LOANS

Loans consist of the following:



	December 31, 2019										December 31, 2018
(dollars in thousands)	PCI		All other loans**			Total			% of Gross Loans		PCI		All other loans**			Total			% of Gross Loans

Commercial real estate	$	1,738	$	963,039		$	964,777		66.34	%	$	1,785	$	876,231		$	878,016		65.18	%
Residential first mortgages	—		167,710			167,710			11.53	%	466		156,243			156,709			11.63	%
Residential rentals	295		123,306			123,601			8.50	%	897		123,401			124,298			9.23	%
Construction and land development	—		34,133			34,133			2.35	%	—		29,705			29,705			2.21	%
Home equity and second mortgages	391		35,707			36,098			2.48	%	72		35,489			35,561			2.64	%
Commercial loans	—		63,102			63,102			4.34	%	—		71,680			71,680			5.32	%
Consumer loans	—		1,104			1,104			0.08	%	—		751			751			0.06	%
Commercial equipment	—		63,647			63,647			4.38	%	—		50,202			50,202			3.73	%
Gross loans	2,424		1,451,748			1,454,172			100.00	%	3,220		1,343,702			1,346,922			100.00	%
Net deferred costs (fees)	—		1,879			1,879			0.13	%	—		1,183			1,183			0.09	%
Total loans, net of deferred costs	$	2,424	$	1,453,627		$	1,456,051				$	3,220	$	1,344,885		$	1,348,105
Less: allowance for loan losses	—		(10,942		)	(10,942		)	-0.75	%	—		(10,976		)	(10,976		)	-0.81	%
Net loans	$	2,424	$	1,442,685		$	1,445,109				$	3,220	$	1,333,909		$	1,337,129

** All other loans include acquired Non-PCI pools.

At December 31, 2019 and 2018, the Bank’s allowance for loan losses totaled $10.9 million and $11.0 million, or 0.75% and 0.81%, respectively, of loan balances. Moderate organic loan growth, a continued decline in historical loss rates for the periods used to estimate the allowance, a reduction in specific loan loss allocations and improvements in certain qualitative factors lowered the allowance as a percentage of loans by six basis points at December 31, 2019 compared to December 31, 2018. Improvements to historical charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as delinquency and classified assets, were partially offset by increases in other qualitative factors, such as concentration to capital factors and portfolio growth. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience, current economic conditions, size, growth and composition of the loan portfolio, financial condition of the borrowers and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance.

Net deferred loan costs of $1.9 million at December 31, 2019 included deferred fees paid by customers of $3.3 million offset by deferred costs of $5.2 million. Deferred loan costs include premiums paid for the purchase of residential first mortgages and deferred loan origination costs recorded in accordance with ASC 310-20. Net deferred loan costs of $1.2 million at December 31, 2018 included deferred fees paid by customers of $3.1 million offset by deferred costs of $4.3 million.

Risk Characteristics of Portfolio Segments

Concentrations of Credit - Loans are made primarily within the Company’s operating footprint of Southern Maryland and the greater Fredericksburg area of Virginia. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions. The commercial loan portfolio has concentrations in business loans secured by real estate and real estate development loans. At December 31, 2019 and 2018, the Company had no loans outstanding with foreign entities.

The Company manages its credit products and exposure to credit losses (credit risk) by the following specific portfolio segments (classes), which are levels at which the Company develops and documents its allowance for loan loss methodology. These segments are:

Commercial Real Estate (“CRE”)

Commercial and other real estate projects include office buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 8.9% and 5.9% of the CRE portfolio at December 31, 2019 and 2018, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan is the real property and the leases that produce income for the real property. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price at origination and have an initial contractual loan payment period ranging from three to 20 years.

Loans secured by commercial real estate are larger and involve greater risks than one-to four-family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy.

At December 31, 2019 and 2018, the largest outstanding commercial real estate loans were $21.1 million and $21.5 million, respectively, which were secured by commercial real estate and performing according to their terms.

Residential First Mortgages

Residential first mortgage loans are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The contractual loan payment period for residential loans typically ranges from ten to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter time periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank’s residential portfolio has both fixed-rate and adjustable-rate residential first mortgages. During the years ended December 31, 2019 and 2018, the Bank purchased residential first mortgages of $41.0 million and $11.0 million, respectively.

The annual and lifetime limitations on interest rate adjustments may constrain interest rate increases on these loans. There are also credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential first mortgage portfolio was $52.3 million or 3.6% of total gross loans of $1.45 billion at December 31, 2019 compared to $54.2 million or 4.0% of total gross loans of $1.35 billion at December 31, 2018.

The Bank generally retains the right to service loans sold for a payment based upon a percentage (generally 0.25% of the outstanding loan balance). As of December 31, 2019, and 2018, the Bank serviced $32.9 million and $38.1 million, respectively, in residential mortgage loans for others.

At December 31, 2019, and 2018, the largest outstanding residential first mortgage loans were $3.0 million and $2.1 million, respectively, which were secured by residences located in the Bank’s market area. The loans were performing according to terms.

Residential Rentals

Residential rental mortgage loans are amortizing, with principal and interest due each month. The loans are secured by income-producing 1-4 family units and apartments. As of December 31, 2019, and 2018, $97.1 million and $96.6 million, respectively, were 1-4 family units and $26.5 million and $27.7 million, respectively, were apartment buildings or multi-family units. Loans secured by residential rental properties are generally limited to 80% of the lower of the appraised value or sales price at origination and have initial contractual loan payment periods ranging from three to 20 years. The primary security on a residential rental loan is the property and the leases that produce income. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. The Bank’s adjustable rate residential rental portfolio was $102.2 million or 7.0% of total gross loans of $1.45 billion at December 31, 2019 compared to $97.4 million or 7.2% of total gross loans of $1.35 billion at December 31, 2018.

Loans secured by residential rental properties involve greater risks than 1-4 family residential mortgage loans. Although, there are similar risk characteristics shared with commercial real estate loans, the balances for the loans secured by residential rental properties are generally smaller. Because payments on loans secured by residential rental properties are often dependent on the successful operation or management of the properties, repayment of these loans may be subject to a greater extent to adverse conditions in the rental real estate market or the economy than similar owner-occupied properties.

At December 31, 2019 and 2018, the largest outstanding residential rental mortgage loan was $9.7 million and $10.0 million, respectively, which was secured by over 120 single family homes located in the Bank’s market area. The loan was performing according to its terms at December 31, 2019 and 2018.

Construction and Land Development

The Bank offers loans for the construction of one-to-four family dwellings. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. In addition, the Bank offers loans to acquire and develop land, as well as loans on undeveloped, subdivided lots for home building. The Bank’s construction and land development portfolio was $34.1 million or 2.4% of total gross loans of $1.45 billion at December 31, 2019 compared to $29.7 million or 2.2% of total gross loans of $1.35 billion at December 31, 2018.

A decline in demand for new housing might adversely affect the ability of borrowers to repay these loans. Construction and land development loans are inherently riskier than financing owner-occupied real estate. The Bank’s risk of loss is affected by the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates made to complete the project. In addition, the volatility of the real estate market has made it increasingly difficult to ensure that the valuation of land associated with these loans is accurate. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, a project’s value might be insufficient to assure full repayment. As a result of these factors, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank forecloses on a project, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

At December 31, 2019 and 2018, the largest outstanding construction and land development loans were $5.3 million and $2.5 million, respectively, which were secured by land in the Bank’s market area.

Home Equity and Second Mortgage Loans

The Bank maintains a portfolio of home equity and second mortgage loans. The Bank’s home equity and second mortgage portfolio was $36.1 million or 2.5% of total gross loans of $1.45 billion at December 31, 2019 compared to $35.6 million or 2.6% of total gross loans of $1.35 billion at December 31, 2018. These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second mortgage.

Commercial Loans

The Bank offers its business customers a variety of commercial loan products including term loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The portfolio consists primarily of demand loans and lines of credit. When making commercial business loans, the Bank considers the financial condition of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the borrower operates, the value of the collateral, and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable or other security as determined by the Bank. Commercial loans are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral would make full recovery from the sale of collateral unlikely.

The Bank’s commercial loan portfolio was $63.1 million or 4.3% of total gross loans of $1.45 billion at December 31, 2019 compared to $71.7 million or 5.3% of total gross loans of $1.35 billion at December 31, 2018. At December 31, 2019 and 2018, the largest outstanding commercial loans were $2.8 million and $4.2 million, respectively, which were secured by commercial real estate (all of which were located in the Bank’s market area), cash and investments. These loans were performing according to terms at December 31, 2019 and 2018.

Consumer Loans

Consumer loans consist of loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit. Consumer loans entail greater risk from other loan types due to being secured by rapidly depreciating assets or the reliance on the borrower’s continuing financial stability.

Commercial Equipment Loans

These loans consist primarily of fixed-rate, short-term loans collateralized by a commercial customer’s equipment or secured by real property, accounts receivable, or other security as determined by the Bank. When making commercial equipment loans, the Bank considers the same factors it considers when underwriting a commercial business loan. Commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flows of the borrower’s business. As a result, repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure, collateral would need to be liquidated to repay the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic.

The Bank’s commercial equipment portfolio was $63.6 million or 4.4% of total gross loans of $1.45 billion at December 31, 2019 compared to $50.2 million or 3.7% of total gross loans of $1.35 billion at December 31, 2018. At December 31, 2019 and 2018, the largest outstanding commercial equipment loans were $2.1 million and $2.5 million, respectively, which were secured by commercial real estate (located in the Bank’s market area), cash and investments. These loans were performing according to terms at December 31, 2019 and 2018.

Non-accrual and Aging Analysis of Current and Past Due Loans

Non-accrual loans as of December 31, 2019 and 2018 were as follows:



(dollars in thousands)	December 31, 2019
(dollars in thousands)	Non- accrual Delinquent Loans		Number of Loans	Non-accrual Current Loans		Number of Loans	Total Non-accrual Loans		Total Number of Loans
Commercial real estate	$	10,562	11	$	1,687	5	$	12,249	16
Residential first mortgages	—		—	830		3	830		3
Residential rentals	—		—	937		5	937		5
Construction and land development	—		—	—		—	—		—
Home equity and second mortgages	177		3	271		3	448		6
Commercial loans	1,807		2	1,320		1	3,127		3
Consumer loans	—		—	—		—	—		—
Commercial equipment	241		5	25		1	266		6
	$	12,787	21	$	5,070	18	$	17,857	39



(dollars in thousands)	December 31, 2018
(dollars in thousands)	Non- accrual Delinquent Loans	Number of Loans	Non-accrual Current Loans	Number of Loans	Total Non-accrual Loans	Total Number of Loans
Commercial real estate	8,474	11	6,158	6	14,632	17
Residential first mortgages	146	1	1,228	4	1,374	5
Residential rentals	260	2	703	3	963	5
Construction and land development	—	—	—	—	—	—
Home equity and second mortgages	147	2	—	—	147	2
Commercial loans	866	2	—	—	866	2
Consumer loans	—	—	—	—	—	—
Commercial equipment	1,259	5	41	2	1,300	7
	11,152	23	8,130	15	19,282	38

Non-accrual loans decreased $1.4 million from $19.3 million or 1.43% of total loans at December 31, 2018 to $17.9 million or 1.23% of total loans at December 31, 2019. Non-accrual loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from non-accrual or charged-off loans is reversed against interest income. In accordance with the Company’s policy, interest income is recognized on a cash basis or cost-recovery method, until the loan returns to accrual status.

At December 31, 2019, non-accrual loans of $17.9 million included 39 loans, of which $15.0 million, or 84% represented 18 loans and seven customer relationships. At December 31, 2018, non-accrual loans of $19.3 million included 38 loans, of which $15.3 million, or 79% represented 13 loans and four customer relationships. During the year ended December 31, 2019, non-accrual loans decreased $1.4 million primarily as a result of a written off loan relationship. At December 31, 2019, $5.1 million (28%) of non-accrual loans were current with all payments of principal and interest with no impairment and $12.8 million (72%) of non-accrual loans were delinquent with specific valuation reserves $522,000.

Non-accrual loans at December 31, 2019 and 2018 included three and one TDRs totaling $1.4 million and $29,000, respectively. These loans were classified solely as non-accrual for the calculation of financial ratios. Loan delinquency (90 days or greater delinquent and 31-89 days delinquent) increased $1.1 million from $12.2 million, or 0.91% of loans, at December 31, 2018 to $13.3 million, or 0.92% of loans, at December 31, 2019.

Non-accrual loans on which the recognition of interest has been discontinued, which did not have a specific allowance for impairment, amounted to $11.7 million and $17.4 million at December 31, 2019 and 2018, respectively. Interest due but not recognized on these balances at December 31, 2019 and 2018 was $318,000 and $456,000, respectively. Non-accrual loans with a specific allowance for impairment on which the recognition of interest has been discontinued amounted to $6.1 million and $1.9 million at December 31, 2019 and 2018, respectively. Interest due but not recognized on these balances at December 31, 2019 and 2018 was $302,000 and $81,000, respectively.

The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition. An analysis of past due loans as of December 31, 2019 and 2018 was as follows:



(dollars in thousands)	December 31, 2019
(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables
Commercial real estate	$	—	$	217	$	10,563	$	10,780	$	1,738	$	952,259	$	964,777
Residential first mortgages	—		—		—		—		—		167,710		167,710
Residential rentals	—		—		—		—		295		123,306		123,601
Construction and land dev.	—		—		—		—		—		34,133		34,133
Home equity and second mtg.	98		23		177		298		391		35,409		36,098
Commercial loans	—		—		1,807		1,807		—		61,295		63,102
Consumer loans	—		—		—		—		—		1,104		1,104
Commercial equipment	52		159		231		442		—		63,205		63,647
Total	$	150	$	399	$	12,778	$	13,327	$	2,424	$	1,438,421	$	1,454,172



(dollars in thousands)	December 31, 2018
(dollars in thousands)	31-60 Days		61-89 Days		90 or Greater Days		Total Past Due		PCI Loans		Current		Total Loan Receivables
Commercial real estate	$	—	$	677	$	8,474	$	9,151	$	1,785	$	867,080	$	878,016
Residential first mortgages	—		66		146		212		466		156,031		156,709
Residential rentals	13		53		247		313		897		123,088		124,298
Construction and land dev.	—		—		—		—		—		29,705		29,705
Home equity and second mtg.	266		—		147		413		72		35,076		35,561
Commercial loans	—		—		866		866		—		70,814		71,680
Consumer loans	1		4		—		5		—		746		751
Commercial equipment	25		29		1,230		1,284		—		48,918		50,202
Total	$	305	$	829	$	11,110	$	12,244	$	3,220	$	1,331,458	$	1,346,922

There were no loans greater than 90 days still accruing interest at December 31, 2019 and 2018, respectively.

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Impaired loans, including TDRs, at December 31, 2019 and 2018 were as follows:



(dollars in thousands)	December 31, 2019
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	20,914	$	15,919	$	4,788	$	20,707	$	417	$	21,035	$	813
Residential first mortgages	1,921		1,917		—		1,917		—		1,962		86
Residential rentals	941		937		—		937		—		967		56
Construction and land dev.	—		—		—		—		—		—		—
Home equity and second mtg.	524		510		—		510		—		519		23
Commercial loans	3,127		1,807		1,320		3,127		210		3,284		152
Consumer loans	—		—		—		—		—		—		—
Commercial equipment	808		585		203		788		201		826		35
Total	$	28,235	$	21,675	$	6,311	$	27,986	$	828	$	28,593	$	1,165



(dollars in thousands)	December 31, 2018
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	27,835	$	24,515	$	3,025	$	27,540	$	326	$	27,833	$	1,275
Residential first mortgages	2,527		2,527		—		2,527		—		2,573		126
Residential rentals	1,745		1,745		—		1,745		—		1,792		85
Construction and land dev.	729		729		—		729		—		729		45
Home equity and second mtg.	294		288		—		288		—		291		13
Commercial loans	2,762		1,888		863		2,751		700		2,804		118
Consumer loans	1		—		1		1		1		1		—
Commercial equipment	1,315		1,121		178		1,299		153		1,354		31
Total	$	37,208	$	32,813	$	4,067	$	36,880	$	1,180	$	37,377	$	1,693

TDRs, included in the impaired loan schedules above, as of December 31, 2019 and 2018 were as follows:



(dollars in thousands)	December 31, 2019					December 31, 2018
(dollars in thousands)	Dollars			Number of Loans		Dollars			Number of Loans
Commercial real estate	$	1,420		3		$	5,612		7
Residential first mortgages	64			1		66			1
Residential rentals	—			—		216			1
Construction and land development	—			—		729			2
Commercial loans	—			—		53			1
Commercial equipment	565			4		29			1
Total TDRs	$	2,049		8		$	6,705		13
Less: TDRs included in non-accrual loans	(1,399		)	(3	)	(29		)	(1	)
Total performing accrual TDR loans	$	650		5		$	6,676		12

TDRs decreased $4.7 million from $6.7 million at December 31, 2018 to $2.0 million at December 31, 2019. TDRs that are included in non-accrual are classified as non-accrual loans solely for the calculation of financial ratios. The Company had specific reserves of $87,000 on three TDRs totaling $88,000 at December 31, 2019 and $165,000 on one TDRs totaling $1.6 million at December 31, 2018. During the year ended December 31, 2019, TDR disposals, which included payoffs and refinancing consisted of seven loans totaling $4.4 million. TDR loan principal curtailment was $236,000 for the year ended December 31, 2019. There was one TDR added during the year ended December 31, 2019 totaling $25,000. During the year ended December 31, 2018, TDR disposals, which included payoffs and refinancing decreased by three loans totaling $3.9 million. TDR loan principal curtailment was $176,000 for the year ended December 31, 2018. There were zero TDRs added during the year ended December 31, 2018.

Performing TDRs as a percentage of outstanding TDRs at December 31, 2019 and 2018 were $650,000 or 31.7%, and $6.7 million or 99.6%, respectively. Interest income in the amount of $92,000 and $348,000 was recognized on outstanding TDR loans for the years ended December 31, 2019 and 2018, respectively. The Bank’s TDRs are performing according to the terms of their agreements at market interest rates appropriate for the level of credit risk of each TDR loan. The average contractual interest rate on performing TDRs at December 31, 2019 and 2018 was 4.51% and 5.08%, respectively.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses at and for the years ended December 31, 2019, 2018 and 2017, respectively. An allocation of the allowance to one category of loans does not prevent the Company from using that allowance to absorb losses in a different category.



Year Ended	December 31, 2019
(dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance

Commercial real estate	$	6,882	$	(148	)	$	15	$	649		$	7,398
Residential first mortgages	755		—			—		(291		)	464
Residential rentals	498		(53		)	46		(94		)	397
Construction and land development	310		(329		)	—		292			273
Home equity and second mortgages	133		(28		)	6		38			149
Commercial loans	1,482		(1,127		)	40		691			1,086
Consumer loans	6		(5		)	2		7			10
Commercial equipment	910		(685		)	102		838			1,165
	$	10,976	$	(2,375	)	$	211	$	2,130		$	10,942

Purchase Credit Impaired**	$	—	$	—		$	—	$	—		$	—

** There is no allowance for loan loss on the PCI portfolios. A more detailed rollforward schedule will be presented if an allowance is required.



Year Ended	December 31, 2018
(dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance
Commercial real estate	$	6,451	$	(268	)	$	10	$	689		$	6,882
Residential first mortgages	1,144		(115		)	—		(274		)	755
Residential rentals	512		(84		)	—		70			498
Construction and land development	462		—			—		(152		)	310
Home equity and second mortgages	162		(7		)	18		(40		)	133
Commercial loans	1,013		(94		)	189		374			1,482
Consumer loans	7		(2		)	—		1			6
Commercial equipment	764		(647		)	56		737			910
	$	10,515	$	(1,217	)	$	273	$	1,405		$	10,976



Year Ended	December 31, 2017
(dollars in thousands)	Beginning Balance		Charge-offs			Recoveries		Provisions			Ending Balance
Commercial real estate	$	5,212	$	(217	)	$	63	$	1,393		$	6,451
Residential first mortgages	1,406		—			—		(262		)	1,144
Residential rentals	362		(42		)	—		192			512
Construction and land development	941		(26		)	—		(453		)	462
Home equity and second mortgages	138		(14		)	1		37			162
Commercial loans	794		(13		)	1		231			1,013
Consumer loans	3		(2		)	—		6			7
Commercial equipment	1,004		(168		)	62		(134		)	764
	$	9,860	$	(482	)	$	127	$	1,010		$	10,515

The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at December 31, 2019 and 2018, respectively.



	December 31, 2019								December 31, 2018
(dollars in thousands)	Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total		Ending balance: individually evaluated for impairment		Ending balance: collectively evaluated for impairment		Purchase Credit Impaired		Total
Loan Receivables:
Commercial real estate	$	20,707	$	942,332	$	1,738	$	964,777	$	27,540	$	848,691	$	1,785	$	878,016
Residential first mortgages	1,917		165,793		—		167,710		2,527		153,716		466		156,709
Residential rentals	937		122,369		295		123,601		1,745		121,656		897		124,298
Construction and land development	—		34,133		—		34,133		729		28,976		—		29,705
Home equity and second mortgages	510		35,197		391		36,098		288		35,201		72		35,561
Commercial loans	3,127		59,975		—		63,102		2,751		68,929		—		71,680
Consumer loans	—		1,104		—		1,104		1		750		—		751
Commercial equipment	788		62,859		—		63,647		1,299		48,903		—		50,202
	$	27,986	$	1,423,762	$	2,424	$	1,454,172	$	36,880	$	1,306,822	$	3,220	$	1,346,922

Allowance for loan losses:
Commercial real estate	$	417	$	6,981	$	—	$	7,398	$	326	$	6,556	$	—	$	6,882
Residential first mortgages	—		464		—		464		—		755		—		755
Residential rentals	—		397		—		397		—		498		—		498
Construction and land development	—		273		—		273		—		310		—		310
Home equity and second mortgages	—		149		—		149		—		133		—		133
Commercial loans	210		876		—		1,086		700		782		—		1,482
Consumer loans	—		10		—		10		1		5		—		6
Commercial equipment	201		964		—		1,165		153		757		—		910
	$	828	$	10,114	$	—	$	10,942	$	1,180	$	9,796	$	—	$	10,976

Credit Quality Indicators

Credit quality indicators as of December 31, 2019 and 2018 were as follows:

Credit Risk Profile by Internally Assigned Grade



(dollars in thousands)	Commercial Real Estate				Construction and Land Dev.				Residential Rentals
(dollars in thousands)	12/31/2019		12/31/2018		12/31/2019		12/31/2018		12/31/2019		12/31/2018

Unrated	$	102,695	$	112,280	$	2,075	$	2,172	$	38,139	$	37,478
Pass	840,403		741,037		32,058		26,805		84,811		85,551
Special mention	—		—		—		—		—		—
Substandard	21,679		24,699		—		728		651		1,269
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	964,777	$	878,016	$	34,133	$	29,705	$	123,601	$	124,298



(dollars in thousands)	Commercial Loans				Commercial Equipment				Total Commercial Portfolios
(dollars in thousands)	12/31/2019		12/31/2018		12/31/2019		12/31/2018		12/31/2019		12/31/2018

Unrated	$	16,754	$	19,157	$	26,045	$	15,373	$	185,708	$	186,460
Pass	43,221		49,828		37,399		33,685		1,037,892		936,906
Special mention	—		—		—		—		—		—
Substandard	3,127		2,695		203		1,144		25,660		30,535
Doubtful	—		—		—		—		—		—
Loss	—		—		—		—		—		—
Total	$	63,102	$	71,680	$	63,647	$	50,202	$	1,249,260	$	1,153,901



(dollars in thousands)	Non-Commercial Portfolios **				Total All Portfolios
(dollars in thousands)	12/31/2019		12/31/2018		12/31/2019		12/31/2018

Unrated	$	164,991	$	146,889	$	350,699	$	333,349
Pass	38,718		44,441		1,076,610		981,347
Special mention	—		—		—		—
Substandard	1,203		1,691		26,863		32,226
Doubtful	—		—		—		—
Loss	—		—		—		—
Total	$	204,912	$	193,021	$	1,454,172	$	1,346,922

** Non-commercial portfolios are generally evaluated based on payment activity but may be risk graded if part of a larger commercial relationship or are credit impaired (e.g., non-accrual loans, TDRs).

Credit Risk Profile Based on Payment Activity (Non-Commercial Portfolios)



(dollars in thousands)	Residential First Mortgages				Home Equity and Second Mtg.				Consumer Loans
(dollars in thousands)	12/31/2019		12/31/2018		12/31/2019		12/31/2018		12/31/2019		12/31/2018

Performing	$	167,710	$	156,563	$	35,921	$	35,414	$	1,104	$	751
Nonperforming	—		146		177		147		—		—
Total	$	167,710	$	156,709	$	36,098	$	35,561	$	1,104	$	751

A risk grading scale is used to assign grades to commercial relationships, which include commercial real estate, residential rentals, construction and land development, commercial loans and commercial equipment loans. Loans are graded at inception, annually thereafter when financial statements are received and at other times when there is an indication that a credit may have weakened or improved. Only commercial loan relationships with an aggregate exposure to the Bank of $1,000,000 or greater are subject to being risk rated.

Home equity and second mortgages and consumer loans are evaluated for creditworthiness in underwriting and are monitored based on borrower payment history. Residential first mortgages are evaluated for creditworthiness during credit due diligence before being purchased. Residential first mortgages, home equity and second mortgages and consumer loans are classified as unrated unless they are part of a larger commercial relationship that requires grading or are TDRs or nonperforming loans with an Other Assets Especially Mentioned (“OAEM”) or higher risk rating due to a delinquent payment history.

Management reviews credit quality indicators as part of its individual loan reviews on a quarterly basis. The overall quality of the Bank’s loan portfolio is assessed using the Bank’s risk grading scale, the level and trends of net nonperforming loans and delinquencies, the performance of TDRs and the general economic conditions in the Company’s geographical market. This review process is assisted by frequent internal reporting of loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Credit quality indicators and allowance factors are adjusted based on management’s judgment during the monthly and quarterly review process. Loans subject to risk ratings are graded on a scale of one to ten. The Company considers loans rated substandard, doubtful and loss as classified assets for regulatory and financial reporting.

Ratings 1 thru 6 - Pass

Ratings 1thru 6 have asset risks ranging from excellent low risk to adequate. The specific rating assigned considers customer history of earnings, cash flows, liquidity, leverage, capitalization, consistency of debt service coverage, the nature and extent of customer relationship and other relevant specific business factors such as the stability of the industry or market area, changes to management, litigation or unexpected events that could have an impact on risks.

Rating 7 - OAEM (Other Assets Especially Mentioned) – Special Mention

These credits, while protected by the financial strength of the borrowers, guarantors or collateral, have reduced quality due to economic conditions, less than adequate earnings performance or other factors which require the lending officer to direct more than normal attention to the credit. Financing alternatives may be limited and/or command higher risk interest rates. OAEM loans are the first adversely classified assets on our watch list. These relationships will be reviewed at least quarterly.

Rating 8 - Substandard

Substandard assets are assets that are inadequately protected by the sound worth or paying capacity of the borrower or of the collateral pledged. These assets have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. The loans may have a delinquent history or combination of weak collateral, weak guarantor strength or operating losses. When a loan is assigned to this category the Bank may estimate a specific reserve in the loan loss allowance analysis. These assets listed may include assets with histories of repossessions or some that are non-performing bankruptcies. These relationships will be reviewed at least quarterly.

Rating 9 - Doubtful

Doubtful assets have many of the same characteristics of Substandard with the exception that the Bank has determined that loss is not only possible but is probable and the risk is close to certain that loss will occur. When a loan is assigned to this category the Bank will identify the probable loss and the loan will receive a specific reserve in the loan loss allowance analysis. These relationships will be reviewed at least quarterly.

Rating 10 – Loss

Once an asset is identified as a definite loss to the Bank, it will receive the classification of “loss.” There may be some future potential recovery; however, it is more practical to write off the loan at the time of classification. Losses will be taken in the period in which they are determined to be uncollectable.

Purchased Credit-Impaired Loans and Acquired Loans

PCI loans had an unpaid principal balance of $2.9 million and $3.9 million and a carrying value of $2.4 million and $3.2 million at December 31, 2019 and December 31, 2018, respectively. PCI loans represented 0.13% and 0.19% of total assets at December 31, 2019 and December 31, 2018, respectively. Determining the fair value of the PCI loans at the time of acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest considering prepayment assumptions. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called accretable yield. At acquisition, the difference between contractually required payments and the cash flows expected to be collected reflects estimated credit losses and is called the nonaccretable difference. In accordance with U.S. GAAP, there was no carryover of previously established allowance for loan losses from acquisition. In conjunction with the acquisition of County First, the PCI loan portfolio was accounted for at fair value as follows:



(dollars in thousands)	January 1, 2018
Contractual principal and interest at acquisition	$	6,126
Nonaccretable difference	(1,093		)
Expected cash flows at acquisition	5,033
Accretable yield	(516		)
Basis in PCI loans at acquisition - estimated fair value	$	4,517

A summary of changes in the accretable yield for PCI loans for the year ended December 31, 2019 follows:



	Years Ended December 31,
(dollars in thousands)	2019			2018
Accretable yield, beginning of period	$	733		$	—
Additions	—			516
Accretion	(354		)	(230		)
Reclassification from (to) nonaccretable difference	330			134
Other changes, net	(32		)	313
Accretable yield, end of period	$	677		$	733

Accounting standards require a periodic recast of the expected cash flows on the PCI loan portfolio. The recast was performed during the second and fourth quarters of 2019 and the fourth quarter of 2018 and resulted in a reclassification of $330,000 and $134,000, respectively, from the credit (nonaccretable) portion of the discount to the liquidity (accretable) portion of the discount. Also, based on the recast, future expected cash flows, not related to the reclassification, decreased $32,000 for the year ended December 31, 2019 and increased $313,000 for the year ended December 31, 2018.

The following is a summary of acquired and non-acquired loans as of December 31, 2019 and 2018:



BY ACQUIRED AND NON-ACQUIRED	December 31, 2019		%		December 31, 2018		%
Acquired loans - performing	$	74,654	5.13	%	$	103,667	7.70	%
Acquired loans - purchase credit impaired ("PCI")	2,424		0.17	%	3,220		0.24	%
Total acquired loans	77,078		5.30	%	106,887		7.94	%
Non-acquired loans**	1,377,094		94.70	%	1,240,035		92.06	%
Gross loans	1,454,172		100.00	%	1,346,922		100.00	%
Net deferred costs (fees)	1,879		0.13	%	1,183		0.09	%
Total loans, net of deferred costs	$	1,456,051			$	1,348,105

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

At December 31, 2019 acquired performing loans, which totaled $74.7 million, included a $1.2 million net acquisition accounting fair market value adjustment, representing a 1.55% discount and PCI loans which totaled $2.4 million, included a $516,000 adjustment, representing a 17.55% discount.

At December 31, 2018 acquired performing loans, which totaled $103.7 million, included a $1.9 million net acquisition accounting fair market value adjustment, representing a 1.76% discount and PCI loans which totaled $3.2 million, included a $696,000 adjustment, representing a 17.77% discount.

Related Party Loans

Included in loans receivable were loans made to executive officers and directors or their related interests. These loans were made in the ordinary course of business at substantially the same terms and conditions as those prevailing at the time for comparable transactions with persons not affiliated with the Bank and are not considered to involve more than the normal risk of collectability. For the years ended December 31, 2019, 2018 and 2017, all loans to directors and executive officers of the Bank performed according to original loan terms. Activity in loans outstanding to executive officers and directors are summarized as follows:



(dollars in thousands)	At and For the Years Ended December 31,
(dollars in thousands)	2019			2018			2017
Balance, beginning of period	$	24,852		$	26,476		$	26,464
Loans and additions	1,845			46			3,699
Change in Directors' status	(10,452		)	575			—
Repayments	(7,575		)	(2,245		)	(3,687		)
Balance, end of period	$	8,670		$	24,852		$	26,476

In addition, the Bank had outstanding loans of $5.4 million, $9.2 million and $10.4 million, respectively, for the years ended December 31, 2019, 2018 and 2017 to charitable and community organizations in which the Bank's executive officers and directors volunteer.

Loan Participations

The Bank sells portions of commercial, commercial real estate and commercial construction loans to other lenders. The Bank's sold participated loans with other lenders at December 31, 2019 and 2018 were $14.9 million and $24.6 million, respectively. The Bank may also buy loans, portions of loans, or participation certificates from other lenders to limit overall exposure. The Bank only purchases loans or portions of loans after reviewing loan documents, underwriting support, and completing other procedures, as necessary.

The Bank's purchased participation loans from other lenders at December 31, 2019 and 2018 were $3.4 million and $11.9 million, respectively. Purchased participation loans are subject to the same regulatory and internal policy requirements as other loans in the Bank's portfolio.