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LOANS
 3 Months Ended
Mar. 31, 2020
Receivables [Abstract]  
Loans LOANS
Loans consist of the following:
 March 31, 2020December 31, 2019
(dollars in thousands)PCIAll other loans**Total% of Gross LoansPCIAll other loans**Total% of Gross Loans
Commercial real estate$1,730  $975,948  $977,678  65.61 %$1,738  $963,039  $964,777  66.34 %
Residential first mortgages—  170,795  170,795  11.46 %—  167,710  167,710  11.53 %
Residential rentals—  133,016  133,016  8.93 %295  123,306  123,601  8.50 %
Construction and land development—  38,627  38,627  2.59 %—  34,133  34,133  2.35 %
Home equity and second mortgages395  35,542  35,937  2.41 %391  35,707  36,098  2.48 %
Commercial loans—  70,971  70,971  4.76 %—  63,102  63,102  4.34 %
Consumer loans—  1,134  1,134  0.08 %—  1,104  1,104  0.08 %
Commercial equipment—  61,931  61,931  4.16 %—  63,647  63,647  4.38 %
Gross loans2,125  1,487,964  1,490,089  100.00 %2,424  1,451,748  1,454,172  100.00 %
Net deferred costs—  2,059  2,059  0.14 %—  1,879  1,879  0.13 %
Total loans, net of deferred costs2,125  1,490,023  1,492,148  2,424  1,453,627  1,456,051  
Less: allowance for loan losses—  (15,061) (15,061) (1.01)%—  (10,942) (10,942) (0.75)%
Net loans$2,125  $1,474,962  $1,477,087  $2,424  $1,442,685  $1,445,109  
______________________________________
**   All other loans include acquired Non-PCI pools.
Net deferred loan costs of $2.1 million at March 31, 2020 included deferred fees paid by customers of $3.3 million offset by deferred costs of $5.4 million, which include premiums paid for the purchase of residential first mortgages and deferred costs recorded in accordance with ASC 310-20 to capture loan origination costs. 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.
Risk Characteristics of Portfolio Segments
Concentrations of Credit - Loans are primarily made 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 March 31, 2020 and December 31, 2019, 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 9.7% and 8.9% of the CRE portfolio at March 31, 2020 and December 31, 2019, respectively. The Bank offers both fixed-rate and adjustable-rate loans under these product lines. The primary security on a commercial real estate loan comprises 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 March 31, 2020 and December 31, 2019, the largest outstanding commercial real estate loans were $21.0 million and $21.1 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 three months ended March 31, 2020 and the year ended December 31, 2019, the Bank purchased residential first mortgages of $14.5 million and $41.0 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 $48.7 million or 3.3% of total gross loans of $1.5 billion at March 31, 2020 compared to $52.3 million or 3.6% of total gross loans of $1.5 billion at December 31, 2019.
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 March 31, 2020 and December 31, 2019, the Bank serviced $32.7 million and $32.9 million, respectively, in residential mortgage loans for others.

At March 31, 2020 and December 31, 2019, the largest outstanding residential first mortgage loans were $3.0 million and $3.0 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 March 31, 2020 and December 31, 2019, $104.3 million and $97.1 million, respectively, were 1‑4 family units and $28.7 million and $26.5 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 an initial contractual loan payment period ranging from three to 20 years. The primary security on a residential rental loan is the related real property and the related 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 $111.8 million or 7.5% of total gross loans of $1.49 billion at March 31, 2020 compared to $102.2 million or 7.0% of total gross loans of $1.45 billion at December 31, 2019.
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 to a greater extent than similar owner-occupied properties.
At March 31, 2020 and December 31, 2019, the largest outstanding residential rental mortgage loan was $9.6 million and $9.7 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.
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 $38.6 million or 2.6% of total gross loans of $1.49 billion at March 31, 2020 compared to $34.1 million or 2.4% of total gross loans of $1.45 billion at December 31, 2019.
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 March 31, 2020 and December 31, 2019, the largest outstanding construction and land development loans were $9.3 million and $5.3 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 $35.9 million or 2.4% of total gross loans of $1.49 billion at March 31, 2020 compared to $36.1 million or 2.5% of total gross loans of $1.45 billion at December 31, 2019. 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 $71.0 million or 4.8% of total gross loans of $1.49 billion at March 31, 2020 compared to $63.1 million or 4.3% of total gross loans of $1.45 billion at December 31, 2019. At March 31, 2020 and December 31, 2019, the largest outstanding commercial loans were $6.4 million and $2.8 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 March 31, 2020 and December 31, 2019.

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 $61.9 million or 4.2% of total gross loans of $1.49 billion at March 31, 2020 compared to $63.6 million or 4.4% of total gross loans of $1.45 billion at December 31, 2019. At March 31, 2020 and December 31, 2019, the largest outstanding commercial equipment loans were $2.0 million and $2.1 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 March 31, 2020 and December 31, 2019.

U.S. Small Business Administration Paycheck Protection Program (PPP) Loans
There were no PPP loans funded as of March 31, 2020. As of April 30, 2020, the Company had funded or received SBA approvals to fund 770 SBA PPP loans representing $121.5 million. The Company does not expect to establish an allowance for loan losses for PPP loans due to a 100% U.S. government guaranty.

Non-accrual and Aging Analysis of Current and Past Due Loans
Non-accrual loans as of March 31, 2020 and December 31, 2019 were as follows:
 March 31, 2020
(dollars in thousands)Non-accrual Delinquent LoansNumber of LoansNon-accrual Current LoansNumber of LoansTotal Non-accrual LoansTotal Number of Loans
Commercial real estate$10,970  12  $1,126  3  $12,096  15  
Residential first mortgages196  1  —  —  196  1  
Residential rentals239  1  46  1  285  2  
Home equity and second mortgages153  3  302  3  455  6  
Commercial loans2,906  3  —  —  2,906  3  
Commercial equipment390  5  21  2  411  7  
 $14,854  25  $1,495  9  $16,349  34  

 December 31, 2019
(dollars in thousands)Non-accrual Delinquent LoansNumber of LoansNon-accrual Current LoansNumber of LoansTotal Non-accrual LoansTotal 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  
Home equity and second mortgages177  3  271  3  448  6  
Commercial loans1,807  2  1,320  1  3,127  3  
Commercial equipment241  5  25  1  266  6  
$12,787  21  $5,070  18  $17,857  39  
Non-accrual loans decreased $1.5 million from $17.9 million or 1.23% of total loans at December 31, 2019 to $16.3 million or 1.10% of total loans at March 31, 2020. Loans can be current but classified as non-accrual due to customer operating results or payment history. All interest accrued but not collected from loans that are placed on non-accrual or charged-off is reversed against interest income. In accordance with the Company’s policy, such interest income is recognized on a cash basis or cost-recovery method, until qualifying for return to accrual status.
At March 31, 2020, non-accrual loans of $16.3 million included 34 loans, of which $14.1 million, or 86% represented 13 loans and seven customer relationships. Non-accrual loans of $1.5 million (9%) were current with all payments of principal and interest with no impairment at March 31, 2020. Delinquent non-accrual loans were $14.9 million (91%) with specific reserves of $1.6 million at March 31, 2020.
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. 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, there were $5.1 million (28%) of non-accrual
loans current with all payments of principal and interest with no impairment and $12.8 million (72%) of delinquent non-accrual loans with a total of $522,000 specifically reserved.
Non-accrual loans included TDRs totaling $1.39 million and $1.40 million at March 31, 2020 and December 31, 2019, respectively. These loans were classified as non-accrual solely for the calculation of financial ratios. Loan delinquency (90 days or greater delinquent and 31-89 days delinquent) increased $7.5 million from $13.3 million, or 0.92% of loans, at December 31, 2019 to $20.8 million, or 1.40% of loans, at March 31, 2020.
Non-accrual loans, which did not have a specific allowance for impairment, amounted to $11.0 million and $11.7 million at March 31, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at March 31, 2020 and December 31, 2019 was $496,000 and $318,000, respectively. Non-accrual loans with a specific allowance for impairment amounted to $5.3 million and $6.1 million at March 31, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at March 31, 2020 and December 31, 2019 was $296,000 and $302,000, 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.
Past due and PCI loans as of March 31, 2020 and December 31, 2019 were as follows:
 March 31, 2020
(dollars in thousands)31‑60 Days61‑89 Days90 or Greater DaysTotal Past DuePCI LoansCurrentTotal Loan Receivables
Commercial real estate$6,028  $—  $10,533  $16,561  $1,730  $959,387  $977,678  
Residential first mortgages330  —  —  330  —  170,465  170,795  
Residential rentals240  —  —  240  —  132,776  133,016  
Construction and land dev.—  —  —  —  —  38,627  38,627  
Home equity and second mtg.99  —  153  252  395  35,290  35,937  
Commercial loans1,148  —  1,807  2,955  —  68,016  70,971  
Consumer loans—  —  —  —  —  1,134  1,134  
Commercial equipment64  12  384  460  —  61,471  61,931  
Total$7,909  $12  $12,877  $20,798  $2,125  $1,467,166  $1,490,089  

 December 31, 2019
(dollars in thousands)31‑60 Days61‑89 Days90 or Greater DaysTotal Past DuePCI LoansCurrentTotal 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 equipment52  159  231  442  —  63,205  63,647  
Total$150  $399  $12,778  $13,327  $2,424  $1,438,421  $1,454,172  

There were no loans that were past due 90 days or greater accruing interest at March 31, 2020 and December 31, 2019.

Impaired Loans and Troubled Debt Restructures (“TDRs”)

Troubled debt restructurings ("TDR") are those loans for which we have granted a concession to a borrower experiencing financial difficulties where we do not receive adequate compensation. TDRs are identified at the point when the borrower enters into a modification program.

On March 22, 2020, federal banking regulators issued an interagency statement that included guidance on their approach for the accounting for loan modifications as a result of the COVID-19 pandemic. In collaboration with the FASB staff and the SEC, the agencies confirmed that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. There were no funded COVID-19 loan modifications as of March 31, 2020. As of April 30, 2020, the Company had executed 66 loan deferrals on outstanding loan balances of $47.4 million. Also as of April 30, 2020, the Company was processing 305 deferral requests representing $233.5 million in outstanding balances. Given the ongoing uncertainty regarding the length and economic impact of the COVID-19 crisis and the effects of various government stimulus programs, the estimated number and dollar impact of loan deferrals the Company could execute is subject to change. Refer to Management's Discussion and Analysis for additional information about the interagency guidance and the Bank's COVID-19 loan modification programs.
Impaired loans, including TDRs, at March 31, 2020 and 2019 and at December 31, 2019 were as follows:
 March 31, 2020
(dollars in thousands)Unpaid Contractual Principal BalanceRecorded Investment With No AllowanceRecorded Investment With AllowanceTotal Recorded InvestmentRelated AllowanceQuarter Average Recorded InvestmentQuarter Interest Income RecognizedYTD Average Recorded InvestmentYTD Interest Income Recognized
Commercial real estate$22,527  $18,250  $4,064  $22,314  $367  $22,347  $140  $22,347  $140  
Residential first mortgages1,738  1,738  —  1,738  —  1,744  16  1,744  16  
Residential rentals656  656  —  656  —  658  6  658  6  
Home equity and second mtg.530  519  —  519  —  519  5  519  5  
Commercial loans2,906  1,807  1,099  2,906  932  2,951  —  2,951  —  
Commercial equipment949  576  350  926  350  939  15  939  15  
Total$29,306  $23,546  $5,513  $29,059  $1,649  $29,158  $182  $29,158  $182  

 March 31, 2019
(dollars in thousands)Unpaid Contractual Principal BalanceRecorded Investment With No AllowanceRecorded Investment With AllowanceTotal Recorded InvestmentRelated AllowanceQuarter Average Recorded InvestmentQuarter Interest Income RecognizedYTD Average Recorded InvestmentYTD Interest Income Recognized
Commercial real estate$22,320  $20,019  $2,274  $22,293  $208  $22,373  $184  $22,373  $184  
Residential first mortgages2,507  2,505  —  2,505  —  2,518  27  2,518  27  
Residential rentals1,773  1,768  —  1,768  —  1,779  21  1,779  21  
Construction and land dev.729  729  —  729  —  729  11  729  11  
Home equity and second mtg.257  250  —  250  —  250  2  250  2  
Commercial loans2,672  1,834  827  2,661  700  2,669  27  2,669  27  
Commercial equipment390  199  174  373  150  381  2  381  2  
Total$30,648  $27,304  $3,275  $30,579  $1,058  $30,699  $274  $30,699  $274  

 December 31, 2019
(dollars in thousands)Unpaid Contractual Principal BalanceRecorded Investment With No AllowanceRecorded Investment With AllowanceTotal Recorded InvestmentRelated AllowanceYTD Average Recorded InvestmentYTD Interest Income Recognized
Commercial real estate$20,914  $15,919  $4,788  $20,707  $417  $21,035  $813  
Residential first mortgages1,921  1,917  —  1,917  —  1,962  86  
Residential rentals941  937  —  937  —  967  56  
Home equity and second mtg.524  510  —  510  —  519  23  
Commercial loans3,127  1,807  1,320  3,127  210  3,284  152  
Commercial equipment808  585  203  788  201  826  35  
Total$28,235  $21,675  $6,311  $27,986  $828  $28,593  $1,165  
TDRs included in the impaired loan schedules above, as of March 31, 2020 and December 31, 2019 were as follows:
 March 31, 2020December 31, 2019
(dollars in thousands)Dollars Number of LoansDollarsNumber of Loans
Commercial real estate$1,418  3  $1,420  3  
Residential first mortgages63  1  64  1  
Commercial equipment554  4  565  4  
Total TDRs$2,035  8  $2,049  8  
Less: TDRs included in non-accrual loans(1,394) (3) (1,399) (3) 
Total accrual TDR loans$641  5  $650  5  
TDRs decreased $14,000 during the three months ended March 31, 2020 due to principal paydowns. There were no TDRs added during the three months ended March 31, 2020. The Company fully reserved three TDRs totaling $83,000 at March 31, 2020.
The Company had specific reserves of $87,000 on three TDR totaling $88,000 at December 31, 2019. During the year ended December 31, 2019, TDR disposals, which included payoffs and refinancing, included 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.
Allowance for Loan Losses ("ALLL")
The following tables detail activity in the allowance for loan losses at and for the three months ended March 31, 2020 and 2019, 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. There is no allowance for loan loss on the PCI portfolios. A more detailed rollforward schedule will be presented if a PCI allowance is required.
Three Months EndedMarch 31, 2020
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$7,398  $—  $—  $1,685  $9,083  
Residential first mortgages464  —  —  398  862  
Residential rentals397  —  —  305  702  
Construction and land development273  —  —  163  436  
Home equity and second mortgages149  —  1  108  258  
Commercial loans1,086  —  5  1,175  2,266  
Consumer loans10  —  —  5  15  
Commercial equipment1,165  —  13  261  1,439  
 $10,942  $—  $19  $4,100  $15,061  

Three Months EndedMarch 31, 2019
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$6,882  $—  $2  $(142) $6,742  
Residential first mortgages755  —  —  (33) 722  
Residential rentals498  (53) 46  (29) 462  
Construction and land development310  —  —  (162) 148  
Home equity and second mortgages133  —  2  (3) 132  
Commercial loans1,482  —  5  (81) 1,406  
Consumer loans6  (4) 1  5  8  
Commercial equipment910  (685) 56  945  1,226  
$10,976  $(742) $112  $500  $10,846  
The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at March 31, 2020 and 2019 and December 31, 2019.
 March 31, 2020December 31, 2019March 31, 2019
(dollars in thousands)Ending balance: individually evaluated for impairmentEnding balance: collectively evaluated for impairmentPurchase Credit ImpairedTotalEnding balance: individually evaluated for impairmentEnding balance: collectively evaluated for impairmentPurchase Credit ImpairedTotalEnding balance: individually evaluated for impairmentEnding balance: collectively evaluated for impairmentPurchase Credit ImpairedTotal
Loan Receivables:
Commercial real estate$22,314  $953,634  $1,730  $977,678  $20,707  $942,332  $1,738  $964,777  $22,293  $867,122  $1,750  $891,165  
Residential first mortgages1,738  169,057  —  170,795  1,917  165,793  —  167,710  2,505  153,680  468  156,653  
Residential rentals656  132,360  —  133,016  937  122,369  295  123,601  1,768  121,864  886  124,518  
Construction and land development—  38,627  —  38,627  —  34,133  —  34,133  729  32,069  —  32,798  
Home equity and second mortgages519  35,023  395  35,937  510  35,197  391  36,098  250  36,373  123  36,746  
Commercial loans2,906  68,065  —  70,971  3,127  59,975  —  63,102  2,661  68,064  —  70,725  
Consumer loans—  1,134  —  1,134  —  1,104  —  1,104  —  851  —  851  
Commercial equipment926  61,005  —  61,931  788  62,859  —  63,647  373  49,347  —  49,720  
$29,059  $1,458,905  $2,125  $1,490,089  $27,986  $1,423,762  $2,424  $1,454,172  $30,579  $1,329,370  $3,227  $1,363,176  
Allowance for loan losses:
Commercial real estate$367  $8,716  $—  $9,083  $417  $6,981  $—  $7,398  $208  $6,534  $—  $6,742  
Residential first mortgages—  862  —  862  —  464  —  464  —  722  —  722  
Residential rentals—  702  —  702  —  397  —  397  —  462  —  462  
Construction and land development—  436  —  436  —  273  —  273  —  148  —  148  
Home equity and second mortgages—  258  —  258  —  149  —  149  —  132  —  132  
Commercial loans932  1,334  —  2,266  210  876  —  1,086  700  706  —  1,406  
Consumer loans—  15  —  15  —  10  —  10  —  8  —  8  
Commercial equipment350  1,089  —  1,439  201  964  —  1,165  150  1,076  —  1,226  
$1,649  $13,412  $—  $15,061  $828  $10,114  $—  $10,942  $1,058  $9,788  $—  $10,846  

At March 31, 2020 and December 31, 2019, the Bank’s allowance for loan losses totaled $15.1 million and $10.9 million, or 1.01% and 0.75%, respectively, of loan balances. Management’s determination of the adequacy of the allowance is based on periodic evaluations 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.

The Company's allowance methodology considers quantitative historical loss factors and qualitative factors to determine the estimated level of incurred losses inherent in the Company's loan portfolios. The increased provision for loan losses ("PLL") recorded in the first three months of 2020 was due to growth in the loan portfolio and the uncertainty surrounding economic conditions as a result of the COVID-19 pandemic. At and for the three months ended March 31, 2020, the Company's ALLL and PLL increased $4.1 million and the ALLL increased 37.6% to $15.1 million at March 31, 2020 from $10.9 million at December 31, 2019. ALLL and PLL increases were primarily due to elevated scores for three qualitative factors (economic conditions, regulatory environment and lending policies and staff capabilities) in the Company's incurred loss model. Management believes that PLL and ALLL as a percent of total loans may increase in future periods if the credit quality of our loan portfolio declines and loan defaults increase as a result of the COVID-19 pandemic.
In addition, during the first quarter of 2020, the Company changed the historical loss factor portfolio segment application from a 5-year average that annualized the current year to date charge-off factor to a rolling 20 Quarter charge-off average. The change resulted in an immaterial change to the ALLL calculation. In addition, the Company will continue to track a total write-off factor (for 20 quarters) that averages charge-offs for all of the Bank’s portfolio segments and a rolling four quarter and rolling eight quarter charge-off rate as it may be appropriate to use these rates if Management believes these charge-off rates are indicative of incurred losses.
Credit Quality Indicators
Credit quality indicators as of March 31, 2020 and December 31, 2019 were as follows:
Credit Risk Profile by Internally Assigned Grade
 Commercial Real EstateConstruction and Land Dev.Residential Rentals
(dollars in thousands)3/31/202012/31/20193/31/202012/31/20193/31/202012/31/2019
Unrated$126,211  $102,695  $2,785  $2,075  $39,494  $38,139  
Pass828,041  840,403  35,842  32,058  93,152  84,811  
Special mention202  —  —  —  370  —  
Substandard23,224  21,679  —  —  —  651  
Doubtful—  —  —  —  —  —  
Loss—  —  —  —  —  —  
Total$977,678  $964,777  $38,627  $34,133  $133,016  $123,601  

 Commercial LoansCommercial EquipmentTotal Commercial Portfolios
(dollars in thousands)3/31/202012/31/20193/31/202012/31/20193/31/202012/31/2019
Unrated$17,127  $16,754  $25,633  $26,045  $211,250  $185,708  
Pass50,938  43,221  35,948  37,399  1,043,921  1,037,892  
Special mention—  —  —  —  572  —  
Substandard2,906  3,127  350  203  26,480  25,660  
Doubtful—  —  —  —  —  —  
Loss—  —  —  —  —  —  
Total$70,971  $63,102  $61,931  $63,647  $1,282,223  $1,249,260  

Non-Commercial Portfolios **Total All Portfolios
(dollars in thousands)3/31/202012/31/20193/31/202012/31/2019
Unrated$170,369  $164,991  $381,619  $350,699  
Pass36,353  38,718  1,080,274  1,076,610  
Special mention473  —  1,045  —  
Substandard671  1,203  27,151  26,863  
Doubtful—  —  —  —  
Loss—  —  —  —  
Total$207,866  $204,912  $1,490,089  $1,454,172  
** 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
 Residential First MortgagesHome Equity and Second Mtg.Consumer Loans
(dollars in thousands)3/31/202012/31/20193/31/202012/31/20193/31/202012/31/2019
Performing$170,795  $167,710  $35,784  $35,921  $1,134  $1,104  
Nonperforming—  —  153  177  —  —  
Total$170,795  $167,710  $35,937  $36,098  $1,134  $1,104  
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 have impairment quantified because of an event (e.g., TDRs or nonperforming loans).
Management regularly reviews credit quality indicators as part of its individual loan reviews and on a monthly and 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 charge-offs, 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 1 thru 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 are 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 noncollectable.
Purchased Credit-Impaired Loans and Acquired Loans
PCI loans had an unpaid principal balance of $2.6 million and a carrying value of $2.1 million at March 31, 2020. The carrying value of PCI loans represented 0.12% of total assets at March 31, 2020. 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. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carryover of a previously established allowance for loan losses from acquisition.
A summary of changes in the accretable yield for PCI loans for the three months ended March 31, 2020 and 2019 and the year ended December 31, 2019 follows:
 Three Months Ended March 31,Year Ended
(dollars in thousands)20202019December 31, 2019
Accretable yield, beginning of period$677  $733  $733  
Additions—  —  —  
Accretion(139) (54) (354) 
Reclassification from (to) nonaccretable difference—  —  330  
Other changes, net—  —  (32) 
Accretable yield, end of period$538  $679  $677  
At March 31, 2020 performing acquired loans, which totaled $69.2 million, included a $1.0 million net acquisition accounting fair market value adjustment, representing a 1.47% discount; and PCI loans which totaled $2.1 million, included a $447,000 adjustment, representing a 17.38% discount. 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.
During the three months ended March 31, 2020 and 2019 there was $222,000 and $172,000, respectively, of accretion interest.
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 quarter of 2019 which resulted in a reclassification of $330,000 from the credit (nonaccretable) portion of the discount to the liquidity (accretable) portion of the discount.
The following is a summary of acquired and non-acquired loans as of March 31, 2020 and December 31, 2019:
BY ACQUIRED AND NON-ACQUIREDMarch 31, 2020%December 31, 2019%
Acquired loans - performing$69,205  4.65 %$74,654  5.13 %
Acquired loans - purchase credit impaired ("PCI")2,125  0.14 %2,424  0.17 %
Total acquired loans71,330  4.79 %77,078  5.30 %
Non-acquired loans**1,418,759  95.21 %1,377,094  94.70 %
Gross loans1,490,089  1,454,172  
Net deferred costs (fees)2,059  0.14 %1,879  0.13 %
Total loans, net of deferred costs$1,492,148  $1,456,051  
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** Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.