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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2023
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number: 001-39285

Partners Bancorp

(Exact name of registrant as specified in its charter)

Maryland	52-1559535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2245 Northwood Drive, Salisbury, Maryland	21801
(Address of principal executive offices)	(Zip Code)

410-548-1100

(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 $0.01 per share	PTRS	Nasdaq Capital Market

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 (§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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2023, there were 17,985,577 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

Table of Contents

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION



		Page
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)		3

Consolidated Statements of Income (Unaudited)		4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)		5

Consolidated Statements of Stockholders' Equity (Unaudited)		6

Consolidated Statements of Cash Flows (Unaudited)		7

Notes to Consolidated Financial Statements (Unaudited)		8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		49

Item 3. Quantitative and Qualitative Disclosures About Market Risk		85

Item 4. Controls and Procedures		85

PART II OTHER INFORMATION


Item 1. Legal Proceedings		85

Item 1A. Risk Factors		85

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		85

Item 3. Defaults Upon Senior Securities		86

Item 4. Mine Safety Disclosures		86

Item 5. Other Information		86

EXHIBIT INDEX		87

SIGNATURES		88

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

PARTNERS BANCORP

CONSOLIDATED BALANCE SHEETS



	September 30,		December 31,
	2023		2022
(Dollars in thousands, except per share amounts)	(Unaudited)		*

ASSETS
Cash and due from banks	$	15,674	$	14,678
Interest-bearing deposits in other financial institutions		23,141		103,922
Federal funds sold		9,816		22,990
Cash and cash equivalents		48,631		141,590
Securities available for sale, at fair value		121,920		133,657
Loans held for sale		354		1,314
Loans, less allowance for credit losses of $16,075 at September 30, 2023 and $14,315 at December 31, 2022		1,281,429		1,218,551
Accrued interest receivable		4,729		4,566
Premises and equipment, less accumulated depreciation		14,116		14,857
Restricted stock		5,640		6,512
Operating lease right-of-use assets		4,631		5,065
Financing lease right-of-use assets		1,447		1,550
Other investments		5,363		4,888
Bank owned life insurance		19,064		18,706
Core deposit intangible, net		1,185		1,540
Goodwill		9,582		9,582
Other assets		14,942		12,234
Total assets	$	1,533,033	$	1,574,612
LIABILITIES
Deposits:
Non-interest-bearing demand	$	508,793	$	528,770
Interest-bearing demand		111,936		121,787
Savings and money market		374,210		431,538
Time		328,090		257,510
		1,323,029		1,339,605
Accrued interest payable on deposits		1,071		267
Short-term borrowings with the Federal Home Loan Bank		10,000		42,000
Long-term borrowings with the Federal Home Loan Bank		19,800		19,800
Subordinated notes payable, net		22,249		22,215
Other borrowings		596		613
Operating lease liabilities		5,037		5,465
Financing lease liabilities		1,907		2,006
Other liabilities		5,685		3,312
Total liabilities		1,389,374		1,435,283
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $0.01, authorized 40,000,000 shares, issued and outstanding 17,985,577 as of September 30, 2023 and 17,973,724 as of December 31, 2022, including 9,338 nonvested shares as of September 30, 2023 and 18,669 nonvested shares as of December 31, 2022		180		180
Surplus		88,809		88,669
Retained earnings		70,916		62,854
Noncontrolling interest in consolidated subsidiaries		515		707
Accumulated other comprehensive loss, net of tax		(16,761)		(13,081)
Total stockholders' equity		143,659		139,329
Total liabilities and stockholders' equity	$	1,533,033	$	1,574,612

* Derived from audited consolidated financial statements.

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2023		2022		2023		2022
INTEREST INCOME ON:
Loans, including fees	$	18,224	$	14,119	$	51,493	$	40,222
Investment securities:
Taxable		690		607		2,054		1,519
Tax-exempt		188		180		560		545
Federal funds sold		253		353		823		433
Other interest income		423		1,198		1,664		1,914
		19,778		16,457		56,594		44,633
INTEREST EXPENSE ON:
Deposits		3,778		1,071		8,906		3,440
Borrowings		721		511		2,401		1,524
		4,499		1,582		11,307		4,964
NET INTEREST INCOME		15,279		14,875		45,287		39,669
Provision for credit losses		2		419		396		803
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		15,277		14,456		44,891		38,866
NONINTEREST INCOME:
Service charges on deposit accounts		285		255		795		727
Losses on sales and calls of investment securities		—		(5)		—		(5)
Mortgage banking income, net		99		231		455		949
Gains on disposal of other assets, net		2		—		2		—
Impairment loss on restricted stock		—		—		—		(1)
Other income		720		760		2,156		2,316
		1,106		1,241		3,408		3,986
NONINTEREST EXPENSE:
Salaries and employee benefits		5,483		5,688		17,337		16,767
Premises and equipment		1,418		1,411		4,194		4,292
(Gains) and operating expenses on other real estate owned, net		—		—		—		(9)
Amortization of core deposit intangible		115		128		355		394
Merger related expenses		157		167		1,617		720
Other expenses		3,242		2,953		9,413		8,484
		10,415		10,347		32,916		30,648
INCOME BEFORE TAXES ON INCOME		5,968		5,350		15,383		12,204
Federal and state income taxes		1,506		1,292		3,943		2,914
NET INCOME	$	4,462	$	4,058	$	11,440	$	9,290
Net loss attributable to noncontrolling interest		76		52		192		108
NET INCOME ATTRIBUTABLE TO PARTNERS BANCORP	$	4,538	$	4,110	$	11,632	$	9,398
Earnings per common share:
Basic earnings per share	$	0.25	$	0.23	$	0.65	$	0.52
Diluted earnings per share	$	0.25	$	0.23	$	0.65	$	0.52

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2023		2022		2023		2022
NET INCOME	$	4,462	$	4,058	$	11,440	$	9,290
OTHER COMPREHENSIVE LOSS, NET OF TAX:
Unrealized holding losses on securities available for sale arising during the period		(4,484)		(5,690)		(4,816)		(20,131)
Deferred income tax effect		1,070		1,368		1,136		4,733
Other comprehensive loss, net of tax		(3,414)		(4,322)		(3,680)		(15,398)

Reclassification adjustment for losses included in net income		—		5		—		5
Deferred income tax effect		—		(1)		—		(1)
Other comprehensive loss, net of tax		—		4		—		4
TOTAL OTHER COMPREHENSIVE LOSS		(3,414)		(4,318)		(3,680)		(15,394)
COMPREHENSIVE INCOME (LOSS)	$	1,048	$	(260)	$	7,760	$	(6,104)
Comprehensive loss attributable to noncontrolling interest		76		52		192		108
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO PARTNERS BANCORP	$	1,124	$	(208)	$	7,952	$	(5,996)

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)


For the three months ended:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Loss		Equity
Balances, June 30, 2022	$	179	$	88,552	$	55,695	$	1,122	$	(10,761)	$	134,787
Net income (loss)		—		—		4,110		(52)		—		4,058
Other comprehensive loss, net of tax		—		—		—		—		(4,318)		(4,318)
Comprehensive loss												(260)
Cash dividends, $0.025 per share		—		—		(449)		—		—		(449)
Minority interest equity distribution		—		—		—		(343)		—		(343)
Stock-based compensation expense		—		24		—		—		—		24
Balances, September 30, 2022	$	179	$	88,576	$	59,356	$	727	$	(15,079)	$	133,759

Balances, June 30, 2023	$	180	$	88,785	$	67,097	$	591	$	(13,347)	$	143,306
Net income (loss)		—		—		4,538		(76)		—		4,462
Other comprehensive loss, net of tax		—		—		—		—		(3,414)		(3,414)
Comprehensive income												1,048
Cash dividends, $0.040 per share		—		—		(719)		—		—		(719)
Stock-based compensation expense		—		24		—		—		—		24
Balances, September 30, 2023	$	180	$	88,809	$	70,916	$	515	$	(16,761)	$	143,659


For the nine months ended:									Accumulated
									Other		Total
	Common				Retained		Noncontrolling		Comprehensive		Stockholders'
(Dollars in thousands, except per share amounts)	Stock		Surplus		Earnings		Interest		Income (Loss)		Equity
Balances, December 31, 2021	$	179	$	88,390	$	51,305	$	1,179	$	315	$	141,368
Net income (loss)		—		—		9,398		(108)		—		9,290
Other comprehensive loss, net of tax		—		—		—		—		(15,394)		(15,394)
Comprehensive loss												(6,104)
Cash dividends, $0.075 per share		—		—		(1,347)		—		—		(1,347)
Minority interest equity distribution		—		—		—		(344)		—		(344)
Stock option exercises, net		—		115		—		—		—		115
Stock-based compensation expense		—		71		—		—		—		71
Balances, September 30, 2022	$	179	$	88,576	$	59,356	$	727	$	(15,079)	$	133,759

Balances, December 31, 2022	$	180	$	88,669	$	62,854	$	707	$	(13,081)	$	139,329
Net income (loss)		—		—		11,632		(192)		—		11,440
Other comprehensive loss, net of tax		—		—		—		—		(3,680)		(3,680)
Comprehensive income												7,760
Cumulative effect adjustment due to the adoption of ASU 2016-13		—		—		(1,412)		—		—		(1,412)
Cash dividends, $0.120 per share		—		—		(2,158)		—		—		(2,158)
Stock option exercises, net		—		69		—		—		—		69
Stock-based compensation expense		—		71		—		—		—		71
Balances, September 30, 2023	$	180	$	88,809	$	70,916	$	515	$	(16,761)	$	143,659

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
(Dollars in thousands)	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,632	$	9,398
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		396		803
Depreciation		1,262		1,404
Amortization and accretion		181		347
Losses on sales and calls of investment securities		—		5
Net gains on sales of assets		(2)		—
Loss on equity securities		53		226
Gain on sale of loans held for sale, originated		(424)		(869)
Net gains on other real estate owned, including write‑downs		—		(5)
Increase in bank owned life insurance cash surrender value		(358)		(338)
Stock‑based compensation expense, net of employee tax obligation		71		71
Net accretion of certain acquisition related fair value adjustments		(45)		(163)
Impairment loss on restricted stock		—		1
Changes in assets and liabilities:
Loans held for sale		1,384		4,732
Accrued interest receivable		(163)		278
Other assets		(605)		(621)
Accrued interest payable on deposits		804		(91)
Other liabilities		1,495		855
Net cash provided by operating activities		15,681		16,033
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale		(1,772)		(40,599)
Purchases of other investments		(528)		(25)
Purchase of Farmers Bank Stock		—		(49)
Proceeds from the sale of Farmers Bank Stock		—		44
Proceeds from maturities and paydowns of securities available for sale		8,547		10,717
Net increase in loans		(64,262)		(87,840)
Proceeds from sale of assets		2		—
Purchases of premises and equipment		(521)		(487)
Proceeds from the sales of foreclosed assets		—		842
Redemption (purchase) of restricted stocks		872		(21)
Net cash used in investing activities		(57,662)		(117,418)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in demand, money market, and savings deposits, net		(87,156)		89,287
Cash received for the exercise of stock options		69		115
Increase (decrease) in time deposits, net		70,578		(76,225)
Decrease in borrowings, net		(32,020)		(441)
Net decrease in minority interest contributed capital		(192)		(452)
Decrease in finance lease liability		(99)		(89)
Dividends paid		(2,158)		(1,347)
Net cash (used in) provided by financing activities		(50,978)		10,848
Net decrease in cash and cash equivalents		(92,959)		(90,537)
Cash and cash equivalents, beginning of period		141,590		338,829
Cash and cash equivalents, ending of period	$	48,631	$	248,292
SUPPLEMENTARY CASH FLOW INFORMATION:
Interest paid	$	10,160	$	5,291
Income taxes paid		4,125		2,416
Right of use assets and corresponding lease liabilities		190		—
Unrealized loss on securities available for sale		(4,816)		(20,131)
SUPPLEMENTARY NON‑CASH INVESTING ACTIVITIES:
Cumulative effect adjustment due to the adoption of ASU 2016-13	$	(1,412)	$	—

The Notes to the Unaudited Consolidated Financial Statements are an integral part of these consolidated financial statements.

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PARTNERS BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Its Significant Accounting Policies

Partners Bancorp (the “Company”) is a multi-bank holding company with two wholly owned subsidiaries (the “Subsidiaries”), The Bank of Delmarva (“Delmarva”), a commercial bank headquartered in Seaford, Delaware that operates primarily in Wicomico and Worcester counties in Maryland, Sussex County in Delaware, and Camden and Burlington counties in New Jersey, and Virginia Partners Bank (“Partners”), a commercial bank headquartered in Fredericksburg, Virginia that operates in and around the greater Fredericksburg, Virginia area (Stafford County, Spotsylvania County, King George County, Caroline County, and the City of Fredericksburg, Virginia), the Greater Washington area (the District of Columbia, Arlington County, Clarke County, Fairfax County, Fauquier County, Loudoun County, Prince William County, Warren County, and the Cities of Alexandria, Fairfax, Falls Church, Manassas, Manassas Park, and Reston, Virginia) and Anne Arundel County and the three counties of Southern Maryland (Charles County, Calvert County and St. Mary’s County). The Subsidiaries engage in general banking business and provide a broad range of financial services to individual and corporate customers, and are subject to competition from other financial institutions. The Subsidiaries are also subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. The accounting and reporting policies of the Company and its Subsidiaries conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and practices within the banking industry.

Significant accounting policies not disclosed elsewhere in the consolidated financial statements are as follows:

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company; the Subsidiaries, along with their consolidated subsidiaries: Delmarva Real Estate Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Davie Circle, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; Delmarva BK Holdings, LLC, a wholly owned subsidiary of Delmarva, which is a real estate holding company; DHB Development, LLC, of which Delmarva previously held a 40.55% interest, and which is a real estate holding company; Bear Holdings, Inc., a wholly owned subsidiary of Partners, which is a real estate holding company; Johnson Mortgage Company, LLC (“JMC”), of which Partners owns a 51% interest, and which is a residential mortgage company; and 410 William Street, LLC, a wholly owned subsidiary of Partners, which holds investment property. During the second quarter of 2023, DHB Development, LLC was dissolved, and all remaining assets were distributed to the members, which resulted in no gain or loss to the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Presentation:

The unaudited interim consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, changes in stockholder's equity, and cash flows in conformity with U.S. GAAP. In the opinion of management, the unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position at September 30, 2023 and December 31, 2022, the results of its operations for three and nine months and its cash flows for the nine months ended September 30, 2023 and 2022 in conformity with U.S. GAAP.

Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023, or for any other period.

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Use of Estimates:

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company’s reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Actual results could differ from those estimates. The more significant areas in which management of the Company applies critical assumptions and estimates that are most susceptible to change in the short term include the calculation of the allowance for credit losses and the unrealized gain or loss on investment securities available for sale.

Adoption of New Accounting Standard in 2023:

Effective January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which replaced the prior incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL” or the “CECL Standard”). The measurement of expected credit losses under the CECL Standard is applicable to financial assets measured at amortized cost, including portfolio loans and investment securities classified as held to maturity (“HTM”). It also applies to off-balance-sheet credit exposures including loan commitments, standby letters of credit, financial guarantees and other similar instruments. In addition, the CECL Standard changes the accounting for investment securities classified as available for sale ("AFS"), including a requirement that estimated credit losses on AFS investment securities be presented as an allowance rather than as a direct write-down of the carrying balance of investment securities which the Company does not currently intend to sell or does not believe, based on current conditions, that it is likely that the Company will be required to sell.

The Company adopted the CECL Standard using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect reduction to retained earnings totaling $1.4 million, as detailed in the table below. As discussed further below, purchased credit deteriorated assets (“PCD”) were measured on a prospective basis in accordance with the CECL Standard and all purchased credit impaired (“PCI”) loans as of December 31, 2022 were considered PCD loans upon adoption. Results for reporting periods beginning after January 1, 2023 are presented under the CECL Standard while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The adoption of the CECL Standard resulted in the following adjustments to our financial statements as of January 1, 2023:



Dollars in thousands			Change in Consolidated Balance Sheet		Tax Effect		Change to Retained Earnings from Adoption of ASU 2016-13

Allowance for credit losses ("ACL") - loans		$	1,330	$	310	$	1,020
Adjustment related to purchased credit-deteriorated loans	(1)		9		-		9
Total ACL - loans			1,339		310		1,029
Adjustment to PCD Loans			(9)		-		(9)
ACL - unfunded credit commitments			512		120		392
Total impact of CECL adoption		$	1,842	$	430	$	1,412

(1) Represents a gross-up of the balance sheet related to PCD loans resulting from the adoption of ASU 2016-13 on January 1, 2023.

Loans designated as PCI and accounted for under Accounting Standards Codification (“ASC”) 310-30 were designated as PCD loans. In accordance with the CECL Standard, the Company did not reassess whether PCI loans met the criteria of PCD loans as of the date of adoption and determined all PCI loans were PCD loans. The Company recorded an increase to the balance of PCD loans and an increase to the allowance for credit losses for loans of $9 thousand, which

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represented the expected credit losses for PCD loans. The remaining non-credit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2023 over the remaining estimated life of the loans.

On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 addresses areas identified by the Financial Accounting Standards Board (“FASB”) as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL Standard. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL Standard and enhance the disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, the amendments require that the Company disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The Company adopted the standard prospectively and it did not have a material impact on the consolidated financial statements.

In December 2018, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Office of Comptroller of the Currency (“OCC”) approved a final rule to address changes to credit loss accounting under U.S. GAAP, including banking organizations’ adoption of the CECL Standard. The final rule provides banking organizations the option to phase-in, over a three-year period, the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. The Company has elected to phase-in the impact of the adoption of this standard on the Company’s regulatory capital over the three-year transition period. See Note 9 – Regulatory Capital Requirements for further information.

Investment Securities Available for Sale (“AFS”):

Management evaluates all AFS investment securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the investment security or it is more likely than not that the Company will be required to sell the investment security, the investment security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, downgrades in the ratings of the investment security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specific to the investment security. If the 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 investment security and any deficiency is recorded as an allowance for credit losses, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss), net of tax.

Changes in the allowance for credit losses are recorded as a provision for (or recovery of) credit losses in the Consolidated Statements of Income. Losses are charged against the allowance for credit losses when management believes an AFS investment security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit losses related to the AFS investment securities portfolio.

Impairment may result from credit deterioration of the issuer or collateral underlying the investment security. In performing an assessment of recoverability, all relevant information is considered, including the length of time and extent to which fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

Restricted Stock, Equity Securities and Other Investments:

Federal Reserve Bank (“FRB”) stock, at cost, Federal Home Loan Bank (“FHLB”) stock, at cost, Atlantic Central Bankers Bank (“ACBB”) stock, at cost, and Community Bankers Bank (“CBB”) stock, at cost, are equity interests in the FRB, FHLB, ACBB, and CBB, respectively. These securities do not have a readily determinable fair value for purposes

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of ASC 321 “Investments-Equity Securities” (“ASC 321”) because their ownership is restricted and they lack an active market. As there is no readily determinable fair value for these securities, they are carried at cost less any impairment.

Equity securities with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Any equity securities without readily determinable fair values are carried at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments. The entirety of any impairment on equity securities is recognized in earnings. Equity securities are included in “Other investments” on the Consolidated Balance Sheets.

Other investments include an equity ownership of Solomon Hess SBA Loan Fund LLC, for which the value is adjusted for its pro rata share of assets in the fund. Other investments also include equity securities the Company holds with Community Capital Management in their Community Reinvestment Act (“CRA”) Qualified Investment Fund.

Bank Owned Life Insurance:

The Company has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other changes or amounts due that are probable at settlement.

Loans and the Allowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjusted for deferred loan fees and costs, which are amortized over the term of the loan using the effective interest rate method. Interest on loans is accrued based on the principal amounts outstanding. It is the Company’s policy to discontinue the accrual of interest when a borrower is determined to be experiencing financial difficulty or when principal or interest on the loan is delinquent for ninety days or more. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Cash collections on loans classified as nonaccrual are applied as reductions of the loan principal balance and no interest income is recognized on those loans until the principal balance has been collected. As a general rule, a nonaccrual loan may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (2) when it otherwise becomes well secured and in the process of collection.

The allowance for credit losses is maintained at a level believed to be adequate by management to absorb expected losses inherent in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, the concentration of credits within each segment, the effects of any changes in lending policies, procedures, including underwriting standards and collections, charge-off and recovery practices, the effects of changes in the experience, depth and ability of management, the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors, an assessment of individually evaluated loans and actual loss experience, the value of the underlying collateral, the condition of various market segments, both locally and nationally, and current reasonable and supportable forecasts of economic events in specific industries and geographical areas, including unemployment levels, and other pertinent factors, including regulatory guidance and general economic conditions, along with external factors such as competition and the legal environment. The Company’s allowance for credit losses incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast period of twelve months. After the forecast period, the Company’s model immediately reverts back to the historical loss rate adjusted for the quantitative factors described above for the remaining contractual life of the financial assets. Determination of the allowance for credit losses is inherently subjective, as it requires significant estimates, which may be susceptible to significant change. Loan losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. A provision for credit losses is charged to operations based on management's periodic evaluation of the factors previously mentioned, as well as other pertinent factors. Evaluations are conducted at least quarterly and more often if deemed necessary. Expected credit losses are estimated over the contractual term of the loans, and are adjusted for expected prepayments.

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The Company’s allowance for credit losses measures the expected lifetime loss using pooled assumptions and loan level details for loans that share common risk characteristics and evaluates an individual reserve in instances where the loans do not share the same risk characteristics.

Loans that share common risk characteristics are considered collectively assessed. Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. Quantitative loss estimation models have been developed based largely on internal and peer historical data at the loan and portfolio levels and the economic conditions during the same time period.

Expected losses for the Company’s collectively assessed loan segments are estimated using the average charge-off method, which calculates an estimate of losses based upon historical experience and is applied prospectively across the life of each loan. This method calculates future cash flows at the individual loan level based upon loan characteristics. Life calculations for each loan grouping incorporates future cash flows at the loan level, in addition to prepayment assumptions.

Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the specific reserve is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the specific reserve is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed uncollectible.

The Company obtains appraisals from a pre-approved list of independent, third party appraisers located in the market in which the collateral is located. At a minimum, it is ascertained that the appraiser is currently licensed in the state in which the property is located, experienced in the appraisal of properties similar to the property being appraised, has knowledge of current real estate market conditions and financing trends, and is reputable. Independent appraisals or valuations are obtained on all individually assessed loans, and these appraisals or valuations are updated every twelve months. External valuation sources are the primary source to value collateral dependent loans; however, the Company may also utilize values obtained through other valuation sources. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. The specific reserve on loans individually assessed is updated, reviewed, and approved on a quarterly basis at or near the end of each reporting period.

The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Upon origination, each commercial loan is assigned a risk rating, with loans closer to one having less risk. This risk rating scale is the Company’s primary credit quality indicator.

Loan Charge-off Policies

Loans are generally fully or partially charged down to the fair value of securing collateral when:

●

management deems the asset to be uncollectible;

●

repayment is deemed to be made beyond the reasonable time frames;

●

the asset has been classified as a loss by internal or external review; or

●

the borrower has filed bankruptcy and the loss becomes evident owing to a lack of assets.

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Acquired Loans

Loans acquired in connection with acquisitions are recorded at their acquisition date fair value with no carryover of related allowance for credit losses. Acquired loans are classified into two categories: (1) PCD loans, which are purchased financial instruments with more than insignificant credit deterioration, and (2) loans with insignificant credit deterioration (“non-PCD”). PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance for credit losses established on the acquisition date, which is recognized in the current period provision for credit losses. For PCD loans, an allowance for credit losses is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost basis”. There is no provision for credit losses recognized on PCD loans because the initial allowance for credit losses is established by grossing-up the amortized cost of the PCD loan. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

PCD loans are accounted for in accordance with ASC 326-20, Financial Instruments- Credit Losses- Measured at Amortized Cost (“ASC 326-20”), if, at acquisition, the loan or pool of loans has experienced more than insignificant credit deterioration since origination. At acquisition, the Company considers several factors as indicators that an acquired loan or pool of loans has experienced more than insignificant credit deterioration. These factors include loans 30 days or more past due, loans with an internal risk grade of below average or lower, loans classified as nonaccrual by the acquired institution, and the materiality of the credit.

Under ASC 326-20, a group of loans with similar risk characteristics can be assessed to determine if the pool of loans is PCD. However, if a loan does not have similar risk characteristics as any other acquired loan, the loan is individually assessed to determine if it is PCD. In addition, the initial allowance for credit losses related to acquired loans can be estimated for a pool of loans if the loans have similar risk characteristics. Even if the loans were individually assessed to determine if they were PCD, they can be grouped together in the initial allowance for credit losses calculation if they share similar risk characteristics. If a PCD loan has an unfunded commitment at acquisition, the initial allowance for credit losses calculation reflects only the expected credit losses associated with the funded portion of the PCD loan. Expected credit losses associated with the unfunded commitment are included in the initial measurement of the commitment. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s amortized cost basis and the unpaid principal balance. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the interest and credit discount or premium is allocated to individual loans as determined by the difference between the loan’s amortized cost basis and the unpaid principal balance. The premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan.

TDRs prior to the Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, a loan was accounted for and reported as a TDR when, for economic or legal reasons, the Company granted a concession to a borrower experiencing financial difficulty that it would not otherwise consider. Management would work with borrowers identified as being in financial difficulty to modify to more affordable terms before their loan would reach nonaccrual status. These modified terms may have included rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. A restructuring that resulted in only an insignificant delay in payment was not considered a concession. A delay may have been considered insignificant if the payments subject to the delay were insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period was insignificant relative to the frequency of the payments, the loan’s original contractual maturity or original expected duration.

TDRs were designated as impaired loans because interest and principal payments would not be received in accordance with the original contract terms. TDRs that were performing and on accrual status as of the date of the modification remained on accrual status. TDRs that were nonperforming as of the date of modification generally remained

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as nonaccrual until the prospect of future payments in accordance with the modified loan agreement was reasonably assured, generally demonstrated when the borrower maintained compliance with the restructured terms for a predetermined period, normally at least six months. TDRs that had temporary below-market concessions remained designated as a TDR and impaired regardless of the accrual or performance status until the loan was paid off. However, if the TDR was modified in a subsequent restructure with market terms and the borrower was not currently experiencing financial difficulty, then the loan was no longer designated as a TDR. See “Adoption of New Accounting Standards in 2023” as discussed previously for further discussion related to accounting for modifications of loans to borrowers experiencing financial difficulty subsequent to the adoption of ASU 2022-02 as of January 1, 2023.

Loans Held for Sale:

These loans consist of loans made through Partners’ majority owned subsidiary JMC.

JMC is engaged in the mortgage brokerage business in which JMC originates, closes, and immediately sells mortgage loans and related servicing rights to permanent investors in the secondary market. JMC has written commitments from several permanent investors (large financial institutions) and only closes loans that meet the lending requirements of the permanent investors. Loans are made in connection with the purchase or refinancing of existing and new one to four family residences primarily in southeastern and northern Virginia. Loans are initially funded primarily by JMC’s lines of credit. With the concurrent sale and delivery of mortgage loans to the permanent investors, JMC records receivables for mortgage loans sold and recognizes the related gains and losses on such sales. The receivables for mortgage loans sold are usually satisfied within 30 days of sale, whereupon the related borrowings on the lines of credit are repaid. Because of the short holding period, these loans are carried at the lower of cost or market and no market adjustments were deemed necessary in the first three quarters of 2023 or 2022. JMC’s agreements with its permanent investors include provisions that could require JMC to repurchase loans under certain circumstances, and also provide for the assessment of fees if loans go into default or are refinanced within specified periods of time. JMC has never been required to repurchase a loan and no indemnification reserve has been recorded as of September 30, 2023 or December 31, 2022 for possible repurchases. Management does not believe that a provision for early default or refinancing cost is necessary at September 30, 2023 or December 31, 2022.

JMC enters into commitments with its customers to originate loans where the interest rate on the loans is determined (locked) prior to funding. While this subjects JMC to the risk that interest rates may change from the commitment date to the funding date, JMC simultaneously enters into financial agreements (best efforts forward sales commitments) with its permanent investors giving JMC the right to deliver (put) loans to the investors at specified yields, thus enabling JMC to manage its exposure to changes in interest rates such that JMC is not subject to fluctuations in fair values of these agreements due to changes in interest rates. However, a default by a permanent investor required to purchase loans under such an agreement would expose JMC to potential fluctuation in selling prices of loans due to changes in interest rates. The fair value of rate lock commitments and forward sales commitments was considered immaterial at September 30, 2023 and December 31, 2022 and an adjustment was not recorded. Gains and losses on the sale of mortgages as well as origination fees, brokerage fees, interest rate lock-in fees and other fees paid by mortgagors are included in “Mortgage banking income, net” on the Company’s Consolidated Statements of Income.

Other Real Estate Owned (“OREO”):

OREO comprises properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value, net of estimated selling costs, at the date acquired creating a new cost basis. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent write-downs that may be required, and expenses of operation and gains and losses realized from the sale of OREO are included in “Noninterest expense” on the Company’s Consolidated Statements of Income. At September 30, 2023 and December 31, 2022, there were no properties included in OREO.

Intangible Assets and Amortization:

During the fourth quarter of 2019, the Company acquired Partners, and during the first quarter of 2018, the Company acquired Liberty Bell Bank (“Liberty”). ASC 350, Intangibles-Goodwill and Other (“ASC 350”) prescribes

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accounting for intangible assets subsequent to initial recognition. Acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Intangible assets related to the acquisitions of Partners and Liberty are being amortized over their remaining useful life. See Note 12 – Goodwill and Intangible Assets for further information.

Goodwill:

The Company’s goodwill was recognized in connection with the acquisitions of Partners and Liberty. The Company reviews the carrying value of goodwill at least annually during the fourth quarter or more frequently if certain impairment indicators exist. In testing goodwill for impairment, the Company may first consider qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then no further testing is required and the goodwill of the reporting unit is not impaired. If the Company elects to bypass the qualitative assessment or if management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the fair value of the reporting unit is compared with its carrying amount to determine whether an impairment exists. No impairment adjustment of goodwill was required for the nine months ended September 30, 2023 or 2022 or for the year ended December 31, 2022 based on management’s assessment.

Accounting for Stock Based Compensation:

The Company follows ASC 718-10, Compensation—Stock Compensation (“ASC 718-10”) for accounting and reporting for stock-based compensation plans. ASC 718-10 defines a fair value at grant date to be used for measuring compensation expense for stock-based compensation plans to be recognized in the consolidated statement of income.

Earnings Per Share:

Basic earnings per common share are determined by dividing net income by the weighted average number of shares outstanding for each period, giving retroactive effect to stock splits and dividends. Weighted average common shares outstanding were 17,985,577 and 17,985,371 for the three and nine months ended September 30, 2023, respectively. Calculations of diluted earnings per common share include the average dilutive common stock equivalents outstanding during the period, unless they are anti-dilutive. Dilutive common equivalent shares consist of stock options calculated using the treasury stock method and restricted stock awards. See Note 8 – Earnings Per Share for further information.

Note 2. Investment Securities

The Company’s AFS investment securities portfolio, other than subordinated debt investment securities, is either covered by the explicit or implied guarantee of the United States government or one of its agencies or are generally rated investment grade or higher. Subordinated debt investments, which are not rated, are issued by financial institutions within the geographic region of the Company. In addition, the Company performs a quarterly credit review on the majority of its municipal bonds issued by states and political subdivisions. All AFS investment securities were current with no AFS investment securities past due or on nonaccrual as of September 30, 2023 or December 31, 2022. As such, the Company has recorded no allowance for credit losses related to AFS investment securities as of September 30, 2023.

The following tables summarize the amortized cost and fair value of AFS investment securities and the corresponding amounts of gross unrealized gains and losses at September 30, 2023 and December 31, 2022:

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	September 30, 2023
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,231	$	—	$	1,906	$	15,325
Obligations of States and political subdivisions		29,615		—		3,914		25,701
Mortgage-backed securities		94,450		—		15,842		78,608
Subordinated debt investments		2,471		—		185		2,286
	$	143,767	$	—	$	21,847	$	121,920


	December 31, 2022
	Dollars in Thousands
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Obligations of U.S. Government agencies and corporations	$	17,115	$	—	$	1,649	$	15,466
Obligations of States and political subdivisions		29,480		7		2,422		27,065
Mortgage-backed securities		101,626		—		12,886		88,740
Subordinated debt investments		2,468		—		82		2,386
	$	150,689	$	7	$	17,039	$	133,657

Gross unrealized losses and fair values, aggregated by investment security category and length of time that individual investment securities have been in a continuous unrealized loss position, at September 30, 2023 and December 31, 2022, are as follows:


	September 30, 2023
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	1,934	$	20	$	13,391	$	1,886	$	15,325	$	1,906
Obligations of States and political subdivisions		5,667		430		20,034		3,484		25,701		3,914
Mortgage-backed securities		1,409		100		77,197		15,742		78,606		15,842
Subordinated debt investments		—		—		2,037		185		2,037		185
Total investment securities with unrealized losses	$	9,010	$	550	$	112,659	$	21,297	$	121,669	$	21,847

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	December 31, 2022
	Dollars in Thousands
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies and corporations	$	12,447	$	829	$	3,019	$	820	$	15,466	$	1,649
Obligations of States and political subdivisions		23,975		1,714		1,821		708		25,796		2,422
Mortgage-backed securities		34,133		2,343		54,605		10,543		88,738		12,886
Subordinated debt investments		2,136		82		—		—		2,136		82
Total investment securities with unrealized losses	$	72,691	$	4,968	$	59,445	$	12,071	$	132,136	$	17,039

At September 30, 2023, there was one mortgage-backed investment security (“MBS”), two agency investment securities, and thirteen municipal investment securities that have been in a continuous unrealized loss position for less than twelve months. At September 30, 2023, there were seventy MBS investment securities, sixteen agency investment securities, four subordinated debt investment securities, and forty-nine municipal investment securities that had been in a continuous unrealized loss position for more than twelve months.

The Company has evaluated AFS investment securities in an unrealized loss position for credit related impairment at September 30, 2023 and concluded no impairment existed based on several factors, which included: (1) the majority of these investment securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility and increases in market interest rates, (3) the contractual terms of the investments do not permit the issuer(s) to settle the investment securities at a price less than the cost basis of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investment securities and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investment securities before recovery of their amortized cost basis. As such, the Company has recorded no allowance for credit losses related to AFS investment securities as of September 30, 2023.

During the three and nine months ended September 30, 2023, the Company did not sell any investment securities. During the three and nine months ended September 30, 2022, the Company sold one investment security, resulting in a loss of $5 thousand.

During the three and nine months ended September 30, 2023, no investment securities either matured or were called. During the three months ended September 30, 2022, there were no calls or maturities on investment securities. During the nine months ended September 30, 2022, two investment securities either matured or were called, resulting in no gain or loss for the period.

The Company has pledged certain investment securities as collateral for qualified customers’ deposit accounts at September 30, 2023 and December 31, 2022. The amortized cost and fair value of these pledged investment securities was $10.1 million and $8.3 million, respectively, at September 30, 2023. The amortized cost and fair value of these pledged investment securities was $10.4 million and $9.1 million, respectively, at December 31, 2022.

The Company realized a loss of $53 thousand on equity securities during the three and nine months ended September 30, 2023. The Company realized a loss of $75 thousand and $226 thousand on equity securities during the three and nine months ended September 30, 2022, respectively. These losses are included in the “Other expenses” line item of “Noninterest Expense” in the Consolidated Statements of Income.

Contractual maturities of investment securities at September 30, 2023 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. MBS investment securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government

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National Mortgage Association. Repayment of MBS investment securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.

The following is a summary of maturities, calls, or repricing of AFS investment securities:


	September 30, 2023
	Investment Securities AFS
	Dollars in Thousands
		Amortized		Fair
		Cost		Value
Due in one year or less	$	6,341	$	6,238
Due after one year through five years		12,180		11,247
Due after five years through ten years		39,663		35,516
Due after ten years or more		85,583		68,919
	$	143,767	$	121,920

Note 3. Loans and Allowance for Credit Losses

Major categories of loans as of September 30, 2023 and December 31, 2022 are as follows:


(Dollars in thousands)	September 30, 2023		December 31, 2022
Originated Loans
Real Estate Mortgage
Construction and land development	$	113,281	$	117,256
Residential real estate		212,719		204,211
Nonresidential		704,242		633,910
Home equity loans		30,707		22,866
Commercial		115,579		115,221
Consumer and other loans		3,660		2,554
		1,180,188		1,096,018
Acquired Loans
Real Estate Mortgage
Construction and land development		51		40
Residential real estate		22,387		25,693
Nonresidential		77,858		88,710
Home equity loans		8,022		8,579
Commercial		8,794		13,332
Consumer and other loans		204		494
		117,316		136,848
Total Loans
Real Estate Mortgage
Construction and land development		113,332		117,296
Residential real estate		235,106		229,904
Nonresidential		782,100		722,620
Home equity loans		38,729		31,445
Commercial		124,373		128,553
Consumer and other loans		3,864		3,048
		1,297,504		1,232,866
Less: Allowance for credit losses		(16,075)		(14,315)
	$	1,281,429	$	1,218,551

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Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13. The allowance for credit losses under ASU 2016-13 is calculated utilizing the average historical loss methodology. The Company uses historical loss rates for the CECL Standard calculation based on Company specific historical losses and peer loss history, where applicable. The Company utilizes multiple assumptions to calculate the expected credit losses, which may include loan groupings, prepayment speeds, unfunded commitment funding assumptions, and forward-looking factors for the forecast period. For its reasonable and supportable forecasting of current expected credit losses, the Company analyzes a simple regression using forecasted economic metrics and historical peer loss data. The Company uses the average of four quarters of projected charge-offs and recoveries based on the Federal Open Markets Committee (“FOMC”) forecast to account for the forward-looking adjustment. To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company considers the following qualitative adjustment factors: concentration of credit, ability of staff, loan review, trends in loan quality, policy changes, collateral, and changes in nature and/or volume of loans. The Company made an accounting election to exclude accrued interest from the measurement of the allowance for credit losses because the Company has a robust policy in place to reverse or write-off accrued interest when loans are placed on nonaccrual, as described in Note 1 – Nature of Business and Its Significant Accounting Policies.

All loan information presented as of September 30, 2023 is in accordance with ASU 2016-13. All loan information presented as of December 31, 2022, or prior to the three and nine month periods ended September 30, 2023, is presented in accordance with previously applicable U.S. GAAP. Prior to adopting ASU 2016-13, the Company reviewed and analyzed each of the segments above using historical charge-off experience for their respective segments as well as the following qualitative factors: changes in the levels and trends in delinquencies, nonaccruals, classified assets and TDRs; changes in the value of underlying collateral; changes in the nature and volume of the portfolio; effects of any changes in lending policies, procedures, including underwriting standards and collections, charge-off and recovery practices; changes in the experience, depth and ability of management; changes in the national and local economic conditions and developments, including the condition of various market segments; changes in the concentration of credits within each pool; changes in the quality of the Company’s loan review system and the degree of oversight by the Company’s Board of Directors; changes in external factors such as competition and the legal environment. These factors resulted in a FASB ASC 450-10-20 calculated reserve for environmental factors.

Credit quality indicators are utilized to help estimate the collectability of each loan within the segments. The primary credit quality indicator used for evaluating credit quality is the risk rating categories of Pass, Watch, Special Mention, Substandard, and Doubtful. While other credit quality indicators may be evaluated as part of the Company’s credit risk management activities, including delinquency trends and loan or borrower specific market conditions, among other things, these indicators are primarily used in estimating the allowance for credit losses. The determination for a specific reserve is measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling cost when foreclosure is probable, instead of discounted cash flows. If management determined that the value of the loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), a specific reserve is recognized within the allowance for credit losses estimate or a charge-off to the allowance for credit losses.

The establishment of a specific reserve does not necessarily mean that the loan with the specific reserve will definitely incur a loss at the reserve level. It is only an estimation of potential loss based upon known events that are subject to change. A specific reserve will not be established unless loss elements can be determined and quantified based on known facts.

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The following table includes impairment information relating to loans and the allowance for credit losses as of December 31, 2022, prior to the adoption of ASU 2016-13:


	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Balance at December 31, 2022
Purchased credit impaired loans:
Balance in allowance	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Related loan balance		—		696		352		—		8		—		—		1,056
Individually evaluated for impairment:
Balance in allowance	$	8	$	—	$	—	$	—	$	282	$	—	$	—	$	290
Related loan balance		259		1,748		2,442		54		326		—		—		4,829
Collectively evaluated for impairment:
Balance in allowance	$	1,072	$	2,059	$	8,637	$	249	$	1,636	$	76	$	296	$	14,025
Related loan balance		117,037		227,460		719,826		31,391		128,219		3,048		—		1,226,981

Note: The balances above include unamortized discounts on acquired loans of $1.7 million.

The following tables provide a summary of the activity in the allowance for credit losses allocated by loan class for the three and nine months ended September 30, 2023 and the year ended December 31, 2022. Allocation of a portion of the allowance for credit losses to one loan class does not preclude its availability to absorb losses in other loan classes.


	September 30, 2023
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Quarter Ended
Beginning Balance	$	1,933	$	2,710	$	8,023	$	628	$	2,563	$	47	$	313	$	16,217
Adjustment for PCD acquired loans		—		—		—		—		—		—		—		—
Charge-offs		—		—		—		—		(310)		(21)		—		(331)
Recoveries		—		9		143		1		70		10		—		233
Provision/(recovery)		192		(68)		214		37		(452)		36		(3)		(44)
Ending Balance	$	2,125	$	2,651	$	8,380	$	666	$	1,871	$	72	$	310	$	16,075
Nine Months Ended
Beginning Balance	$	1,080	$	2,059	$	8,637	$	249	$	1,918	$	76	$	296	$	14,315
Effect of adoption of ASC 326		1,919		259		(1,579)		453		347		(27)		(33)		1,339
Adjustment for PCD acquired loans		—		—		—		—		—		—		—		—
Charge-offs		(10)		—		—		—		(362)		(51)		—		(423)
Recoveries		—		36		164		3		162		20		—		385
Provision/(recovery)		(864)		297		1,158		(39)		(194)		54		47		459
Ending Balance	$	2,125	$	2,651	$	8,380	$	666	$	1,871	$	72	$	310	$	16,075


	December 31, 2022
	Real Estate Mortgage
	Construction
	and Land		Residential								Consumer
Dollars in Thousands	Development		Real Estate		Nonresidential		Home Equity		Commercial		and Other		Unallocated		Total
Year Ended
Beginning Balance	$	1,143	$	1,893	$	9,239	$	212	$	1,885	$	36	$	248	$	14,656
Charge-offs		(13)		—		(1,555)		(27)		(182)		(72)		—		(1,849)
Recoveries		1		59		23		9		20		48		—		160
Provision/(recovery)		(51)		107		930		55		195		64		48		1,348
Ending Balance	$	1,080	$	2,059	$	8,637	$	249	$	1,918	$	76	$	296	$	14,315

Table of Contents

Nonaccruals

In general, a loan will be placed on nonaccrual status at the end of the reporting month in which the interest or principal is past due more than 90 days or it is determined that the borrower is experiencing financial difficulty that is not considered temporary. Exceptions to the policy are those loans that are in the process of collection and are well-secured. A well-secured loan is secured by collateral with sufficient market value to repay principal and all accrued interest.

The following tables show nonaccrual loans as of September 30, 2023 and December 31, 2022:


	Nonaccrual with		Nonaccrual with
	No Allowance		Allowance
	For Credit		For Credit		Total Nonaccrual		Allowance for
At September 30, 2023	Losses		Losses		Loans		Credit Losses

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	73	$	—	$	73	$	—
Residential real estate		1,157		—		1,157		—
Nonresidential		627		—		627		—
Home equity loans		51		—		51		—
Commercial		—		—		—		—
Consumer and other loans		—		—		—		—
TOTAL	$	1,908	$	—	$	1,908	$	—


	Nonaccrual with		Nonaccrual with
	No Allowance		Allowance
	For Credit		For Credit		Total Nonaccrual		Allowance for
At December 31, 2022	Losses		Losses		Loans		Credit Losses

	Dollars in Thousands
Real Estate Mortgage
Construction and land development	$	248	$	11	$	259	$	8
Residential real estate		1,263		—		1,263		—
Nonresidential		305		—		305

PARTNERS BANCORP 10-Q