Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income and costs, such as deferred fees and costs, charge-offs, and discounts or premiums on acquired or purchased loans. Interest on loans is recognized in earnings over the contractual term of the loan and is calculated using the effective interest method on principal amounts outstanding. Loan fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs or principal curtailments, as applicable.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off are reversed against interest income at the time the loans are placed on nonaccrual or charged-off. Any subsequent interest received on these loans is recognized as interest income under the cash basis method of accounting or applied as a reduction of the principal balance of the loan until the loan qualifies

for return to accrual status. Generally, a loan is returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, or the loan becomes well-secured and in the process of collection.

	September 30, 2020			December 31, 2019
Mortgage loans on real estate:
Residential first mortgages	$	286,127		$	293,913
Commercial mortgages (non-owner occupied)		282,378			196,143
Construction, land and land development		132,502			126,010
Commercial mortgages (owner occupied)		76,225			82,829
Residential revolving and junior mortgages		29,051			31,893
Commercial and industrial		187,219			181,730
Paycheck Protection Program		56,788			—
Consumer		6,443			11,985
Total loans		1,056,733			924,503
Net unamortized deferred loan fees		(2,123	)		(313	)
Allowance for loan losses		(12,899	)		(7,562	)
Loans receivable, net	$	1,041,711		$	916,628

As of September 30, 2020 and December 31, 2019, the Company had $388.4 million and $369.5 million, respectively, of loans pledged to the FHLB as collateral for borrowings. After adjustments by the FHLB, the total lendable collateral was $289.4 million and $288.8 million as of September 30, 2020 and December 31, 2019, respectively.

Beginning on April 3, 2020, the Company has participated in the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Through the PPP, which is administered by the Small Business Administration, the federal government partnered with banks, including the Bank, to provide over $650 billion to small businesses to support payrolls and other operating expenses. PPP loans have a two-year term if originated prior to June 5, 2020 or a five-year term if originated on or subsequent to June 5, 2020 and earn interest at 1% per year. Banks originating PPP loans earn a processing fee of 1%, 3%, or 5% of the loan amount, depending on the size of the loan. The Company believes that the majority of these loans will be forgiven in accordance with the terms of the program, and will be paid in full pursuant to the U.S. government guarantee. As of September 30, 2020, the Company’s PPP loan balances were $56.8 million, and the Company had received $2.4 million of processing fees for originating approximately 700 loans. The Company is accounting for the PPP processing fees in accordance with ASC 310-20, Receivable-Nonrefundable Fees and Other Costs, which requires fees, net of costs, to be deferred and amortized as a component of loan yield over the contractual life of the loan, accelerated for prepayments. Of the $2.4 million of processing fees received in the second and third quarters of 2020, approximately $287 thousand and $532 thousand have been recognized as interest income in the three and nine months ended September 30, 2020, respectively.

From the onset of the global COVID-19 pandemic, the Company has proactively addressed the needs of its commercial and individual borrowers by modifying loans allowing for the short-term deferral of principal payments or of principal and interest payments. Pursuant to the CARES Act, banks have the option to temporarily suspend certain requirements of GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time if certain conditions are met, such as the borrower was current as of December 31, 2019 and the modification was due to financial conditions due to the COVID-19 pandemic. All loan modifications made by the Company were made on a good faith basis to borrowers who met the requirements for modifications under the CARES Act. As a result of regulatory and accounting guidance regarding such modifications, the loans are not designated as TDRs, as of September 30, 2020.

The following table presents, as of September 30, 2020, the loan balances and number by loan type and the percentage these loans comprise within each loan type for which modifications were made.

	Loan Count	Principal Balance		% of Loan Type
Mortgage loans on real estate:
Residential first mortgages	14	$	2,886		1	%
Commercial mortgages (non-owner occupied)	23		47,102		17	%
Construction, land and land development	13		22,879		17	%
Commercial mortgages (owner occupied)	17		10,520		14	%
Residential revolving and junior mortgages	1		257		1	%
Commercial and industrial	87		17,575		9	%
Consumer	2		8		0	%
Total	157	$	101,227		10	%

All loans with COVID-19 Modifications, with the exception of $375 thousand and $509 thousand of loans on nonaccrual and 30-89 days past due, respectively, are reported as current as of September 30, 2020 in the tables that follow.

The following tables present the recorded investment for past due, based upon contractual terms, and nonaccrual loans as of the dates stated. A loan past due 90 days or more is generally placed on nonaccrual unless it is both well-secured and in the process of collection. Loans presented below as 90 days or more past due and still accruing include purchased credit-impaired (“PCI”) loans.

September 30, 2020	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Residential first mortgages	$	768	$	13	$	2,848	$	3,629	$	282,498	$	286,127
Commercial mortgages (non-owner occupied)		—		128		6,107		6,235		276,143		282,378
Construction, land and land development		484		—		899		1,383		131,119		132,502
Commercial mortgages (owner occupied)		48		21		208		277		75,948		76,225
Residential revolving and junior mortgages		61		—		397		458		28,593		29,051
Commercial and industrial		684		—		6,553		7,237		179,982		187,219
Paycheck Protection Program		—		—		—		—		56,788		56,788
Consumer		23				186		209		6,234		6,443
Total loans	$	2,068	$	162	$	17,198	$	19,428	$	1,037,305	$	1,056,733

December 31, 2019	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Residential first mortgages	$	3,904	$	16	$	1,403	$	5,323	$	288,590	$	293,913
Commercial mortgages (non-owner occupied)		126		—		433		559		195,584		196,143
Construction, land and land development		77		—		417		494		125,516		126,010
Commercial mortgages (owner occupied)		173		—		587		760		82,069		82,829
Residential revolving and junior mortgages		52		—		724		776		31,117		31,893
Commercial and industrial		570		—		670		1,240		180,490		181,730
Consumer		139		—		242		381		11,604		11,985
Total loans	$	5,041	$	16	$	4,476	$	9,533	$	914,970	$	924,503

The increase in nonaccrual loans as of September 30, 2020 compared to December 31, 2019 was primarily due to loans to borrowers adversely affected by the COVID-19 pandemic. These borrowers exhibited weakness and management believes it is probable the borrowers will be unable to meet the contractual payment terms of their loan agreements. As of September 30, 2020, loans representing a significant amount of the increase in balances were current.

The following tables include an aging analysis, based upon contractual terms, of the recorded investment of PCI loans included in the tables above as of the dates stated.

September 30, 2020	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total PCI Loans
Mortgage loans on real estate:
Residential first mortgages	$	39	$	13	$	—	$	52	$	2,381	$	2,433
Commercial mortgages (non-owner occupied)		—		128		—		128		—		128
Construction, land and land development		—		—		—		—		1,368		1,368
Commercial mortgages (owner occupied)		—		21		—		21		203		224
Residential revolving and junior mortgages		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Paycheck Protection Program		—		—		—		—		—		—
Consumer		—		—		—		—		37		37
Total purchased credit-impaired loans	$	39	$	162	$	—	$	201	$	3,989	$	4,190

December 31, 2019	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total PCI Loans
Mortgage loans on real estate:
Residential first mortgages	$	239	$	16	$	—	$	255	$	2,836	$	3,091
Commercial mortgages (non-owner occupied)		126		—		—		126		—		126
Construction, land and land development		—		—		—		—		1,357		1,357
Commercial mortgages (owner occupied)		25		—		—		25		229		254
Residential revolving and junior mortgages		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		42		42
Total purchased credit-impaired loans	$	390	$	16	$	—	$	406	$	4,464	$	4,870

The following table presents the changes in accretable yield for PCI loans for the periods stated.

	For the Three Months Ended						For the Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Balance at beginning of period	$	702		$	858		$	973		$	1,083
Accretion of acquisition accounting adjustment		(64	)		(121	)		(203	)		(305	)
Reclassifications from nonaccretable balance, net		—			6			5			62
Other changes, net		—			250			(137	)		153
Balance at end of period	$	638		$	993		$	638		$	993

Loans in the Company’s loan portfolio are risk rated on a periodic basis by experienced credit personnel.

Pass – Several pass credit risk ratings apply to loans in this category. These ratings are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities to management attention credits that have all characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention for loans risk rated special mention. Any collateral securing loans in this category may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the loan. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as an asset is not warranted.

The following tables present the Company’s risk rating of loans by loan type as of the dates stated.

	Grade
September 30, 2020	Pass		Special Mention		Substandard		Doubtful		Total Loans
Residential first mortgages	$	280,760	$	1,890	$	3,477	$	—	$	286,127
Commercial mortgages (non-owner occupied)		236,058		40,084		6,236		—		282,378
Construction, land and land development		103,472		26,764		2,266		—		132,502
Commercial mortgages (owner occupied)		64,993		10,893		339		—		76,225
Residential revolving and junior mortgages		28,140		514		397		—		29,051
Commercial and industrial		166,650		14,607		5,962		—		187,219
Paycheck Protection Program		56,788		—		—		—		56,788
Consumer		5,704		541		198		—		6,443
Total loans	$	942,565	$	95,293	$	18,875	$	—	$	1,056,733

	Grade
December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Total Loans
Residential first mortgages	$	290,322	$	1,091	$	2,500	$	—	$	293,913
Commercial mortgages (non-owner occupied)		195,584		—		559		—		196,143
Construction, land and land development		123,916		—		2,094		—		126,010
Commercial mortgages (owner occupied)		81,936		149		744		—		82,829
Residential revolving and junior mortgages		31,084		86		723		—		31,893
Commercial and industrial		177,608		2,289		1,833		—		181,730
Consumer		11,729		—		256		—		11,985
Total loans	$	912,179	$	3,615	$	8,709	$	—	$	924,503

In March of 2020, the Company downgraded approximately $88.5 million of loans to borrowers in industries highly affected by the COVID-19 pandemic, such as hotels, restaurants, retail, churches, and assisted-living facilities. The majority of the risk rating downgrades due to COVID-19 were from pass grades to special mention, and the majority were in commercial and construction loan types. During the second quarter of 2020, risk ratings for certain loans in these highly affected industries were adjusted as additional information became available. During the third quarter of 2020, an additional $4.7 million of loans were downgraded from pass grades to special mention or substandard.