What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-31 · 99 added, 112 removed, 484 unchanged (30% of the section changed)

5 unchanged sentences

The basic and diluted income per share was $1.57 and $1.17 for fiscal year 2022 and 2021, respectively.

When comparing net income for 2021 to 2020, earnings decreased due to higher noninterest expenses, which included merger-related expenses of $8.5 million related to the acquisition of Severn.

Without these merger-related expenses, noninterest expense increased $9.9 million, among all expense categories except other real-estate owned expense and general legal and professional fees (non-merger related).

However, in fiscal 2021 compared to fiscal 2020, the Company recorded increases in net interest income of $11.5 million, noninterest income of $2.7 million and a decrease in provision for credit losses of $4.3 million.

Total assets were $3.460 billion at December 31, 2021, a $1.5 billion, or 79.0%, increase when compared to $1.933 billion at the end of 2020.

The merger with Severn, added approximately $1.1 billion to total assets as of October 31, 2021.

Excluding the day 1 value of acquired assets, total assets increased $406.8 million, or 21.0%, when compared to the end of 2020.

This non-merger related growth in assets reflected increases in investment securities held to maturity of $214.6 million, interest-bearing deposits with other banks of $77.6 million, loans of $80.3 million and loans held for sale of $28.1 million, partially offset by a decrease in investment securities available for sale of $43.6 million.

Total deposits increased $1.326 billion, or 77.9%, when compared to December 31, 2020.

The merger with Severn, added approximately $955.3 million to total deposits as of October 31, 2021.

Excluding these assumed deposits, total deposits increased $370.2 million, or 21.8%, when compared to the end of 2020.

The significant movement into deposit accounts, excluding the deposits acquired from Severn, continues to be driven by new account openings and municipal deposit inflows.

Total stockholders’ equity increased $155.7 million, or 79.8%, when compared to December 31, 2020, primarily due to the acquisition of Severn.

At December 31, 2021, the ratio of total equity to total assets was 10.14% and the ratio of total tangible equity to total tangible assets was 8.25%.

Small Business Administration’s Paycheck Protection Program

We established our process for participating in the Small Business Administration’s Paycheck Protection Program (“PPP”) that enabled our clients to utilize this valuable resource beginning in April 2020.

Loans under the PPP were designed to provide assistance for small businesses during the COVID-19 pandemic to help meet the costs associated with payroll, mortgage interest, rent and utilities.

These loans are guaranteed by the SBA and forgiveness of the loans, by the SBA, is granted to the borrower if the borrower uses at least 60% of the funds to cover payroll costs and benefits.

Forgiveness is also based on the small business maintaining or quickly rehiring their employees and maintaining salary levels for their employees.

Loans under the PPP did not require any collateral or personal guarantees, as such, these loans are included in the Company’s commercial loans segment.

Between April 2020 and through the date the PPP program ended we processed 1,488 PPP loans for approximately $126.7 million, which has allowed us to further strengthen and deepen our client relationships, while positively impacting thousands of individuals.

We are also closely monitoring the credit quality of the loan portfolio and monitor lines of credit draws for deviation from normal activity to improve loan performance and reduce credit risk.

As of December 31, 2021, the Company had 227 PPP loans totaling $27.6 million that were outstanding, inclusive of loans issued pre-merger and those acquired from Severn.

The Company had no COVID related loan deferrals as of December 31, 2021.

When comparing net income for 2022 to 2021, earnings increased due to increases in net interest income $37.2 million and noninterest income of $9.6 million primarily offset by an increase in noninterest expense of $23.5 million related to increases in salaries and wages, employee benefits, and other loan and customer expenses primarily due to the acquisition of Severn Bancorp, Inc.

(“Severn”) in the fourth quarter of 2021.

Total assets were $3.477 billion at December 31, 2022, a $17.1 million, or less than 1.0%, increase when compared to $3.460 billion at the end of 2021.

During 2022, the Company shifted its asset mix by deploying cash and cash equivalents into higher yielding loans and investment securities.

Total deposits decreased $16.5 million, or less than 1%, when compared to December 31, 2021.

The decrease in total deposits was due to decreases in money market and savings accounts of $85.7 million, noninterest-bearing deposits of $65.5 million and time deposits of $35.2 million, partially offset by an increase in interest bearing checking accounts of $170.0 million.

Total stockholders’ equity increased $13.6 million, or 3.9%, when compared to December 31, 2021, primarily due to current year earnings, partially offset by unrealized losses on available for sale securities of $9.1 million and dividends paid to common stockholders of $9.5 million.

At December 31, 2022, the ratio of total equity to total assets was 10.48% and the ratio of total tangible equity to total tangible assets was 8.67%, compared to 10.14% and 8.25% for 2021.

CRITICAL ACCOUNTING POLICIES

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Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio as of the balance sheet date.

The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio as of the balance sheet date.

Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of similar loans based on historical loss experience, and consideration of current economic trends and conditions and other factors impacting the loan portfolio, all of which may be susceptible to significant change.

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If the fair value of a reporting unit is less than book value, an expense may be required to write down the related goodwill to record an impairment loss.

As of December 31, 2021, the Company had banking and mortgage reporting unit.

As of December 31, 2022, the Company had banking and mortgage reporting units.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

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This represented a $37.2 million, or 57.8%, increase from 2021.

The increase in net interest income when comparing 2021 to 2020 was primarily the result of higher average balances on earnings assets of $574.1 million, or 35.6% and lower rates paid on interest-bearing deposits of 30bps, partially offset by the addition of subordinated debt from the acquisition of Severn and a full year of legacy subordinated debt issued by the Company in the third quarter of 2020.

The increase in net interest income when comparing 2022 to 2021 was primarily the result of higher average balances on earnings assets of $1.04 billion, or 47.4%, partially offset by an increase in interest bearing deposits of $684.5 million, higher rates paid on interest bearing deposits of 16bps, and additional interest on subordinated debt acquired in the 4 th quarter of 2021.

This was the result of a full year of integration with Severn, significant loan growth, and a rising interest rate environment resulting in higher yields on loans and deposits.

Our net interest margin (i.e., tax-equivalent net interest income divided by average earning assets) is managed through loan and deposit pricing and asset/liability strategies.

The net interest margin was 3.15% for 2022 and 2.94% for 2021.

The net interest margin decreased when comparing 2021 to 2020 primarily due to a decline in the average yields on total earning assets of 50bps, which was compounded by the significant increase in deposits, resulting in excess liquidity being invested in lower yielding assets.

In addition, subordinated debt both issued by the Company in 2020 and acquired in the Severn merger, contributed $1.0 million in additional interest expense.

Partially offsetting the decrease in average yields on earnings assets and subordinated debt, was a decline in the average rates paid on interest-bearing deposits of 30bps and the decrease in the average balance on long-term advances from the FHLB.

The net interest margin increased when comparing 2022 to 2021 primarily due to an increase in the average yield on total earning assets of 33bps, partially offset by higher interest rates paid on interest bearing deposits and borrowings.

The net interest spread, which is the difference between the average yield on earning assets and the average rate paid for interest-bearing liabilities was 2.96% for 2022 and 2.80% for 2021.

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Interest-bearing deposits

Securities sold under retail repurchase agreements and short-term FHLB advances

Securities sold under retail repurchase agreements and federal funds purchased

Advances from FHLB - short-term

Advances from FHLB - long-term

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Net interest margin

Tax-equivalent adjustment

(1) All amounts are reported on a tax-equivalent basis computed using the statutory federal income tax rate of 21% for 2022 and 2021, exclusive of nondeductible interest expense.

The tax-equivalent adjustment amounts used in the above table to compute yields aggregated $155 thousand in 2022 and $150 thousand in 2021.

(2) Average loan balances include nonaccrual loans.

(2) Average loan balances include nonaccrual loans and loans held for sale.

(3) Interest income on loans includes amortized loan fees, net of costs, and accretion of discounts on acquired loans, which are included in the yield calculations.

On a tax-equivalent basis, total interest income was $114.0 million for 2022 compared to $70.3 million for 2021.

The increase in interest income for 2021 compared to 2020 was primarily due to the increase in the average balance in earning assets of $574.1 million which was due to both the acquisition of Severn and organic growth in 2021.

The interest on loans had the most significant impact on total interest income, which increased $8.4 million in 2021, due to the increase in the average balance of loans of $199.6 million, or 14.6%, combined with accretion income of approximately $628 thousand in relation to acquired loans.

In addition, PPP loan forgiveness for the year 2021 also contributed to fees, net of costs, of $3.8 million in 2021 compared to $977 thousand in 2020.

The increase in interest income on taxable investment securities and interest-bearing deposits was due to increases in their respective average balances of $191.5 million and $183.0 million, the result of excess liquidity and the acquisition of Severn during the fourth quarter of 2021.

The increase in interest income for 2022 compared to 2021 was primarily due to the increase in the average balance in earning assets of $1.04 billion which was due to both the acquisition of Severn and organic growth in 2022.

The interest on loans had the most significant impact on total interest income, which increased $34.3 million in 2022, due to the increase in the average balance of loans of $725.2 million, or 46.2%, combined with accretion income of approximately $3.0 million in relation to acquired loans.

The increase in interest income on taxable investment securities and interest-bearing deposits was due to increases in their respective average balances of $259.8 million and $50.4 million.

As a percentage of total average earning assets, loans, investment securities, and interest-bearing deposits were 71.2%, 18.3%, and 10.5%, respectively, for 2022.

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Interest expense was $12.5 million for 2022 compared to $6.0 million for 2021.

The decrease in interest expense for 2021 was primarily due to the decrease in the average rates paid on interest-bearing deposits, partially offset by a full year of legacy subordinated debt and the addition of subordinated debt acquired from Severn.

During 2021, money market/savings deposits, demand deposits and certificates of deposit over $100 thousand experienced the most significant growth with increases in the average balances of $260.3 million, $106.6 million and $15.1 million, respectively, while the average rates paid on these deposits decreased 6, 12 and 86bps, respectively.

The long-term advances from the FHLB declined in both the average balance and rates paid on these borrowings due to the payoff of these advances by the Company in April of 2020, partially offset by the addition of these borrowings from the acquisition of Severn, which are scheduled to mature in October of 2022.

The increase in interest expense for 2022 was primarily due to the increase in the average rates paid on interest-bearing deposits, and a full year of interest on subordinated debt acquired from Severn.

During 2022, money market/savings deposits, demand deposits and certificates

of deposit over $100 thousand experienced significant growth with increases in the average balances of $348.0 million, $187.7 million and $95.7 million, respectively, while the average rates paid on these deposits increased 47 and 14bps on demand deposits and money market/savings deposits, respectively and decreased 27bps on certificates of deposit over $100 thousand.

The following Rate/Volume Variance Analysis identifies the portion of the changes in tax-equivalent net interest income attributable to changes in volume of average balances or to changes in the yield on earning assets and rates paid on interest-bearing liabilities.

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Taxable investment securities

Tax-exempt investment securities

Interest-bearing deposits

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Securities sold under repurchase agreements

and short-term FHLB advances

and federal funds purchased

Advances from FHLB - Short-term

Advances from FHLB - Long-term

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Noninterest income increased $9.6 million, or 71.0%, in 2022 when compared to 2021.

The increase in noninterest income was largely due to the addition of the mortgage division and Mid-Maryland title from Severn.

The mortgage division added $948 thousand and Mid-Maryland contributed $247 thousand in 2021.

In addition, the increase in noninterest income in 2021 included increases in debit card interchange fees of $958 thousand, service charges on deposit accounts of $557 thousand and trust and investment fee income of $323 thousand, partially offset by a decrease in the gains on sales and calls of investment securities of $345 thousand.

The following table summarizes our noninterest income from continuing operations for the presented years ended December 31.

The increase in noninterest income primarily consisted of increases in revenue associated with the mortgage division of $4.3 million, service charges on deposit accounts of $2.3 million, revenue from Mid-Maryland Title of $1.1 million and other noninterest income of $1.2 million.

The increase in other noninterest income was primarily due to increases in rental fee income of $1.3 million.

These changes were all primarily attributable to the acquisition of Severn in the 4 th quarter of 2021.

The following table summarizes our noninterest income for the presented years ended December 31.

Change from Prior Year

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Noninterest expense, excluding merger related expenses, increased $29.9 million, or 62.0%, when compared to the same period in 2021.

The increase was mainly the result of increases in salaries and wages, employee related benefits, occupancy expense, data processing, amortization of intangible assets and FDIC insurance premium expense, which were all significantly impacted by adding Severn and its operations in the last two months of 2021.

In addition, as previously mentioned, during 2021, the Company recorded merger-related expenses of $8.5 million due to the acquisition of Severn .

The increase was mainly the result of increases in salaries and wages, employee related benefits, occupancy expense, data processing, amortization of intangible assets, FDIC insurance premium expense, and legal and professional fees which were all significantly impacted by adding Severn and its operations for the full year of 2022 as well as the addition of two new branches in 2022

The Company had 464 full-time equivalent employees at December 31, 2022, and 454 full-time equivalent employees at December 31, 2021.

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The effective tax rate was 26.0% for 2022 and 27.4% for 2021.

The Company’s effective tax rate increased in 2021 due to slightly higher pre-tax earnings, nondeductible expenses related to the merger and the reapportionment of assets and revenue for state income tax purposes.

The Company’s effective tax rate decreased in 2022 primarily due to nondeductible expenses related to the acquisition of Severn in 2021, higher pre-tax earnings and reapportionment of assets and revenue for state income tax purposes.

Please refer to Note 18 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K for further information.

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These liquid investments are maintained at a level that management believes is necessary to meet current liquidity needs.

However, in recent years, due to the significant increases in deposits, both organically and through acquisition, the amounts invested exceeded then current liquidity needs.

Total interest-bearing deposits with other banks increased $396.4 million from $170.3 million at December 31, 2020 to $566.7 million at December 31, 2021.

This significant increase was primarily due to the acquisition of Severn on October 31, 2021 which added $318.8 million in interest-bearing deposits with other banks.

Organic growth in customer deposits, excluding the acquisition of Severn, which increased $370.2 million, or 21.8%, during 2021 when compared to 2020, also contributed to the increase in interest-bearing deposits with other banks.

Total interest-bearing deposits with other banks decreased $548.9 million from $566.7 million at December 31, 2021 to $17.8 million at December 31, 2022.

The Company principally utilized the excess liquidity to fund increases in both loans held for investment of $436.9 million and investment securities of $128.3 million as compared to the prior year end.

Investment Securities

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Investment securities available for sale are stated at estimated fair value based on quoted prices and may be sold as part of the asset/liability management strategy or which may be sold in response to changing interest rates.

Net unrealized holding gains and losses on available for sale debt securities are reported net of related income taxes as accumulated other comprehensive income, a separate component of stockholders’ equity.

Net unrealized holding gains and losses on available for sale debt securities are reported net of related income taxes as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

Investment securities in the held to maturity category are stated at cost adjusted for amortization of premiums and accretion of discounts.

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Total investment securities increased $128.3 million from $527.1 million at December 31, 2021 to $655.4 million at December 31, 2022.

The Bank acquired $146.3 million from the acquisition of Severn in the fourth quarter of 2021.

Excluding acquired securities, the Bank purchased $255.5 million in securities in 2021, all of which were classified as held to maturity.

The investment strategy remained relatively consistent when comparing 2021 to 2020 due to excess liquidity, which was partially utilized to purchase securities with higher average yields than current overnight Fed funds rate.

The one exception to the investment strategy in 2021 was classifying new security purchases as held to maturity.

This change in investment strategy was implement by management to avoid large unrealized losses in available for sale securities which are accounted for within accumulated other comprehensive income and the intention to hold such securities to maturity to avoid any realized losses.

The Bank purchased $208.1 million in debt securities in 2022, all of which were classified as held to maturity.

The investment strategy remained relatively consistent when comparing 2022 to 2021 due to excess liquidity, which was partially utilized to purchase securities with higher average yields than the then current overnight Fed funds rate.

The larger percentage of securities designated as held to maturity reflects the amount that management believes is not needed to support our anticipated growth and liquidity needs.

Investment securities available for sale were $83.6 million at the end of 2022 and $117.0 million at the end of 2021.

The Bank did not purchase any available for sale securities in 2021 and purchased $73.5 million in available for sale securities in 2020.

During 2020, the Bank purchased thirteen mortgage-backed securities and four government agency bonds aggregating $55.4 million and $18.0 million, respectively.

The Bank did not purchase any available for sale securities in 2022 and 2021.

At year-end 2022, 21.7% of the available for sale securities in the portfolio were U.S.

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The Bank purchased $208.1 million in held to maturity securities in 2022 and $255.5 million for 2021.

During 2021, the Bank purchased thirty-two mortgage-backed securities totaling $177.1 million, fifteen government agency bonds totaling $75.9 million and two subordinated debt instruments from other banks amounting to $2.5 million.

In 2020, the Bank purchased six mortgage-backed securities totaling $27.4 million, five government agency bonds amounting to $17.7

million and seven subordinated debt instruments from other banks amounting to $12.1 million.

During 2022, the Bank purchased twenty-two mortgage-backed securities totaling $142.2 million, eleven government agency bonds totaling $62.4 million, two subordinated debt instruments from other banks amounting to $2.0 million and three community reinvestment bonds amounting to $1.5 million.

In 2021, the Bank purchased thirty-two mortgage-backed securities totaling $177.1 million, fifteen government agency bonds amounting to 75.9 million and two subordinated debt instruments from other banks amounting to $2.5 million.

At year-end 2022, 27.2% of the held to maturity securities in the portfolio were U.S.

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Mortgage-backed

Other Debt Securities

Total available for sale

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We originate residential mortgage loans for sale on the secondary market, which we have elected to carry at fair value.

At December 31, 2021, the fair value of loans held for sale amounted to $37.7 million.

At December 31, 2020, the Company had no loans held for sale.

At December 31, 2022, the fair value of loans held for sale amounted to $4.2 million and $37.7 million at December 31, 2021.

When we sell mortgage loans we make certain representations to the purchaser related to loan ownership, loan compliance and legality, and accurate documentation, among other things.

If a loan is found to be out of compliance with any of the representations subsequent to the date of purchase, we may be required to repurchase the loan or indemnify the purchaser.

The Company was not required to repurchase any loans during 2021 or 2022.

Loans Held for Investment

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The following table represents the composition of the Company’s loan portfolio for the presented years ended December 31.

December 31, 2022

Loans acquired from

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Total loans, net

December 31, 2021

Loans acquired from

(Dollars in thousands)

Severn acquisition

Residential real estate

Commercial real estate

Total loans excluding PPP loans

Allowance for credit losses

Total loans, net

The acquisition of Severn added $584.6 million in total loans as of the acquisition date, of which $372.2 million in total loans remained outstanding as of December 31, 2022.

Excluding these loans and legacy PPP loans, total legacy loans increased $635.9 million, or 41.1%, when compared to December 31, 2021.

At December 31, 2021 and December 31, 2020, PPP loans accounted for $27.6 million and $122.8 million of total loans, respectively.

At December 31, 2022 and December 31, 2021, PPP loans accounted for $187 thousand and $27.6 million of total loans, respectively.

Most of our loans, excluding PPP loans, are secured by real estate and are classified as construction, residential or commercial real estate loans.

The increase in legacy loans, excluding PPP loans, was comprised of increases in consumer loans of $93.0 million, or 295.7%, commercial loans of $40.0 million, or 45.2%, construction loans of $38.4 million, or 36.0%, residential real estate loans of $26.3 million, or 5.9% and commercial real estate loans of $18.6 million, or 2.8% at December 31, 2021 compared to December 31, 2020.

The increase in legacy loans, excluding PPP loans, was comprised of increases in residential real estate of $210.6 million, or 44.8%, commercial real estate loans of $199.4 million, or 29.3%, consumer loans of $160.8 million, or 129.2%, and construction loans of $81.8 million, or 56.3%, offset by a decrease in commercial loans $16.7 million, or 13.0%, at December 31, 2022 compared to December 31, 2021.

At December 31, 2022, the legacy loan portfolio, excluding PPP loans, was comprised of 40.3% commercial real estate, 31.2% residential real estate, 10.4% construction, 5.1% commercial and 13.1% consumer.

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The Bank uses deposits primarily to fund loans and to purchase investment securities.

Total deposits increased from $1.70 billion at December 31, 2020 to $3.03 billion at December 31, 2021.

The Severn acquisition added approximately $955.3 million to total deposits as of October 31, 2021.

Excluding these deposits, total deposits increased $370.2 million, or 23.7%, when compared to December 31, 2020.

The increase in deposit products consisted of the following:

demand/money market/savings deposits of $464.4 million and other time deposits of $9.4 million.

Noninterest-bearing deposits decreased $71.5 million.

Total deposits decreased from $3.03 billion at December 31, 2021 to $3.01 billion at December 31, 2022.

When compared to December 31, 2021 total deposits decreased $16.5 million, or less than 1%.

The decrease in deposit products consisted of the following:

money market/savings deposits of $85.7, noninterest-bearing deposits of $65.5 million and time deposits of $35.2 million.

Interest bearing checking accounts increased $170.0 million.

The following table sets forth the average balances of deposits and the percentage of each category to total average deposits for the years ended December 31.

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Other time deposits

The increase in average balances in 2021 was significantly impacted by the addition of acquired Severn deposits in the fourth quarter of 2021.

Average interest-bearing deposits increased $684.5 million, or 47.5%, in 2022, compared to an increase of $384.5 million, or 36.4%, in 2021.

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Securities sold under agreements to repurchase are issued in conjunction with cash management services for commercial depositors.

At December 31, 2021 and December 31, 2020, the Company had $4.1 million and $1.1 million, respectively, in securities sold under retail repurchase agreements

Long-Term Advances from FHLB

There were no securities sold under retail purchase agreements at the end of 2022.

Short-Term and Long-Term Advances from the FHLB

The Company occasionally borrows from the FHLB to meet longer term liquidity needs, specifically to fund loan growth when liquidity from deposit growth is not sufficient.

The acquisition of Severn added $10.1 million in long-term FHLB borrowings outstanding at the end of 2021, which carried an interest rate of 2.19%, with a maturity date of October 2022.

We also borrow from FHLB on a short-term basis to meet short term liquidity needs.

At the end of 2022 short-term advances from FHLB were $40 million.

There were no long-term FHLB borrowings at the end of 2022.

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On October 31, 2021, the Company acquired from the Severn merger, Junior Subordinated Debt Securities due in 2035 (“2035 Debentures”) which had an outstanding principal balance of $20.6 million.

The debt balance of $18.2 million is presented net of a fair value adjustment on the date of acquisition of $2.4 million at December 31, 2021.

The debt balance of $18.4 million is presented net of the remaining $2.2 million acquisition discount at December 31, 2022.

The 2035 Debentures were issued pursuant to an Indenture dated as of December 17, 2004 (the “2035 Indenture”) between the Company and Wells Fargo Bank, National Association as Trustee.

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Payments of principal, interest, premium, and other amounts under the 2035 Debentures are subordinated and junior in right of payment to the prior payment in full of all senior indebtedness of the Company, as defined in the 2035 Indenture.

The 2035 Debentures

are currently redeemable, in whole or in part, by the Company.

regulators have directed banks to cease offering new LIBOR-based products after December 31, 2021.

The 2035 Debentures are currently redeemable, in whole or in part, by the Company.

regulators have directed banks to cease offering new

LIBOR-based products after December 31, 2021.

Existing LIBOR contracts, per above, can continue to be serviced through the June 30, 2023 cessation date;

however, Wells Fargo will be working with customers to move to an ARR in advance of LIBOR cession, where possible.

however, Wells Fargo Bank, as Trustee, will be working with holders of the 2035 Debentures to move to an (ARR) in advance of LIBOR cession, where possible.

The 2035 Debentures were issued and sold to Severn Capital Trust I (the “Trust”), of which 100% of the common equity is owned by the Company.

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Total stockholders’ equity was $364.3 million at December 31, 2022, compared to $350.7 million at December 31, 2021.

The increase in stockholders’ equity in 2021 was primarily due to the acquisition of Severn which added $148.8 million to common stock and additional paid in capital, partially offset by common stock repurchases in the first quarter of 2021.

The increase in stockholders’ equity in 2022 was primarily due to current year earnings, partially offset by an increase in unrealized losses on available for sale securities of $9.1 million, net of tax, and dividends paid to stockholders of $9.5 million.

The ratio of period-end equity to total assets was 10.48% for 2022, as compared to 10.14% for 2021.

We record unrealized holding gains (losses), net of tax, on investment securities available for sale as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.

At December 31, 2021, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding gain, net of tax, of $56 thousand compared to net unrealized holding gain, net of tax, of $1.5 million at December 31, 2020.

At December 31, 2022, the portion of the investment portfolio designated as “available for sale” had a net unrealized holding loss, net of tax, of $9.0 million compared to net unrealized holding gain, net of tax, of $56 thousand at December 31, 2021.

The Bank and Company are subject to various regulatory capital requirements administered by the federal banking agencies.

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includes phased in capital conservation buffer of 2.50%

See Note 20 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank (December 31, 2021 and 2020) and Company (December 2021).

See Note 20 to the Consolidated Financial Statements for further information about the regulatory capital positions of the Bank and Company.

Asset Quality - Provision for Credit Losses and Risk Management

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Management believes the current allowance is adequate to provide for probable and estimable losses inherent in our loan portfolio;

however, future changes in the composition of the loan portfolio and financial condition of borrowers may result in additions to the allowance.

however, future changes in the composition of the loan portfolio and financial condition of borrowers may result in additions to the

Examination of the portfolio and allowance by various regulatory agencies and consultants engaged by the Company may result in the need for additional provisions based on information available at the time of the examination.

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These loans are assigned higher allowance factors than favorably rated loans due to management’s concerns regarding collectability or management’s knowledge of particular elements regarding the borrower.

As seen in the table below, the provision for credit losses was $(358) thousand for 2021 and $3.9 million for 2020.

The reversal in the provision for credit losses for 2021 was the result of recoveries in 2021 compared to charge-offs in 2020 and the reduction of qualitative factors established in 2020 related to the COVID-19 pandemic.

Net loan recoveries totaled $414 thousand in 2021, compared to net loan charge-offs of $519 thousand in 2020.

The allowance for credit losses was $13.9 million, or 0.93% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2021, compared to an allowance of $13.9 million, or 1.09% of period end loans, excluding PPP loans and acquired loans from Northwest with associated purchase discount mark at December 31, 2020.

The primary drivers for the decrease in the percentage of the allowance for credit losses to total period end loans were improved credit quality and the reduced impact of qualitative factors related to the pandemic.

The ratio of net (recoveries) charge-offs to average loans was (0.03)% for 2021, compared to 0.04% for 2020.

The overall credit quality improved in 2021 compared to 2020 primarily due to a reduction in nonaccrual loans of $3.5 million and loans 90 days and still accruing of $296 thousand, partially offset by an increase in OREO of $532 thousand.

In addition, accruing TDRs declined $1.3 million when comparing 2021 to 2020 which reflects continued workout efforts on outstanding problem loans.

When comparing 2021 to 2020 loan risk categories, substandard and special mention loans

decreased $8.1 million and $3.3 million, respectively.

The decrease in substandard and special mention loans was primarily due to property sales, payoffs and credit risk rating upgrades during 2021.

Pass/Watch loans increased $12.0 million during 2021 when compared to 2020 primarily due to pass/watch loans acquired from Severn.

These loans consisted of hospitality, restaurants, retail stores and other commercial loans.

The provision for credit losses was $1.9 million for 2022 and $(358) thousand for 2021.

The increase in provision for credit losses was primarily a result of the increase in loans held for investment in 2022 of $436.9 million.

Net loan recoveries totaled $774 thousand in 2022, compared to net loan recoveries of $414 thousand in 2021.

The allowance for credit losses was $16.6 million, or 0.78% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2022, compared to an allowance of $13.9 million, or 0.93% of period end loans, excluding PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest, at December 31, 2021.

The decrease in the percentage of the allowance for credit losses to total period end loans was primarily driven by lower historical loss experience and the elimination of pandemic related qualitative factors.

The ratio of net (recoveries) to average loans was (0.03) % for 2022, compared to (0.03) % for 2021.

Nonperforming loans increased at year end 2022 as compared to 2021 primarily due to increases in loans 90 days past due and still accruing of $1.3 million which was primarily a result of timing of the renewal process for certain loans that had matured, and not specific credit concerns related to the underlying borrowers.

Accruing TDRs declined $1.3 million when comparing 2022 to 2021 which reflects continued workout efforts on outstanding problem loans.

When comparing 2022 to 2021 loan risk categories, special mention and substandard loans decreased $4.4 million and $1.3 million, respectively.

The decrease in substandard and special mention loans was primarily due to payoffs and credit risk rating upgrades during 2022.

Pass/Watch loans decreased $46.4 million during 2022 when compared to 2021.

Management will continue to monitor and charge off nonperforming assets as rapidly as possible and focus on the generation of healthy loan growth and new business development opportunities.

The following table sets forth a summary of our loan loss experience for the presented years ended December 31.

December 31, 2022

December 31, 2021

Percentage of net

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Commercial real estate

Average loans outstanding during the period

Allowance for credit losses at period end as a percentage of total period end loans (1)

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Allowance for credit losses at period end as a percentage of period end nonaccrual loans

(1) As of December 31, 2021 and December 31, 2020, these ratios included all loans held for investment, including PPP loans of $27.6 million and $122.8 million, respectively.

(1) As of December 31, 2022 and December 31, 2021, these ratios included all loans held for investment, including PPP loans of $187 thousand and $27.6 million, respectively.

(2) As of December 31, 2022 and December 31, 2021, these ratios exclude PPP loans, acquired loans and the associated purchase discount mark on the acquired loans from both Severn and Northwest.

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Commercial real estate

At December 31, 2021, nonperforming assets were $3.0 million, a decrease of $3.2 million, or 51.4%, when compared to December 31, 2020.

The decrease in nonperforming assets was due to diligent workout efforts by the Company to reduce nonaccrual loans and loans 90 days past due and still accruing, partially offset by an increase in other real estate owned properties which was significantly impacted by the acquisition of OREO from Severn.

At December 31, 2022, nonperforming assets were $3.9 million, an increase of $902 thousand, or 29.6%, when compared to December 31, 2021.

The increase in nonperforming assets was primarily due to the increase in loans 90 days past due and still accruing, partially offset by a decrease in other real estate owned properties.

Accruing TDRs were $4.4 million at December 31, 2022, a decrease of $1.3 million, or 22.3%, when compared to December 31, 2021.

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The Company’s Board of Directors has established a comprehensive asset liability management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”).

The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical

change in the yield curve of U.S.

Treasury interest rates for maturities from one day to thirty years.

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When interest rates change, actual movements in different categories 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.

As an example, certain money market deposit accounts are assumed to reprice at 50% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement.

As an example, certain money market deposit accounts are

assumed to reprice at 50% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement.

As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the Company’s net interest margin.

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Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.

Additionally, certain assets, such as adjustable rate mortgage loans, have features

which restrict changes in interest rates on a short-term basis and over the life of the asset.

Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset.

Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates of deposit could deviate significantly from those assumed in calculating the tables.

The Consolidated Financial Statements and related consolidated financial data presented herein have been prepared in accordance with GAAP and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation.

and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation.

As a financial institution, virtually all of our assets and liabilities are monetary in nature and interest rates have a more significant impact on our performance than the effects of general levels of inflation.

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To the extent that deposits are not adequate to fund customer loan demand, liquidity needs can be met in the short-term funds markets.

We have arrangements with correspondent banks whereby we have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

We have arrangements with correspondent banks whereby we

have $15 million available in federal funds lines of credit and a reverse repurchase agreement available to meet any short-term needs which may not otherwise be funded by the Bank’s portfolio of readily marketable investments that can be converted to cash.

The Bank is also a member of the FHLB, which provides another source of liquidity, and had credit availability of approximately $298.7 million from the FHLB as of December 31, 2022.

At December 31, 2021, our loan to deposit ratio was approximately 70.0%, lower than the 85.5% at year-end 2020.

This decrease is the result of our excess liquidity position due to our deposits increasing $1.33 billion, or 77.9%, since year end 2020.

At December 31, 2022, our loan to deposit ratio was approximately 85.0%, higher than the 70.0% at year-end 2021.

This increase is the result of our loans increasing $436.9 million, or 20.6% since year end 2021.

Investment securities available for sale totaling $83.6 million at the end of 2022 were available for the management of liquidity and interest rate risk, subject to certain pledging requirements, which can be easily transitioned to held to maturity securities.

The comparable amount was $117.0 million at December 31, 2021.

Cash and cash equivalents were $583.6 million at December 31, 2021, an increase of $396.7 million, or 212.2%, compared to the $186.9 million at year-end 2020, which reflects the increase in deposits during 2021.

Cash and cash equivalents were $55.5 million at December 31, 2022, a decrease of $528.1 million, or 90.5%, compared to the $583.6 million at year-end 2021, which reflects the use of such funds to invest in loans and investment securities during 2022.

Management is not aware of any demands, commitments, events or uncertainties that will materially affect our ability to maintain liquidity at satisfactory levels.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis