,718,528
Basic weighted average common shares	5,652,189			5,788,003
Diluted weighted average common shares	5,659,629			5,797,525

OTHER DATA
Full-time equivalent employees	196			186
Full-service offices	12			11
Loan Production Offices	4			4

CAPITAL RATIOS
Tier 1 capital to average assets (Leverage)	9.60		%	9.23		%
Tier 1 common capital to risk-weighted assets	11.26			11.92
Tier 1 capital to risk-weighted assets	11.87			12.64
Total risk-based capital to risk-weighted assets	14.08			14.92
Common equity to assets	7.76			8.94
Tangible common equity to tangible assets	7.32			8.48

Income Tax Expense

For the years ended December 31, 2021 and 2020, the Company recorded income tax expense of $8.7 million and $4.5 million, respectively.

The Company's consolidated effective tax rate for 2021 was 25.2% compared to 21.78% for the year ended December 31, 2020. The Company's new state tax apportionment approach was implemented during the first quarter of 2020 and included the impact of amended income tax returns which reduced consolidated income tax expense by $0.7 million. Management evaluated the tax provision and determined the change in tax position qualified as a change in estimate under FASB ASC Section 250.

The following table shows a breakdown of income tax expense for the year ended December 31, 2020 split between the apportionment adjustment and a normalized 2020 income tax provision:

	For the Year Ended December 31, 2020
(dollars in thousands)		Tax Provision		Effective Tax Rate
Income tax apportionment adjustment		$	(743)	(3.6)	%
Income taxes before apportionment adjustment		5,237		25.4
Income tax expense as reported		$	4,494	21.8	%
Income before income taxes		$	20,630

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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2021 AND 2020

	At or for the Years Ended
(dollars in thousands, except per share amounts)	December 31, 2021		December 31, 2020
FINANCIAL CONDITION DATA
Total assets	$	2,327,306	$	2,026,439
Loans receivable, net	1,586,791		1,594,075
Investment securities	502,818		251,167
Goodwill	10,835		10,835
Core deposit intangible	1,032		1,527
Deposits	2,056,164		1,745,602
Borrowings	12,231		27,302
Junior subordinated debentures	12,000		12,000
Subordinated notes - 4.75% **	19,510		19,526
Stockholders’ equity - common	208,133		198,013

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

	At or for the Years Ended
(dollars in thousands, except per share amounts)	December 31, 2021			December 31, 2020
COMMON SHARE DATA
Basic earnings per common share	$	4.47		$	2.74
Diluted earnings per common share	4.47			2.74
Dividends declared per common share	0.58			0.50
Common dividend payout ratio	12.86			18.25
Book value per common share	36.40			33.54
Tangible book value per common share	34.32			31.45
Common shares outstanding at end of period	5,718,528			5,903,613
Basic weighted average common shares	5,788,003			5,892,269
Diluted weighted average common shares	5,797,525			5,893,559
OTHER DATA
Full-time equivalent employees	186			189
Full-service offices	11			12
Loan Production Offices	4			4
CAPITAL RATIOS
Tier 1 capital to average assets (Leverage)	9.23		%	9.56		%
Tier 1 common capital to risk-weighted assets	11.92			11.47
Tier 1 capital to risk-weighted assets	12.64			12.23
Total risk-based capital to risk-weighted assets	14.92			14.69
Common equity to assets	8.94			9.77
Tangible common equity to tangible assets	8.48			9.22

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Assets

Total assets increased $~~300~~82.97 million or 143.8555% to $2.3341 billion at December 31, ~~2021~~2022 from December 31, ~~2020~~2021 primarily due to ~~cash~~net ~~increasing~~loan growth. Cash decreased $62114.62 million, or 81.2276%, to $~~139~~25.75 million and was used to fund net loan growth. Available for sale ("AFS") securities, ~~increasing~~which are reported at fair value, decreased $~~251~~35.76 million, or ~~100~~7.1908%, to $~~502~~467.82 million, primarily due to unrealized losses from rising interest rates during 2022. ~~The~~Correspondingly, ~~differences~~deferred tax assets increased $15.6 million to $24.7 million primarily due to increases in ~~allocations~~unrealized ~~between~~losses of the ~~cash~~Bank's ~~and~~AFS investment ~~categories~~portfolio ~~reflect~~related ~~both~~to ~~operational~~changes ~~needs~~in ~~and~~interest ~~excess~~rates. ~~liquidity~~Deferred ~~that~~tax ~~was~~assets ~~not~~also ~~deployed~~increased ~~into~~due ~~new~~to ~~loan~~the ~~originations~~adoption of the current expected credit losses ("CECL") accounting standard on January 1, 2022.

Cash and Cash Equivalents

Cash and cash equivalents totaled $~~139~~25.75 million at December 31, ~~2021~~2022, compared to $77139.17 million at December 31, ~~2020~~2021. Total cash and cash equivalents fluctuate due to transactions in process and other liquidity demands. Management believes liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional and wholesale funding sources, and the portions of the investment and loan portfolios that mature within one year.

Investment Securities and Credit Quality of Investment Securities

Investment securities ~~increased $251.7 million in 2021 to $502.8 million at December 31, 2021 due to no net loan growth~~ and ~~an increase in customer deposits of $310.6 million.. Investment securities and~~ FHLB stock at December 31, ~~2021~~2022 and December 31, ~~2020~~2021, had estimated fair value ~~were~~of $~~504~~471.38 million and $~~253~~504.93 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 December 31, 2021 and December 31, 2020. AFS securities are evaluated quarterly to determine whether a decline in their value is other than temporarily impaired ("OTTI"). No OTTI charge was recorded for the periods reported.

~~Gross~~Management ~~unrealized~~monitors ~~losses at December 31, 2021~~ and ~~December 31,~~manages ~~2020~~investment ~~for~~portfolio ~~AFS~~performance ~~securities were $6.0 million~~ and ~~$0.4~~liquidity ~~million,~~through ~~respectively,~~monthly ofreporting ~~amortized~~including ~~cost~~analyses of ~~$500.5~~expected ~~million~~cash inflows and ~~$240.0~~outflows ~~million,~~from ~~respectively~~investment ~~(see Note 2 in Consolidated Financial Statements)~~securities. ~~The~~Management ~~change~~believes ~~in unrealized losses was~~ the ~~result~~risk ofcharacteristics ~~changes~~inherent in ~~interest~~the ~~rates~~investment ~~and~~portfolio ~~other~~are ~~non-credit~~acceptable. ~~related~~The ~~factors,~~Company ~~while~~did ~~credit~~not ~~risks~~hold ~~remained~~any ~~stable.~~noninvestment ~~The~~grade ~~Company~~securities ~~intends~~at toDecember 31, 2022 and ~~has the ability to~~December 31, ~~hold~~2021. ~~investment~~AFS securities ~~with~~are ~~unrealized~~evaluated ~~losses~~quarterly ~~until~~to ~~they~~determine ~~mature,~~whether ata ~~which~~decline ~~time~~in ~~the~~their ~~Company will receive full~~ value ~~for~~is the ~~securities.~~result ~~Management~~of ~~believes~~a ~~that~~deterioration ~~the~~in ~~investment~~credit ~~securities~~quality. ~~with~~A ~~unrealized~~reserve ~~losses~~for ~~will~~credit ~~either~~losses ~~recover~~was innot ~~market~~recorded ~~value~~for orthe beperiods ~~paid off as agreed~~reported.

~~The~~Gross ~~Bank~~unrealized ~~holds~~losses 70at December 31, 2022 and December 31, 2021 for AFS securities were $58.2%4 ormillion and $~~351~~6.30 million, (respectively, of amortized cost) of ~~its~~$521.0 ~~AFS~~million ~~investment~~and ~~securities~~$500.5 million, asrespectively ~~asset-backed~~(see ~~securities~~Note ~~issued~~2 byin ~~GSEs~~Consolidated orFinancial UStatements).S. ~~Agencies~~The change in unrealized losses was the result of changes in interest rates and other non-credit related factors, ~~GSE~~while ~~agency~~credit ~~bonds~~risks orremained Ustable.S. ~~government~~The ~~obligations.~~Company Inintends ~~addition~~to, and has the ~~Company's~~ability ~~investment~~to, ofhold ~~$56.4~~investment ~~million~~securities ~~(amortized~~with ~~cost)~~unrealized inlosses ~~student~~until ~~loan~~they ~~trusts~~mature, at which ~~represent~~time ~~11.3% of~~ the ~~AFS~~Company ~~investment~~will ~~portfolio,~~receive ~~are~~full ~~97%~~value ~~U.S.~~for ~~government~~the ~~guaranteed~~securities. AtManagement ~~December 31,~~believes ~~2021,~~that the ~~Company~~investment ~~also~~securities ~~had~~with ~~$92.6~~unrealized ~~million~~losses orwill ~~18.5%~~either ofrecover ~~AFS~~in ~~investments~~market invalue ~~municipal~~or ~~bonds.~~be paid off as agreed.

AtThe ~~December 31,~~Bank ~~2021~~holds ~~and~~68.0% ~~December 31,~~or ~~2020,~~$354.2 million (amortized cost) of its AFS investment securities, as asset-backed securities issued ~~and guaranteed~~ by GSEs ~~and~~or U.S. Agencies ~~had average lives of 6.91 years and 5.09 years~~, ~~and~~GSE ~~average~~agency ~~durations~~bonds ofor 6U.~~41 years and 4~~S.81 ~~years,~~government ~~respectively~~obligations. AtIn ~~December 31~~addition, ~~2021~~the ~~and~~Company's ~~December 31,~~investment ~~2020,~~of ~~AFS~~$49.6 ~~asset-backed~~million ~~securities~~(amortized ~~issued~~cost) byin student loan ~~trust~~trusts, ~~and~~which ~~others~~represent ~~had~~9.5% ~~an average life~~ of ~~6.24~~the ~~years~~AFS ~~and~~investment ~~6.47 years~~portfolio, ~~and~~are an97% ~~average duration of 6~~U.~~03 years and 6~~S.14 ~~years,~~government ~~respectively~~guaranteed. ~~AFS~~At ~~municipal~~December 31, ~~bonds issued by states~~2022, ~~political~~the ~~subdivisions~~Company oralso ~~agencies~~ had ~~an average life of 8~~$99.758 ~~years~~million ~~and~~or 919.812% ~~years and an average duration~~ of ~~7.83~~AFS ~~years~~investments ~~and~~in ~~8.53~~municipal ~~years at December 31, 2021 and December 31, 2020, respectively~~bonds.

At December 31, 2022 and December 31, 2021, AFS asset-backed securities issued and guaranteed by GSEs and U.S. Agencies had average lives of 6.02 years and 6.91 years, and average durations of 5.00 years and 6.41 years, respectively. At December 31, 2022 and December 31, 2021, AFS asset-backed securities issued by student loan trust and others had an average life of 6.01 years and 6.24 years, and an average duration of 4.83 years and 6.03 years, respectively. AFS municipal bonds issued by states, political subdivisions or agencies had an average life of 10.51 years and 8.75 years and an average duration of 8.72 years and 7.83 years at December 31, 2022 and December 31, 2021, respectively.

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


	One year or Less				After One Through Five Years				After Five Through Ten Years				After Ten Years				Total Investment Securities
(dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Fair Value
AFS Investment securities:
Asset-backed securities issued by GSEs and U.S. Agencies	$	21,592	3.51	%	$	83,129	3.48	%	$	139,511	3.37	%	$	73,192	3.10	%	$	317,424	$	285,439
Asset-backed securities issued by Others	4,228		4.26	%	16,278		4.21	%	27,320		3.98	%	14,333		3.45	%	62,159		59,518
Municipal securities	6,786		2.50	%	26,127		2.50	%	43,849		2.50	%	23,004		2.90	%	99,766		79,618
Corporate bonds	331		4.03	%	1,274		4.03	%	2,137		4.03	%	1,121		—	%	4,863		4,404
U.S. Treasury bonds	2,504		1.17	%	9,641		1.24	%	16,180		1.23	%	8,488		—	%	36,813		33,767
Total AFS investment securities	$	35,441	3.24	%	$	136,449	3.21	%	$	228,997	3.11	%	$	120,138	3.08	%	$	521,025	$	462,746

The tables below present the Standard & Poor’s (“S&P”) or equivalent credit rating from other major rating agencies for AFS investment securities by carrying value at December 31, 2022 and December 31, 2021. 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.


December 31, 2022			December 31, 2021
Credit Rating	Amount		Credit Rating	Amount
(dollars in thousands)			(dollars in thousands)
AAA	$	425,907	AAA	$	456,162
AA	32,297		AA	41,455
A	138		A	222
BBB	4,404		BB	—
Total	$	462,746	Total	$	497,839

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~~The~~Loan ~~amortized~~Portfolio ~~cost~~and ~~of AFS investment securities by contractual maturity at December 31, 2021 are shown below~~U. ~~Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties~~S. ~~The~~SBA ~~maturities~~PPP ~~and weighted average yields at December 31, 2021 are shown below.~~Loans

	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	$	24,623	1.84	%	$	81,038	1.84	%	$	127,706	1.81	%	$	100,971	2.11	%	$	334,338	$	331,343
Asset-backed securities issued by Others	4,172		0.75	%	13,729		0.76	%	21,635		0.83	%	17,106		0.99	%	56,642		56,795
Municipal securities	6,817		2.42	%	22,434		2.42	%	35,353		2.42	%	27,952		2.59	%	92,556		92,841
U.S. Treasury bonds	1,248		1.08	%	4,106		1.23	%	6,471		1.23	%	5,117		—	%	16,942		16,860
Total AFS investment securities	$	36,860	1.79	%	$	121,307	1.81	%	$	191,165	1.84	%	$	151,146	2.16	%	$	500,478	$	497,839

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

~~The~~In ~~tables~~2022, ~~below~~net ~~present~~loans ~~the~~increased ~~Standard~~$211.7 &million ~~Poor’s~~primarily ~~(“S&P”)~~due orto ~~equivalent~~growth ~~credit~~in ~~rating~~commercial ~~from~~and ~~other~~residential ~~major~~rental ~~rating~~portfolios ~~agencies~~being ~~for~~offset ~~AFS~~by ~~investment~~U.S. ~~securities~~SBA byPPP ~~carrying~~loan ~~value~~forgiveness atand ~~December 31,~~decreases ~~2021~~in construction and ~~December 31,~~land ~~2020.~~development ~~The~~and ~~Company~~residential ~~considers~~first ~~noninvestment~~mortgages ~~grade~~portfolios. ~~securities~~Total ~~rated~~portfolio ~~BB+~~loans orwhich ~~lower~~include asall ~~classified~~loans ~~assets~~except ~~for~~the ~~regulatory~~U.S. ~~and~~SBA ~~financial~~PPP ~~reporting~~loans, grew to $1.82 ~~GSE~~billion ~~asset-backed~~as ~~securities~~of ~~and~~December 31, ~~GSE~~2022 ~~agency~~from ~~bonds~~$1.58 billion as of December 31, 2021, with ~~S&P~~commercial ~~AA+~~portfolios ~~ratings~~increasing ~~were~~$250.1 ~~treated~~million asor ~~AAA~~17.1% ~~based~~and onconsumer ~~regulatory~~and ~~guidance~~residential mortgages portfolios decreasing $8.0 million or 6.7%.

December 31, 2021			December 31, 2020
Credit Rating	Amount		Credit Rating	Amount
(dollars in thousands)			(dollars in thousands)
AAA	$	456,162	AAA	$	220,757
AA	41,455		AA	25,059
A	222		A	289
Total	$	497,839	Total	$	246,105

During 2020 and 2021, the Company originated 1,532 U.S. SBA PPP loans with original balances of $201.3 million. As of December 31, 2022, there were two U.S. SBA PPP loans with outstanding balances of $0.3 million.

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


	At December 31,
	2022				2021
(dollars in thousands)	Balance		%		Balance		%		$ Change		% Change
Portfolio Loans:
Commercial real estate	$	1,232,826	67.69	%	$	1,113,793	70.54	%	$	119,033	10.69	%
Residential first mortgages	79,872		4.39	%	92,710		5.87	%	(12,838)		(13.85)	%
Residential rentals	338,292		18.58	%	194,911		12.35	%	143,381		73.56	%
Construction and land development	17,259		0.95	%	35,502		2.25	%	(18,243)		(51.39)	%
Home equity and second mortgages	25,602		1.41	%	25,661		1.63	%	(59)		(0.23)	%
Commercial loans	42,055		2.31	%	50,512		3.20	%	(8,457)		(16.74)	%
Consumer loans	6,272		0.34	%	3,015		0.19	%	3,257		108.03	%
Commercial equipment	78,890		4.33	%	62,706		3.97	%	16,184		25.81	%


Total portfolio loans	1,821,068		100.00	%	1,578,810		100.00	%	242,258		15.34	%
Less: Allowance for credit losses	(22,890)		(1.26)	%	(18,417)		(1.17)	%	(4,473)		24.29	%
Total net portfolio loans	1,798,178				1,560,393				237,785		15.24	%
U.S. SBA PPP loans	339				26,398				(26,059)		(1)
Total net loans	$	1,798,517			$	1,586,791			$	211,726	—

_______________________________________

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

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Loan Portfolio and U.S. SBA PPP Loans

The Bank's primary market areas consist of the tri-county area in Southern Maryland, the city of Fredericksburg, Virginia and Spotsylvania and Stafford counties in Virginia. In 2021, the Bank increased lending in Virginia in the cities and surrounding areas of Culpeper, Orange and Charlottesville. The Bank plans to open a loan production office in Charlottesville, Virginia in 2022. At December 31, 2021, loans in Maryland and Virginia are almost evenly distributed with approximately 49% of the Bank's outstanding portfolio loans in our expanding Virginia market. Management is optimistic that the Virginia market will continue to provide opportunities for organic growth. In addition, management believes that the new residential mortgage program started in the second half of 2021 and expected rising interest rates in 2022, should help reduce the dollar amount of residential first mortgage run-off.

In 2021, net loans decreased $7.3 million primarily due to growth in commercial portfolios being offset by U.S. SBA PPP loan forgiveness and decreases in residential first mortgages. Portfolio loans which includes all loans except the U.S. SBA PPP loans, grew to $1.58 billion as of December 31, 2021 from $1.50 billion as of December 31, 2020, with commercial portfolios increasing $118.8 million or 8.9% and consumer and residential mortgages portfolios decreasing $44.2 million or 26.9%.

During 2020 and 2021, the Company originated 1,532 U.S. SBA PPP loans with original balances of $201.3 million. As of December 31, 2021, there were 201 U.S. SBA PPP loans with outstanding balances of $27.3 million. The Company is presently assisting customers with forgiveness applications for outstanding loans.

	At December 31,
	2021				2020
(dollars in thousands)	Balance		%		Balance		%		$ Change		% Change
Portfolio Loans:
Commercial real estate	$	1,115,485	70.66	%	$	1,049,147	69.75	%	$	66,338	6.32	%
Residential first mortgages	91,120		5.77	%	133,779		8.89	%	(42,659)		(31.89)	%
Residential rentals	195,035		12.35	%	139,059		9.24	%	55,976		40.25	%
Construction and land development	35,590		2.25	%	37,520		2.49	%	(1,930)		(5.14)	%
Home equity and second mortgages	25,638		1.62	%	29,129		1.94	%	(3,491)		(11.98)	%
Commercial loans	50,574		3.20	%	52,921		3.52	%	(2,347)		(4.43)	%
Consumer loans	3,002		0.19	%	1,027		0.07	%	1,975		192.31	%
Commercial equipment	62,499		3.96	%	61,693		4.10	%	806		1.31	%
Gross portfolio loans	1,578,943		100.00	%	1,504,275		100.00	%	74,668		4.96	%
Adjustments:
Net deferred (fees) costs	(133)		(0.01)	%	1,264		0.08	%	(1,397)		(110.52)	%
Allowance for loan losses	(18,417)		(1.17)	%	(19,424)		(1.29)	%	1,007		(5.18)	%
	(18,550)				(18,160)				(390)		2.15	%
Net portfolio loans	1,560,393				1,486,115				74,278		5.00	%
Gross U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	27,276				110,320				(83,044)		(75.28)	%
Net deferred fees	(878)				(2,360)				1,482		(62.80)	%
Net U.S. SBA PPP loans	26,398				107,960				(81,562)		(75.55)	%
Total net loans	$	1,586,791			$	1,594,075			$	(7,284)	(0.46)	%
Total gross loans	$	1,606,219			$	1,614,595			$	(8,376)	(0.52)	%

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Maturity of Loan Portfolio

The following table sets forth information at December 31, ~~2021~~2022 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

December 31, 2021
December 31, 2022
(dollars in thousands)Description of Asset	Due in 1 Year or Less		Due After 1 Year Through 5 Years		Due After 5 Years Through 15 Years		Due After 15 Years		Total Loans and Leases
Real Estate Loans
Commercial	$	40111,~~949~~521	$	~~126~~241,~~139~~698	$	~~292~~649,~~021~~900	$	~~656~~229,~~376~~707	$	1,~~115~~232,~~485~~826
Residential first mortgage	944,644		414,~~887~~374		1441,~~911~~360		7119,~~228~~494		9179,~~120~~872
Residential rentals	~~397~~7,357		648,~~240~~197		45122,~~769~~205		~~142~~160,~~629~~533		~~195~~338,~~035~~292
Construction and land development	3113,~~298~~608		43,~~292~~651		—		—		3517,~~590~~259
Home equity and second mortgage	~~721~~1,404		53,~~837~~994		414,~~385~~536		145,~~695~~668		25,~~638~~602
Commercial loans	5042,~~574~~055		—		—		—		5042,~~574~~055
Consumer loans	14,~~666~~999		~~724~~984		~~564~~289		48—		36,~~002~~272
Commercial equipment	120,~~127~~097		2655,~~675~~601		313,~~952~~192		~~2,745~~—		6278,~~499~~890
Total gross portfolio loans	$	126,826	$	174,794	$	389,602	$	887,721	$	1,578,943
Total portfolio loans	$	205,685	$	368,499	$	831,482	$	415,402	$	1,821,068
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	2,538		24,738		—		—		27,276
U.S. SBA PPP loans	103		236		—		—		339
Total gross loans	$	129,364	$	199,532	$	389,602	$	887,721	$	1,606,219
Total portfolio loans	$	205,788	$	368,735	$	831,482	$	415,402	$	1,821,407

The following table sets forth the dollar amount of all loans due after one year from December 31, ~~2021~~2022, which have predetermined interest rates and have floating or adjustable interest rates.

December 31, 2021

Fixed Rates

Floating or Adjustable Rates

Total

December 31, 2022

Fixed Rates

Floating or Adjustable Rates

Total

(dollars in thousands)Description of Asset

Real Estate Loans

Commercial

~~393~~142,~~655~~475

~~680~~978,~~881~~830

1,~~074~~121,~~536~~305

Residential first mortgage

7261,~~170~~585

1813,~~856~~643

9175,~~026~~228

Residential rentals

2431,~~008~~482

~~170~~299,~~630~~453

~~194~~330,~~638~~935

Construction and land development

—3,582

~~4,292~~69

43,~~292~~651

Home equity and second mortgage

~~24,917~~8

—24,190

24,~~917~~198

Consumer loans

1,~~312~~273

24—

1,~~336~~273

Commercial equipment

5017,~~575~~293

1041,~~797~~500

6158,~~372~~793

Gross portfolio loans

~~566~~257,~~637~~698

~~885~~1,~~480~~357,685

1,~~452~~615,~~117~~383

U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans

24,738

—

24,738

U.S. SBA PPP loans

236

—

236

Total gross loans

591,375

885,480

1,476,855

Total portfolio loans

257,934

1,357,685

1,615,619

Loan Concentrations

At December 31, 2022 and 2021, commercial loans, which include commercial real estate, residential ~~rental~~rentals, commercial ~~loans~~equipment and commercial ~~equipment~~ loans, ~~represent~~represented ~~the~~92.9% ~~largest~~and ~~components~~90.1%, respectively, of ~~the~~total ~~loan~~ portfolio loans. The Bank's commercial loans are concentrated in our market area; however, these loans are distributed among many different borrowers in numerous industries.

54Non-owner-occupied commercial real estate as a percentage of risk-based capital at December 31, 2022 and 2021 were $1,032.6 million or 380.9% and $813.0 million or 331.4%, respectively. Construction loans as a percentage of risk-based capital at December 31, 2022 and 2021 were $135.0 million or 49.8% and $140.4 million or 57.2%, respectively.

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Non-owner-occupied commercial real estate as a percentage of risk-based capital at December 31, 2021 and 2020 were $813.0 million or 331.4% and $695.8 million or 316.1%, respectively. Construction loans as a percentage of risk-based capital at December 31, 2021 and 2020 were $140.4 million or 57.2% and $139.2 million and 63.2%, respectively.

Asset Quality

The following table shows asset quality information and ratios at and for the years ended December 31, ~~2021~~2022 and ~~2020~~2021, respectively:

	At or for the Years Ended December 31,
(dollars in thousands)	~~2021~~2022			~~2020~~2021
SELECTED ASSET QUALITY DATA
Gross portfolio loans	$	1,~~578~~821,~~943~~068		$	1,~~504~~578,~~275~~943
Classified assets	56,~~211~~115			225,~~358~~211
Allowance for loan losses	18,417			19,424
Allowance for credit losses	22,890			18,417
Past due loans - 31 to 89 days	~~568~~604			~~179~~568
Past due loans >=90 days (1)	~~961~~438			~~11,965~~961
Total past due loans	1,~~529~~042			121,~~144~~529
Non-accrual loans (2)	76,~~631~~115			187,~~222~~631
Accruing troubled debt restructures (TDRs) (3)	~~447~~429			~~572~~447
Other Real Estate Owned (OREO)	—			~~3,109~~—
Non-accrual loans, OREO and TDRs	$	86,~~078~~544		$	218,~~903~~078
SELECTED ASSET QUALITY RATIOS
SELECTED ASSET QUALITY RATIOS (4)
Classified assets to total assets	0.2225		%	10.1022		%
Classified assets to risk-based capital	2.1023			92.6110
Allowance for loan losses to portfolio loans	1.17			1.29
Allowance for credit losses to portfolio loans	1.26			1.17
Allowance for loan losses to non-accrual loans	241.34			106.60
Allowance for credit losses to non-accrual loans	374.33			241.34
Past due loans - 31 to 89 days to portfolio loans	0.0403			0.0104
Past due loans >=90 days to portfolio loans	0.0602			0.8006
Total past due (delinquency) to portfolio loans	0.1006			0.8110
Non-accrual loans to portfolio loans	0.4834			10.2148
Non-accrual loans and TDRs to portfolio loans	0.5136			10.2551
Non-accrual loans and OREO to total assets	0.3325			10.0533
Non-accrual loans and OREO to portfolio loans and OREO	0.4834			10.4248
Non-accrual loans, OREO and TDRs to total assets	0.3527			10.0835

___________________________________________

(1) Nonperforming loans include all 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.

(3) 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.

(4) Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio. Asset quality ratios for loans exclude U.S. SBA PPP loans.

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Allowance for Credit Losses ("ACL") and Provision for Credit Losses ("PCL")

The following is a breakdown of the Company’s general and specific allowances as a percentage of total portfolio loans at December 31, 2022 and 2021:

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


	December 31, 2022			December 31, 2021
General allowance	$	22,781		$	18,151
Specific allowance	109			266
	$	22,890		$	18,417

General allowance	1.25		%	1.15		%
Specific allowance	0.01		%	0.02		%
Allowance to total portfolio loans (1)	1.26		%	1.17		%

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

Total acquired loans (2)	n/a			$	42,182
Non-acquired loans**(2)	n/a			$	1,536,761
Total portfolio loans	$	1,821,068		$	1,578,943

____________________________________

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

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

(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 a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The Bank uses 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 any underlying collateral. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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

Upon the adoption of ASC 326, the Company recorded a $2.5 million increase to the ACL. ACL balances increased to 1.26% of portfolio loans at December 31, 2022 compared to 1.17% at December 31, 2021. At December 31, 2022, the Company's ACL increased $4.5 million or 24.3% to $22.9 million from $18.4 million at December 31, 2021. The increase in the general allowance was primarily related to the impact of adoption of ASC 326 and portfolio loan growth.

The Company recorded a provision for credit losses of $2.4 million for the year ended December 31, 2022 compared to $0.6 million for the year ended December 31, 2021. Net charge-offs decreased $1.1 million from $1.6 million or 0.11% of average loans for the year ended December 31, 2021 to $0.5 million or 0.03% of average loans for the year ended December 31, 2022. During the year ended December 31, 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 $0.2 million. During the year ended December 31, 2022, the Bank sold non-accrual and classified commercial real estate and residential mortgage loans with an amortized cost of $3.4 million, net of charge-offs of $0.4 million, and recognized a gain on the sale of $0.2 million.

Management believes that the allowance is adequate at December 31, 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

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~~Allowance~~evaluation of the portfolio. For additional information regarding the allowance for ~~Loan~~credit ~~Losses~~losses, ~~("ALLL")~~refer to Notes 1 and ~~Provision~~3 ~~for~~of ~~Loan~~the ~~Losses~~Consolidated ~~("PLL")~~Financial Statements and the Critical Accounting Policy section of the MD&A.

The following istable aallocates ~~breakdown~~the allowance for credit losses by portfolio loan category at the dates indicated. The allocation of the ~~Company’s~~allowance ~~general~~to each category is not necessarily indicative of future losses and ~~specific~~does ~~allowances~~not asrestrict athe ~~percentage~~use of ~~gross~~the ~~portfolio~~allowance ~~loans~~to atabsorb ~~December 31,~~losses ~~2021~~in ~~and~~any ~~2020:~~category.

Breakdown of general and specific allowance as a percentage of gross portfolio loans (1)	December 31, 2021			December 31, 2020
	At December 31,
General allowance	$	18,151		$	18,068
	2022						2021
Specific allowance	266			1,356
(dollars in thousands)	Amount			% (1)			Amount		% (1)
	$	18,417		$	19,424
Commercial real estate	$	17,650		67.69		%	$	13,095	70.66	%
General allowance	1.15		%	1.20		%
Residential first mortgages	207			4.39		%	1,002		5.77	%
Specific allowance	0.02		%	0.09		%
Residential rentals	3,061			18.58		%	2,175		12.35	%
Allowance to gross portfolio loans	1.17		%	1.29		%
Construction and land development	160			0.95		%	260		2.25	%
Allowance to non-acquired gross portfolio loans	1.20		%	1.35		%
Home equity and second mortgages	126			1.41		%	274		1.62	%
Total acquired loans	$	42,182		$	60,977
Commercial loans	190			2.31		%	582		3.20	%
Non-acquired loans**	$	1,536,761		$	1,443,298
Consumer loans	154			0.34		%	58		0.19	%
Gross portfolio loans	$	1,578,943		$	1,504,275
Commercial equipment	1,342			4.33		%	971		3.96	%
U.S. SBA PPP loans	—			—		%	—		—	%
Total allowance for credit losses	$	22,890		100.00		%	$	18,417	100.00	%

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

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

The Company's allowance methodology considers quantitative historical loss factors and qualitative factors to determine the estimated level of incurred losses in the Company's loan portfolios. The ALLL increased in 2020 primarily due to the economic effects of the COVID-19 pandemic and continues to provide for economic uncertainty. ALLL levels decreased to 1.17% of portfolio loans at December 31, 2021 compared to 1.29% at December 31, 2020. At December 31, 2021, the Company's ALLL decreased $1.0 million or 5.2% to $18.4 million from $19.4 million at 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.

The provision for loan losses decreased $10.1 million to $0.6 million for the year ended December 31, 2021 compared to $10.7 million for the year ended December 31, 2020. Net charge-offs also decreased $0.6 million from $2.2 million or 0.15% of average loans for the year ended December 31, 2020 to $1.6 million or 0.11% of average loans for the year ended December 31, 2021.

The Company's general allowance was stable during 2021 increasing modestly $0.1 million from $18.1 million at December 31, 2020 to $18.2 million at December 31, 2021. The stability in the general allowance was primarily due to improvements in some qualitative factors, such as classified assets and past due loans, partially offset by 2021 growth in the higher risk commercial portfolios.

The Company's specific allowance decreased $1.1 million from $1.4 million at December 31, 2020 to $0.3 million at December 31, 2021. The specific allowance is based on management’s estimate of realizable value for impaired loans. During the first quarter of 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 $0.2 million. In the third quarter of 2021, the Bank resolved $7.8 million of non-accrual loans with $0.5 million in charge-offs through 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.

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Management believes that loans that were part of the COVID-19 deferral program in 2020 and 2021 are more likely to default in the future and that the identification and resolution of specific problem credits could be delayed. Our evaluation of qualitative factors considered previously deferred loans, the length of the deferral period, the type and amount of collateral and customer industries. As of December 31, 2021, there were no COVID-19 deferral agreements compared to $35.4 million or 2.4% of gross portfolio loans at December 31, 2020. As of December 31, 2021 there were previously COVID-19 deferred loans of $3.9 million (four relationships - with $3.8 million current and $0.1 million delinquent) deemed to be non-accrual and substandard based on internal reviews. As of December 31, 2020 there were $3.4 million of COVID-19 deferred loans deemed to be non-accrual and substandard. In our evaluation of previously deferred loans, we considered the length of the deferral period, the type and amount of collateral and customer industries.

Management believes that the allowance is adequate at December 31, 2021. The ALLL 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 loan 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 allowance for loan losses 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.

	At December 31,
	2021				2020
(dollars in thousands)	Amount		% (1)		Amount		% (1)
Commercial real estate	$	13,095	70.66	%	$	13,744	69.75	%
Residential first mortgages	1,002		5.77	%	1,305		8.89	%
Residential rentals	2,175		12.35	%	1,413		9.24	%
Construction and land development	260		2.25	%	401		2.49	%
Home equity and second mortgages	274		1.62	%	261		1.94	%
Commercial loans	582		3.20	%	1,222		3.52	%
Consumer loans	58		0.19	%	20		0.07	%
Commercial equipment	971		3.96	%	1,058		4.10	%
Total allowance for loan losses	$	18,417	100.00	%	$	19,424	100.00	%

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

The following table indicates net charge-offs by average portfolio loan category for the years ended as indicated:

	At or for the Years Ended December 31,
	2021						2020
	2022						2021
(dollars in thousands)	Net Charge-off		Average Balance		%		Net Charge-off		Average Balance		%
Commercial real estate	$	~~1,914~~264	$	1,~~085~~179,~~823~~776	0.1802	%	$	~~927~~1,914	$	~~993~~1,~~478~~085,823	0.0918	%
Residential first mortgages	~~142~~97		~~107~~83,~~011~~485		0.1312		—142		~~159~~107,~~265~~011		—0.13
Residential rentals	46—		~~151~~234,~~606~~800		~~0.03~~—		—46		~~132~~151,~~524~~606		—0.03
Construction and land development	—		3627,~~891~~947		—		—		3736,~~930~~891		—
Home equity and second mortgages	(51)		2825,~~051~~774		~~(0.02)~~—		44(5)		3328,~~458~~051		(0.1302)
Commercial and equipment loans	(504)		46,390		(1.09)		1,241		56,793		2.19
Commercial loans	97		42,303		0.23		(467)		46,390		(1.01)
Consumer loans	—49		14,~~783~~590		—1.07		6—		1,~~099~~783		~~0.55~~—
	1,593		1,457,555		0.11		2,218		1,414,547		0.16
Commercial equipment	(46)		71,416		(0.06)		(37)		60,845		(0.06)
Allowance for loan losses	—		(18,788)		—		—		(15,681)		—
	460		1,670,091		0.03		1,593		1,518,400		0.10
Total net charge-off and average portfolio loans	$	1,593	$	1,438,767	0.11	%	$	2,218	$	1,398,866	0.16	%
Allowance for credit losses	—		(21,593)		—		—		(18,788)		—
Total net charge-off and average portfolio loans	$	460	$	1,648,498	0.03	%	$	1,593	$	1,499,612	0.11	%

57Off Balance Sheet Credit Exposure Reserve

The Company's reserve for off balance sheet credit exposures was $0.4 million and increased due to impact of the ASC 326 adoption and growth in unfunded commitments for residential rental loans. 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.

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Effective January 1, 2022, the Company adopted the current expected credit loss (“CECL”) model or ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments". Our CECL model has been substantially developed and the third-party model validation is complete. We conducted parallel runs of the CECL loss estimation model and the Company's existing incurred loss model throughout 2021. We are refining our implementation controls and processes of the CECL model. ASU 2016-13 will also require the establishment of an allowance for expected credit losses for certain debt securities and other financial assets.

Management expects to recognize a one-time cumulative effect adjustment to the allowance for credit losses as of the January 1, 2022. Based on forecasted economic conditions and portfolio balances as of January 1, 2022, we expect to recognize an increase to the opening allowance for credit losses in the range of $2.0 million to $3.0 million. See the discussion of ASU 2016-13 under Recent Accounting Pronouncements in Note 1 for additional information.

Classified Assets and Special Mention Assets

~~During~~Classified ~~2020, classified~~ assets ~~decreased~~increased $120.3 9 million from $5.2 ~~Asset~~million ~~quality~~at ~~has~~December 31, ~~continued~~2021 to ~~improve~~$6.1 inmillion ~~2021~~at ~~with~~December 31, ~~the~~2022. ~~resolution~~Management considers classified assets to be an important measure of ~~$16~~asset quality.~~9 million~~ inThe ~~non-accrual~~Company's ~~and~~risk ~~impaired~~rating ~~loans~~process ~~through~~for ~~loan~~classified ~~sales~~loans ~~and~~is ~~negotiated~~an ~~payoffs~~important asinput ~~well~~into as the ~~resolution~~Company's ofallowance $3methodology.~~1 million~~ inRisk ~~OREO.~~ratings ~~Management~~are ~~remains~~expected ~~committed~~ to ~~expeditiously~~be ~~resolve~~an ~~non-performing~~important orinput ~~substandard~~into ~~credits~~the ~~that~~Company's ~~are~~ACL ~~not~~qualitative ~~likely~~framework. toThe ~~become~~following ~~performing~~is ora ~~passing~~breakdown ~~credits~~of inthe aCompany’s ~~reasonable~~classified ~~timeframe.~~and special mention assets at December 31, 2022 and 2021, respectively:

Classified assets decreased $17.1 million from $22.4 million at December 31, 2020 to $5.2 million at December 31, 2021. Management considers classified assets to be an important measure of asset quality. The Company's risk rating process for classified loans is an important input into the Company's allowance methodology. Risk ratings are expected to be an important indicator in assessing ongoing credit risks of COVID-19 previously deferred loans. The following is a breakdown of the Company’s classified and special mention assets at December 31, 2021 and 2020, respectively:


	As of
(dollars in thousands)	December 31, 2022			December 31, 2021
Classified loans
Substandard	$	6,115		$	5,211
Doubtful	—			—
Loss	—			—
Total classified loans	6,115			5,211
Special mention loans	4,361			—
Total classified and special mention loans	$	10,476		$	5,211

Classified loans	$	6,115		$	5,211
Classified securities	—			—
Other real estate owned	—			—
Total classified assets	$	6,115		$	5,211

Total classified assets and special mention loans	$	10,476		$	5,211

Total classified assets as a percentage of total assets	0.25		%	0.22		%
Total classified assets as a percentage of Risk Based Capital	2.23		%	2.10		%

	As of
(dollars in thousands)	December 31, 2021			December 31, 2020
Classified loans
Substandard	$	5,211		$	19,249
Doubtful	—			—
Loss	—			—
Total classified loans	5,211			19,249
Special mention loans	—			7,672
Total classified and special mention loans	$	5,211		$	26,921
Classified loans	$	5,211		$	19,249
Classified securities	—			—
Other real estate owned	—			3,109
Total classified assets	$	5,211		$	22,358
Total classified assets and special mention loans	$	5,211		$	30,030
Total classified assets as a percentage of total assets	0.22		%	1.10		%
Total classified assets as a percentage of Risk Based Capital	2.10		%	9.61		%

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Non-Performing Assets

The following table sets forth information with respect to the Bank’s non-performing assets. ~~There~~At December 31, 2022 and December 31, 2021 there were no$0.1 million and zero loans, respectively, 90 days or more past due that were still accruing interest ~~at the dates indicated~~.

	December 31,
(dollars in thousands)	2021		2020
Non-accrual loans:
Commercial real estate	$	4,890	$	16,612
Residential first mortgages	450		794
Residential rentals	942		275
Home equity and second mortgages	601		495
Commercial equipment	691		46
U.S. SBA PPP loans	57		—
Total non-accrual loans (1)	7,631		18,222
OREO	—		3,109
TDRs: (1) (2)
Commercial real estate	—		1,376
Residential first mortgages	—		247
Commercial equipment	447		471
Total TDRs	447		2,094
Total Accrual TDRs	447		572
Total non-accrual loans, OREO and Accrual TDRs	$	8,078	$	21,903
Interest income due at stated rates, but not recognized on non-accruals	$	102	$	756

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	December 31,
(dollars in thousands)	2022		2021
Non-accrual loans:
Commercial real estate	$	4,602	$	4,890
Residential first mortgages	—		450
Residential rentals	1,142		942

Home equity and second mortgages	206		601


Commercial equipment	165		691
U.S. SBA PPP loans	—		57
Total non-accrual loans (1)	6,115		7,631

OREO	—		—

TDRs: (1) (2)
Commercial real estate	—		—
Residential first mortgages	—		—




Commercial equipment	457		447
Total TDRs	457		447
Total Accrual TDRs	429		447

Total non-accrual loans, OREO and Accrual TDRs	$	6,544	$	8,078

Interest income due at stated rates, but not recognized on non-accruals	$	22	$	102

___________________________________________

(1) Non-accrual loans include all loans, excluding credit card 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-accrual loans and OREO to total assets decreased from 10.0533% at December 31, ~~2020~~2021 to 0.3325% at December 31, ~~2021~~2022. Non-accrual loans, OREO and TDRs to total assets decreased from 10.0835% at December 31, ~~2020~~2021 to 0.3527% at December 31, ~~2021~~2022.

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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 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 impairment on a loan-by-loan basis.

At December 31, ~~2021~~2022, there were $65.75 million (8889%) of non-accrual loans current with all payments of principal and interest with specific reserves of $0.31 million. Delinquent non-accrual loans were $0.97 million (1211%) of with no specific reserves at December 31, ~~2021~~2022. At December 31, ~~2020~~2021, there were $6.31 million (3498.0%) of non-accrual loans current with all payments of principal and interest with no impairment and $~~12.~~0.1 million (662.0%) of delinquent non-accrual loans with a total of $~~1.3~~29,000 ~~million~~ specifically reserved. There ~~were~~was noone non-accrual TDRs at December 31, ~~2021~~2022, which was fully reserved. Non-accrual loans at December 31, ~~2020~~2021 included ~~six~~zero TDRs ~~totaling $1~~.5 ~~million.~~ These loans were classified solely as non-accrual for the calculation of financial ratios.

Other Real Estate Owned

~~The~~There ~~following~~were isno ~~a summary roll-forward of~~ OREO ~~activity~~balances ~~for~~at ~~the~~December 31, ~~years~~2022 ~~ended~~and at December 31, 2021. ~~and~~For ~~2020:~~additional information on OREO, refer to Note 5 of the Consolidated Financial Statements.

	Years Ended December 31,
(dollars in thousands)	2021		2020
Balance at beginning of year	$	3,109	$	7,773
Additions of underlying property	—		1,240
Disposals of underlying property	(1,722)		(2,882)
Valuation allowance	(1,387)		(3,022)
Balance at end of period	$	—	$	3,109

The decreased OREO valuation allowance during the year ended December 31, 2021 reflects management's actions to resolve non-performing assets. There were no OREO balances at December 31, 2021 compared to $3.1 million at December 31, 2020. For additional information on OREO, refer to Note 6 of the Consolidated Financial Statements.

Liabilities

Deposits and Borrowings - Funding

The Bank has access to both retail deposits and wholesale funding. Wholesale funding includes long-term debt and short-term borrowings of advances from the FHLB of Atlanta and brokered deposits. Retail deposits totaled $2.05 billion or 99.0% of funding at December 31, 2021 compared to $1.74 billion or 98.0% of funding at December 31, 2020. In addition to funding for operations, the Company had junior subordinated debentures of $12.0 million and fixed to floating subordinated notes of $20.0 million at 4.75% at December 31, 2021 and 2020.

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~~The~~Deposits ~~following~~and isBorrowings a- ~~breakdown of the Company’s deposit portfolio at December 31, 2021 and 2020:~~Funding

	December 31,
(dollars in thousands)	2021		%		2020		%		$ Change		% Change
Noninterest-bearing demand	$	445,778	21.68	%	$	362,079	20.74	%	$	83,699	23.12	%
Interest-bearing:
Savings	119,767		5.82	%	98,783		5.66	%	20,984		21.24	%
Demand deposits	790,481		38.45	%	590,159		33.81	%	200,322		33.94	%
Money market deposits	372,717		18.13	%	340,725		19.52	%	31,992		9.39	%
Certificates of deposit	327,421		15.92	%	353,856		20.27	%	(26,435)		(7.47)	%
Total interest-bearing	1,610,386		78.32	%	1,383,523		79.26	%	226,863		16.40	%
Total Deposits	$	2,056,164	100.00	%	$	1,745,602	100.00	%	$	310,562	17.79	%
Transaction accounts	$	1,728,743	84.08	%	$	1,391,746	79.73	%	$	336,997	24.21	%

The Bank has access to both retail deposits and wholesale funding. Wholesale funding includes long-term debt and short-term borrowings of advances from the FHLB of Atlanta and brokered deposits. Retail deposits totaled $2.03 billion or 93.8% of funding at December 31, 2022 compared to $2.05 billion or 99.0% of funding at December 31, 2021. In addition to funding for operations, the Company had junior subordinated debentures of $12.0 million and fixed to floating subordinated notes of $20.0 million at 4.75% at December 31, 2022 and 2021.

~~Total~~The ~~deposits~~following ~~increased~~is ~~at December 31, 2021 compared to December 31, 2020. During the same period, noninterest bearing demand deposits and total transaction deposits increased in dollars and as~~ a ~~percentage~~breakdown of ~~deposits.~~the ~~Customer~~Company’s deposit ~~balances~~portfolio ~~increased~~at in 2021 due to new customer acquisitions as well as lower levels of consumer and business spending related to the COVID-19 pandemic. The Bank has added new customers and lower cost transaction deposits in every year in each of the last six years. CompetitorsDecember 31, ~~merger~~2022 and ~~acquisition activity in our market, the Bank's participation in the SBA US PPP program and focused efforts of our business development teams all contributed to deposit increases in~~ 2021.:

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 increased $128.6 million to $483.5 million at December 31, 2021 compared to $354.9 million at December 31, 2020. Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2021 and December 31, 2020 were 23.1% and 19.6%, respectively. $65.7 million reciprocal deposits were considered brokered at December 31, 2021 and no reciprocal deposits were considered brokered deposits for call reporting purposes as of December 31, 2020.


	December 31,
(dollars in thousands)	2022		%		2021		%		$ Change		% Change
Noninterest-bearing demand	$	630,120	30.17	%	$	445,778	21.68	%	$	184,342	41.35	%
Interest-bearing:
Savings	124,533		5.96	%	119,767		5.82	%	4,766		3.98	%
Demand deposits	638,876		30.59	%	790,481		38.45	%	(151,605)		(19.18)	%
Money market deposits	347,872		16.66	%	372,717		18.13	%	(24,845)		(6.67)	%
Certificates of deposit	347,062		16.62	%	327,421		15.92	%	19,641		6.00	%
Total interest-bearing	1,458,343		69.83	%	1,610,386		78.32	%	(152,043)		(9.44)	%

Total Deposits	$	2,088,463	100.00	%	$	2,056,164	100.00	%	$	32,299	1.57	%

Transaction accounts	$	1,741,401	83.38	%	$	1,728,743	84.08	%	$	12,658	0.73	%

Total deposits increased at December 31, 2022 compared to December 31, 2021. During the same period, noninterest bearing demand deposits and total transaction deposits increased in dollars and noninterest bearing demand deposits increased as a percentage of deposits. Non-interest-bearing demand deposits increased $184.3 million to $630.1 million at December 31, 2022, representing 30.2% 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 cost transaction accounts.

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 increased $38.7 million to $522.3 million at December 31, 2022 compared to $483.5 million at December 31, 2021. Reciprocal deposits as a percentage of the Bank’s liabilities at December 31, 2022 and December 31, 2021 were 23.8% and 23.1%, respectively. For call reporting purposes, $83.9 million of reciprocal deposits were considered brokered at December 31, 2022 compared to $65.7 million at December 31, 2021.

The following table sets forth for the periods indicated the average balances outstanding and average interest rates for each major category of deposits.

	For the Years Ended December 31,
	2021				2020
	2022				2021
(dollars in thousands)	Average Balance		Average Rate		Average Balance		Average Rate
Savings	$	~~108~~121,~~189~~975	0.0508	%	$	84108,~~463~~189	0.1005	%
Demand deposits	~~660~~621,~~330~~755		0.0583	%	~~537~~660,~~043~~330		0.3005	%
Money market deposits	~~358~~376,~~006~~039		0.1114	%	~~312~~358,~~980~~006		0.2511	%
Certificates of deposit	~~342~~313,~~755~~429		0.5347	%	~~370~~342,~~743~~755		10.4153	%
Total interest-bearing deposits	1,~~469~~433,~~280~~198		0.1850	%	1,~~305~~469,~~229~~280		0.5918	%
Noninterest-bearing demand deposits	~~417~~634,~~935~~805				~~324~~417,~~597~~935
	$	12,~~887~~068,~~215~~003	0.1435	%	$	1,~~629~~887,~~826~~215	0.4714	%

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The following table indicates that 1733.81% of the Bank’s certificates of deposit and other time deposits, by account, meet or exceed the FDIC insurance limit (currently, $250,000), by time remaining until maturity as of December 31, ~~2021~~2022.

(dollars in thousands)	At December 31, ~~2021~~2022
Time Deposit Maturity Period
Three months or less	$	1058,~~132~~704
Three through six months	139,~~438~~172
Six through twelve months	1927,~~812~~297
Over twelve months	1419,~~215~~520
Total	$	57114,~~597~~693

Uninsured deposits, which are the portion of deposit accounts that exceed the FDIC insurance limits, currently set at $250,000 were approximately $~~496~~398.03 million and $~~409~~496.10 million at December 31, ~~2021~~2022 and December 31, ~~2020~~2021, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting.

Note 7 includes the scheduled contractual maturities of total certificates of deposits of $~~327~~347.41 million at December 31, ~~2021~~2022.

Stockholders’ Equity

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

(dollars in thousands)	December 31, ~~2021~~2022		December 31, ~~2020~~2021		$ Change		% Change
Common Stock at par of $0.01	$	5756	$	5957	$	(21)	(31.48)	%
Additional paid in capital	9697,~~896~~986		9596,~~965~~896		~~931~~1,090		1.01	%
Retained earnings	~~113~~132,~~448~~235		97113,~~944~~448		1518,~~504~~787		1516.86	%
Accumulated other comprehensive (loss) income	(1,952)		4,504		(6,456)		(143.3)	%
Accumulated other comprehensive loss	(43,092)		(1,952)		(41,140)		2,107.6	%
Unearned ESOP shares	(~~316~~174)		(~~459~~316)		~~143~~142		(3144.29)	%
Total Stockholders' Equity	$	~~208~~187,~~133~~011	$	~~198~~208,~~013~~133	$	10(21,~~120~~122)	5(10.1)	%

~~During~~Total stockholders’ equity decreased $21.1 million during the year ended December 31, ~~2021,~~2022. ~~stockholders’ equity~~Equity increased ~~in part~~ due to net income of $2528.93 million and net stock related activities in connection with stock-based compensation and ESOP activity of $01.90 million. These increases to stockholders’ equity were ~~partially~~ offset by common stock repurchases of $73.06 million, common dividends paid of $3.28 million, and an increase in accumulated other comprehensive loss of $641.51 million.

At December 31, ~~2021~~2022, the Company had a book value of $3633.4011 per common share compared to $3336.5440 at December 31, ~~2020~~2021. The Company’s tangible book value was $3431.3208 at December 31, ~~2021~~2022 compared to $3134.4532 at December 31, ~~2020. The Company remains well capitalized at December 31,~~ 2021 ~~with a Tier 1 capital to average assets (leverage ratio) of 9~~.~~23%~~ ~~compared to 9.56% at December 31, 2020.~~ The Company's common equity to assets ratio decreased to 87.9476% at December 31, ~~2021~~2022 from 98.7794% at December 31, ~~2020~~2021. The Company’s ratio of tangible common equity ("TCE") to tangible assets decreased to 87.4832% at December 31, ~~2021~~2022 from 98.2248% at December 31, ~~2020~~2021. The decrease in the TCE ratio was due primarily to ~~significant~~increased ~~increases~~unrealized losses in ~~cash~~the ~~and~~Bank's ~~investments.~~AFS investment portfolio. The Company’s ~~Common~~common ~~Equity~~equity Tier 1 (“CET1”) ratio was 11.26% at December 31, 2022 compared to 11.92% at December 31, 2021. The Company remains well capitalized at December 31, 2022 with a Tier 1 capital to average assets (leverage ratio) of 9.60% compared to 119.4723% at December 31, ~~2020~~2021.

InThe ~~April~~ESOP ~~2020,~~has ~~banking~~promissory ~~regulators~~notes ~~issued~~with anthe ~~interim~~Company ~~final~~for ~~rule~~the ~~that~~purchase ~~excluded~~of ~~U.S.~~TCFC ~~SBA~~common ~~PPP~~stock ~~loans~~for ~~from~~the benefit of the ~~calculation~~participants in the Plan of ~~risk~~$0.2 million and $0.3 million at December 31, 2022 and 2021, respectively. Loan terms are at prime rate plus one-percentage point and amortize over seven years. As principal is repaid, common shares are allocated to participants based ~~capital~~on ~~ratios~~the byparticipant ~~assigning~~account allocation rules described in the Plan. The Bank is a ~~zero~~guarantor ~~percent~~of ~~risk~~the ~~weight~~ESOP debt with the Company. Unencumbered shares held by the ESOP are treated as outstanding in computing earnings per share. Shares issued to the ESOP but pledged as collateral for loans obtained to provide funds to acquire the shares are not treated as outstanding in computing earnings per share.

~~The~~During ~~ESOP has promissory notes with~~ the ~~Company~~year ~~for~~ended ~~the~~December 31, ~~purchase~~2022, of$0.1 ~~TCFC~~million ~~common~~or ~~stock~~4,150 ~~for~~Employee ~~the~~Stock ~~benefit~~Ownership ~~of the participants in the~~ Plan. ~~Loan~~("ESOP") ~~terms are at prime rate plus one-percentage point and amortize over seven years. As principal is repaid, common~~ shares ~~are~~were allocated towith ~~participants based on~~ the ~~participant~~payment ~~account~~of ~~allocation~~promissory ~~rules~~notes ~~described~~and inthere ~~the~~were ~~Plan.~~no ~~The~~offsetting ~~Bank~~ESOP ispurchases ~~a guarantor~~ of ~~the ESOP debt with the Company~~shares. ~~Unencumbered~~During ~~shares held by~~ the ~~ESOP~~year ~~are~~ended ~~treated~~December 31, as2021, ~~outstanding in computing earnings per share~~$0.1 ~~Shares~~million ~~issued~~or to4,150 ~~the~~ ESOP ~~but~~shares ~~pledged~~were asallocated ~~collateral~~with ~~for loans obtained to provide funds to acquire~~ the ~~shares~~payment ~~are~~of ~~not~~promissory ~~treated as outstanding in computing earnings per share~~notes.

During the year ended December 31, 2021, $0.1 million or 4,150 Employee Stock Ownership Plan ("ESOP") shares were allocated with the payment of promissory notes and there were no offsetting ESOP purchases of shares. During the year ended December 31, 2020, $0.1 million or 4,150 ESOP shares were allocated with the payment of promissory notes. 60

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is our ability to fund operations and meet present and future financial obligations through the sale or repayment of existing assets or by obtaining additional funding through liability management. Cash needs may come from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position.

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 December 31, ~~2021~~2022 and ~~2020~~2021, the Bank had $6445.0 million and $6664.50 million, respectively, in loan commitments outstanding, $2225.0 million and $2022.0 million, respectively, in letters of credit and approximately $~~242~~278.0 million and $~~225~~242.50 million, respectively, available under lines of credit. Certificates of deposit due within one year of December 31, ~~2021~~2022 and ~~2020~~2021 totaled $~~256~~258.91 million or 7874.4536% and $~~266~~256.19 million, or 7578.2145%, respectively, of total certificates of deposit outstanding. If maturing deposits do not remain, the Bank will be required to seek other sources of funds, or use on balance sheet cash and investments. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposits. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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

At December 31, ~~2021~~2022, the Company had on-balance sheet liquidity of $~~139~~25.75 million in cash and cash equivalents. At December 31, ~~2021~~2022, the Company had loans and securities pledged or in safekeeping at FHLB which provided for funding availability of $~~530~~490.5 million at December 31, ~~2021~~2022.

Advances from the FHLB are secured by the Bank’s stock in the FHLB, a portion of the Bank’s loan portfolio and certain investments. Generally, the Bank’s ability to borrow from the FHLB of Atlanta is limited by its available collateral and also by an overall limitation of 30% of assets. FHLB long-term debt consists of adjustable-rate advances with rates based upon LIBOR, fixed-rate advances, and convertible advances. At December 31, ~~2021~~2022 and ~~2020~~2021, 100% of the Bank’s long-term debt was fixed for rate and term, as the conversion optionality of the advances have either been exercised or expired. In addition, the Bank has established unsecured and secured lines of credit with the Federal Reserve Bank and commercial banks. For a discussion of these agreements including collateral see Note 8 in the Consolidated Financial Statements.

Liquidity has improved in the last three years with the increase in transaction deposits and decrease in wholesale funding. The Company’s net loan to deposit ratio was 77.2% at December 31, 2021 compared to 91.3% at December 31, 2020. For the year ended December 31, 2021 and 2020, the average loan to deposit ratios were 83.9% and 94.9%, respectively. 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.

63Comparison of Cash Flows for the Years Ending December 31, 2022 and 2021

During the year ended December 31, 2022, all financing activities provided $91.9 million in cash compared to $285.4 million in cash provided for the same period in 2021. The Company was provided $193.5 million less cash from financing activities compared to the prior year, primarily due to decreased deposit growth of $278.3 million. The Company used $2.8 million less cash in 2022 compared to 2021 for net long-term debt activity and short-term borrowings activity provided $79.0 million more cash in 2022 compared to 2021. The Company used $2.9 million less in cash for stock related activities in 2022 compared to 2021. The decrease was primarily due to a $3.5 million decrease in common stock repurchased.

The Bank’s principal use of cash has been in investing activities including its investments in loans, investment securities and other assets. In 2022, the level of net cash used in investing decreased to $241.5 million from $256.0 million in 2021. The decrease in cash used was primarily the result of less cash used for purchases of investment securities partially offset by an increase in cash used for loan activities.

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~~Comparison~~Cash used for loan activities increased $218.6 million from $4.3 million, for the year ended December 31, 2021 to cash used of $214.2 million for the year ended December 31, 2022. Cash ~~Flows~~used for the ~~Years~~purchase ~~Ending~~of investment securities decreased $249.3 million from $327.7 million for the year ended December 31, 2021 to $78.4 million for the year ended December 31, 2022. Cash used increased $15.9 million as total proceeds from sales and ~~2020~~principal payments of securities for year ended December 31, 2022 decreased compared to the year ended December 31, 2021.

~~During~~Operating ~~the year ended December 31, 2021, all financing~~ activities provided ~~$285.4 million in~~ cash ~~compared~~of to $~~209~~35.24 million ~~in cash provided~~ for the ~~same~~year ~~period~~ended inDecember 31, ~~2020.~~2022 ~~The Company was provided $76.2 million more cash from financing activities~~ compared to ~~the prior year, primarily due to increased deposit growth of~~ $7633.~~8 million. The Company used $~~2.0 million ~~more~~of cash inprovided ~~2021 compared to 2020~~ for ~~net~~the ~~long-term~~same ~~debt~~period ~~activity~~of ~~and short-term borrowings activity used $5.0 million less cash in~~ 2021 ~~compared to 2020~~. The Company used $7.1 million more in cash for stock related activities in 2021 compared to 2020. The decrease was primarily due to $6.7 million increase in common stock repurchased, and an increase in common dividends paid in 2021. The Company used $3.5 million less cash in 2021 compared to 2020 for activity related to subordinated notes.

The Bank’s principal use of cash has been in investing activities including its investments in loans, investment securities and other assets. In 2021, the level of net cash used in investing increased to $256.0 million from $192.7 million in 2020. The increase in cash used was primarily the result of cash used for purchases of investment securities partially offset by a decrease in cash used for loan activities. Cash used for loan activities decreased $167.6 million from $163.3 million, for the year ended for the year ended December 31, 2020 to cash provided of $4.3 million for the year ended December 31, 2021. Cash used increased as principal received on loans in 2021 decreased over the prior year comparable period primarily due to decreased PPP originations in 2021 compared to the prior year. Cash used for the purchase of investment securities increased $178.3 million from $178.3 million for the year ended December 31, 2020 to $327.7 million for the year ended December 31, 2021. Cash used increased $49.5 million as total proceeds from sales and principal payments of securities for year ended December 31, 2021 decreased compared to the year ended December 31, 2020.

Operating activities provided cash of $33.2 million for the year ended December 31, 2021 compared to $28.1 million of cash provided for the same period of 2020.

Capital Resources

The Company has no business other than holding the stock of the Bank and does not currently have any material funding requirements, except for the payment of dividends on common stock, and the payment of interest on subordinated debentures and subordinated notes, and noninterest expense.

The Company evaluates capital resources by the 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 December 31, ~~2021~~2022 and ~~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 December 31, ~~2021~~2022 and ~~2020~~2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. See Note 11 of the Consolidated Financial Statements.

On March 31, 2015, the Bank made the election to continue to exclude most accumulated other comprehensive income ("AOCI") from capital in connection with its quarterly financial filings and, in effect, to retain the AOCI treatment under the capital rules prior to Basel III.

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OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with accounting principles generally accepted in the United States of America and to general practices within the banking industry, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, letters of credit and lines of credit. For a discussion of these agreements, including collateral and other arrangements, see Note 18 in the Consolidated Financial Statements.

For the years ended December 31, ~~2021~~2022 and ~~2020~~2021, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

IMPACT OF INFLATION AND CHANGING PRICES

The Consolidated Financial Statements and notes thereto presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk

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

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

The Board of Directors has 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 used by management to maintain interest rate risk exposure within Board policy guidelines.

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

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

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


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

66It 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. As of December 31, 2022, and 2021, the Company did not exceed any Board approved sensitivity limits for percentage change in net interest income. As of December 31, 2022, the Company did not exceed any Board approved limits for the percentage change in economic value of equity. As of December 31, 2021, the percentage change in economic value of equity exceeded policy guidelines due to already low level of rates on non-maturing deposit instruments Management determined that due to the level of market rates at December 31, 2021, interest rate shocks of -100, -200, -300, and -400 basis points left the Bank with near zero down to negative rate instruments and were not considered practical or informative. Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. The below schedule estimates the changes in net interest income over a twelve-month period for parallel rate shocks for up 200, 100 and down 100 scenarios:


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

December 31, 2022	(2.65)	%	(0.97)	%	0.46	%
December 31, 2021	(1.54)	%	(0.74)	%	(1.13)	%

Measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest

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Itrates ison ~~management’s~~all ~~goal~~of ~~to manage~~ the ~~Bank'~~Company’s ~~portfolios~~cash 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. As of December 31flows, ~~2021,~~ and ~~2020,~~by ~~the~~discounting ~~Company did not exceed any Board approved sensitivity limits for percentage change in net interest income. As of December 31, 2021,~~ the ~~percentage~~cash ~~change~~flows ~~in economic value of equity exceeded policy guidelines due~~ to ~~already~~estimate ~~low level of rates on non-maturing deposit instruments. Management has determined that due to~~ the ~~level~~present ofvalue ~~market rates at December 31, 2021, interest rate shocks~~ of <

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