
	June 30, 2020						December 31, 2019
(dollars in thousands)	Total		% of Gross Loans		Total		% of Gross Loans
Portfolio Loans:
Commercial real estate	$	996,111	66.73	%	$	964,777	66.34	%
Residential first mortgages	165,670		11.10	%	167,710		11.53	%
Residential rentals	132,590		8.88	%	123,601		8.50	%
Construction and land development	37,580		2.52	%	34,133		2.35	%
Home equity and second mortgages	33,873		2.27	%	36,098		2.48	%
Commercial loans	63,249		4.24	%	63,102		4.34	%
Consumer loans	1,117		0.07	%	1,104		0.08	%
Commercial equipment	62,555		4.19	%	63,647		4.38	%
Gross portfolio loans	1,492,745		100.00	%	1,454,172		100.00	%
Less:
Net deferred costs	2,072		0.14	%	1,879		0.13	%
Allowance for loan losses	(16,319)		(1.09)	%	(10,942)		(0.75)	%
	(14,247)				(9,063)
Net portfolio loans	$	1,478,498			$	1,445,109

U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans	$	129,384			$	—
Net deferred fees	(3,746)				—
Net SBA PPP Loans	$	125,638			$	—

Total net loans	$	1,604,136			$	1,445,109

Gross Loans	$	1,622,129			$	1,454,172

In the second quarter of 2020, the Company offered COVID-19 payment deferral programs for our business and individual customers who are adversely affected by the pandemic. The full loan payments or the principal component of the loan payments were deferred between 90 and 180 days. As of June 30, 2020, the Company had executed 312 loan deferrals on outstanding loan balances of $264.9 million, which represented 17.7% of gross portfolio loans. See Note 1 for regulatory and accounting treatment.

Net deferred costs of $2.1 million at June 30, 2020 related to portfolio loans included deferred fees paid by customers of $3.2 million offset by deferred costs of $5.3 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.

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 business loans secured by real estate and real estate development loans. At June 30, 2020 and December 31, 2019, the Company had no loans outstanding with foreign entities.

The U.S. SBA PPP loan was created to address economic hardships anticipated as a result of the COVID-19 pandemic. As of June 30, 2020, the Company had originated 902 SBA PPP loans with balances of $129.4 million. The program is designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if all employee retention criteria are met, and the funds are used for eligible expenses. U.S. SBA PPP loans carry a two or five years term at a 1% annual interest rate until the loan is either forgiven or paid. At June 30, 2020 99.74% or $129.0 million of these loans have a two year term. The Company recorded net deferred fees of $3.7 million during the second quarter of 2020 that are being amortized as a component of interest income through the contractual maturity date of each individual PPP loan. Net deferred fees include fees (deferred fees) paid to participant banks for each PPP loan underwritten and funded as well as costs incurred to underwrite the loans (deferred costs). PPP loan forgiveness will allow the Company to recognize remaining net deferred fees in the quarter of forgiveness.

The Company funded virtually all PPP loans with the Federal Reserve lending facility to fund banks offering SBA PPP loans (the Federal Reserve "PPPLF" program) at a 0.35% annual interest rate. The Company is participating in the Federal Reserve Bank's PPPLF Program. As of June 30, 2020, the Company's outstanding PPPLF advances were $126.8 million. Due to the expected temporary increase to assets and the 100% government guaranty, banking regulators have provided favorable regulatory capital treatment by excluding the activity and balances from regulatory capital ratios.

No credit issues are anticipated with SBA PPP loans as they are fully guaranteed by the Small Business Administration and the Bank's allowance for loan loss does not include an allowance for U.S. SBA PPP loans. Management believes the Company's employees have underwritten all PPP loans in good faith and in accordance with the program's guidelines. The U.S. SBA PPP guidelines indicate that lenders may rely on certifications of the borrower in order to determine eligibility and to rely on specified documents provided by the borrower to determine qualifying loan amount and eligibility for forgiveness. The guideline further specify that lenders will be held harmless for a borrowers’ failure to comply with program criteria.

Commercial and other real estate projects include office buildings, retail locations, churches, other special purpose buildings and commercial construction. Commercial construction balances were 10.2% and 8.9% of the CRE portfolio at June 30, 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.

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 six months ended June 30, 2020 and the year ended December 31, 2019, the Bank purchased residential first mortgages of $21.9 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 $43.2 million or 2.9% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $52.3 million or 3.6% of total gross portfolio 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 June 30, 2020 and December 31, 2019, the Bank serviced $29.1 million and $32.9 million, respectively, in residential mortgage loans for others.

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 June 30, 2020 and December 31, 2019, $103.3 million and $97.1 million, respectively, were 1-4 family units and $29.3 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 $112.4 million or 7.5% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $102.2 million or 7.0% of total gross portfolio loans of $1.5 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.

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 $37.6 million or 2.5% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $34.1 million or 2.4% of total gross portfolio loans of $1.5 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.

The Bank maintains a portfolio of home equity and second mortgage loans. The Bank’s home equity and second mortgage portfolio was $33.9 million or 2.3% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $36.1 million or 2.5% of total gross portfolio loans of $1.5 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.

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 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. 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 $63.2 million or 4.2% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $63.1 million or 4.3% of total gross portfolio loans of $1.5 billion at December 31, 2019. At June 30, 2020 and December 31, 2019, the largest outstanding commercial loans were $6.7 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 June 30, 2020 and December 31, 2019.

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.

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. 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 $62.6 million or 4.2% of total gross portfolio loans of $1.5 billion at June 30, 2020 compared to $63.6 million or 4.4% of total gross portfolio loans of $1.5 billion at December 31, 2019. At June 30, 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 June 30, 2020 and December 31, 2019.


	June 30, 2020
(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	$	18,083	18	$	1,878	5	$	19,961	23
Residential first mortgages	—		—	194		1	194		1
Residential rentals	—		—	281		2	281		2

Home equity and second mortgages	132		3	451		3	583		6
Commercial loans	1,807		2	—		—	1,807		2
Consumer loans	5		1	—		—	5		1
Commercial equipment	50		2	15		2	65		4
	$	20,077	26	$	2,819	13	$	22,896	39


	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
Home equity and second mortgages	177		3	271		3	448		6
Commercial loans	1,807		2	1,320		1	3,127		3
Commercial equipment	241		5	25		1	266		6
	$	12,787	21	$	5,070	18	$	17,857	39

Non-accrual loans increased $5.0 million from $17.9 million or 1.23% of total loans at December 31, 2019 to $22.9 million or 1.41% of total loans at June 30, 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 June 30, 2020, non-accrual loans of $22.9 million included 39 loans, of which $20.0 million, or 87% represented 21 loans and 10 customer relationships. Non-accrual loans of $2.8 million (12%) were current with all payments of principal and interest with no impairment at June 30, 2020. Delinquent non-accrual loans were $20.1 million (88%) with specific reserves of $0.1 million at June 30, 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 $1.60 million and $1.40 million at June 30, 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 $12.6 million from $13.3 million, or 0.92% of loans, at December 31, 2019 to $25.9 million, or 1.74% of loans, at June 30, 2020.

Non-accrual loans, which did not have a specific allowance for impairment, amounted to $22.1 million and $11.7 million at June 30, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at June 30, 2020 and December 31, 2019 was $689,000 and $318,000, respectively. Non-accrual loans with a specific allowance for impairment amounted to $870,000 and $6.1 million at June 30, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at June 30, 2020 and December 31, 2019 was $105,000 and $302,000, respectively.


	June 30, 2020
(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	$	400	$	4,872	$	18,083	$	23,355	$	1,593	$	971,163	$	996,111
Residential first mortgages	51		—		—		51		—		165,619		165,670
Residential rentals	—		—		—		—		—		132,590		132,590
Construction and land dev.	—		220		—		220		—		37,360		37,580
Home equity and second mtg.	82		103		127		312		400		33,161		33,873
Commercial loans	—		—		1,807		1,807		—		61,442		63,249
Consumer loans	1		—		5		6		—		1,111		1,117
Commercial equipment	7		107		50		164		—		62,391		62,555
Total portfolio loans	$	541	$	5,302	$	20,072	$	25,915	$	1,993	$	1,464,837	$	1,492,745

U.S. SBA PPP loans	$	—	$	—	$	—	$	—	$	—	$	129,384	$	129,384


	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 portfolio loans	$	150	$	399	$	12,778	$	13,327	$	2,424	$	1,438,421	$	1,454,172


	June 30, 2020
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Quarter Average Recorded Investment		Quarter Interest Income Recognized		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	21,360	$	20,315	$	842	$	21,157	$	60	$	21,191	$	88	$	21,243	$	238
Residential first mortgages	1,710		1,710		—		1,710		—		1,717		13		1,731		29
Residential rentals	643		643		—		643		—		648		12		653		18

Home equity and second mtg.	656		645		—		645		—		646		10		647		12
Commercial loans	1,807		1,807		—		1,807		—		1,807		—		1,807		—
Consumer loans	5		5		—		5		—		5		—		5		—
Commercial equipment	548		489		44		533		44		539		7		544		21
Total	$	26,729	$	25,614	$	886	$	26,500	$	104	$	26,553	$	130	$	26,630	$	318


	June 30, 2019
(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Quarter Average Recorded Investment		Quarter Interest Income Recognized		YTD Average Recorded Investment		YTD Interest Income Recognized
Commercial real estate	$	20,933	$	18,512	$	2,406	$	20,918	$	289	$	20,975	$	214	$	21,075	$	410
Residential first mortgages	2,124		2,123		—		2,123		—		2,129		20		2,139		41
Residential rentals	971		971		—		971		—		978		17		985		30

Home equity and second mtg.	482		471		—		471		—		476		5		461		9
Commercial loans	2,638		1,807		819		2,626		700		2,629		27		2,649		54

Commercial equipment	367		131		218		349		192		357		2		369		4
Total	$	27,515	$	24,015	$	3,443	$	27,458	$	1,181	$	27,544	$	285	$	27,678	$	548


	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

Home equity and second mtg.	524		510		—		510		—		519		23
Commercial loans	3,127		1,807		1,320		3,127		210		3,284		152

Commercial equipment	808		585		203		788		201		826		35
Total	$	28,235	$	21,675	$	6,311	$	27,986	$	828	$	28,593	$	1,165


	June 30, 2020					December 31, 2019
(dollars in thousands)	Dollars		Number of Loans	Dollars		Number of Loans
Commercial real estate	$	1,408	3	$	1,420	3
Residential first mortgages	257		2	64		1



Commercial equipment	524		3	565		4
Total TDRs	$	2,189	8	$	2,049	8
Less: TDRs included in non-accrual loans	(1,596)		(4)	(1,399)		(3)
Total accrual TDR loans	$	593	4	$	650	5

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.