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LOANS
 9 Months Ended
Sep. 30, 2020
Receivables [Abstract]  
Loans LOANS
Loans consist of the following:
 September 30, 2020December 31, 2019
(dollars in thousands)Total% of Gross LoansTotal% of Gross Loans
Portfolio Loans:
Commercial real estate$1,021,987 68.29 %$964,777 66.34 %
Residential first mortgages147,756 9.87 %167,710 11.53 %
Residential rentals137,950 9.22 %123,601 8.50 %
Construction and land development36,061 2.41 %34,133 2.35 %
Home equity and second mortgages31,427 2.10 %36,098 2.48 %
Commercial loans58,894 3.94 %63,102 4.34 %
Consumer loans1,081 0.07 %1,104 0.08 %
Commercial equipment61,376 4.10 %63,647 4.38 %
Gross portfolio loans1,496,532 100.00 %1,454,172 100.00 %
Less:
Net deferred costs1,610 0.11 %1,879 0.13 %
Allowance for loan losses(18,829)(1.26)%(10,942)(0.75)%
(17,219)(9,063)
Net portfolio loans$1,479,313 $1,445,109 
U.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans$131,088 $— 
Net deferred fees(3,277)— 
Net SBA PPP Loans$127,811 $— 
Total net loans$1,607,124 $1,445,109 
Gross Loans$1,627,620 $1,454,172 
The Company has segregated its loans into two categories; portfolio loans and U.S. SBA PPP loans. Portfolio loans include all loan portfolios except the U.S. SBA PPP loan portfolio.
In the second quarter of 2020, the Company began offering 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 September 30, 2020, the Company had 250 loan deferrals on outstanding loan balances of $251.5 million, which represented 16.80% of gross portfolio loans. See Note 1 for regulatory and accounting treatment.
Deferred Costs/Fees
At September 30, 2020, net deferred costs of $1.6 million related to portfolio loans included $4.9 million in deferred costs offset by $3.3 million in deferred fees paid by customers. Deferred costs include premiums paid for the purchase of residential first mortgages and loan origination costs deferred in accordance with ASC 310-20. Net deferred loan costs of $1.9 million at December 31, 2019 included deferred costs of $5.2 million offset by $3.3 million in deferred fees paid by customers
U.S. SBA PPP loan net deferred fees of $3.3 million at September 30, 2020 included deferred fees paid by the Small Business Administration of $3.9 million partially offset by deferred costs of $661,000.
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 business loans secured by real estate and real estate development loans. At September 30, 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:
U.S. SBA PPP Loans
The U.S. SBA PPP loan was created to address economic hardships anticipated as a result of the COVID-19 pandemic. As of September 30, 2020, the Company had originated 963 SBA PPP loans with balances of $131.1 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 September 30, 2020, 98.44% or $129.0 million of these loans have a two-year term. During the third quarter of 2020, the Company recorded net deferred fees of $3.3 million d 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 net of costs incurred to underwrite the loans (deferred costs). Net deferred fees will be recognized in income when the PPP loan is forgiven.
The Company funded virtually all PPP loans thorough its participation in the Federal Reserve lending facility (the Federal Reserve "PPPLF" Program) at a 0.35% annual interest rate. As of September 30, 2020, the Company's outstanding PPPLF advances were $85.9 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 ALLL 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 guidelines further specify that lenders will be held harmless for a borrowers’ failure to comply with program criteria.
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 8.3% and 8.9% of the CRE portfolio at September 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.
At September 30, 2020 and December 31, 2019, the largest outstanding commercial real estate loans were $20.9 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 10 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 nine months ended September 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 $37.0 million or 2.5% of total gross portfolio loans of $1.5 billion at September 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 September 30, 2020 and December 31, 2019, the Bank serviced $26.5 million and $32.9 million, respectively, in residential mortgage loans for others.

At September 30, 2020 and December 31, 2019, the largest outstanding residential first mortgage loan was $3.0 million which was secured by residences located in the Bank’s market area. The loan was 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 September 30, 2020 and December 31, 2019, $103.5 million and $97.1 million, respectively, were 1-4 family units and $34.5 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 $117.1 million or 7.8% of total gross portfolio loans of $1.5 billion at September 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.
At September 30, 2020 and December 31, 2019, the largest outstanding residential rental mortgage loan was $9.6 million 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 $36.1 million or 2.4% of total gross portfolio loans of $1.5 billion at September 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.

At September 30, 2020 and December 31, 2019, the largest outstanding construction and land development loans were $9.7 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 $31.4 million or 2.1% of total gross portfolio loans of $1.5 billion at September 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.

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 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 $58.9 million or 3.9% of total gross portfolio loans of $1.5 billion at September 30, 2020 compared to $63.1 million or 4.3% of total gross portfolio loans of $1.5 billion at December 31, 2019. At September 30, 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 September 30, 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. 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 $61.4 million or 4.1% of total gross portfolio loans of $1.5 billion at September 30, 2020 compared to $63.6 million or 4.4% of total gross portfolio loans of $1.5 billion at December 31, 2019. At September 30, 2020 and December 31, 2019, the largest outstanding commercial equipment loans were $2.5 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 September 30, 2020 and December 31, 2019.
Non-accrual and Aging Analysis of Current and Past Due Loans
Non-accrual loans as of September 30, 2020 and December 31, 2019 were as follows:
 September 30, 2020
(dollars in thousands)Non-accrual Delinquent LoansNumber of LoansNon-accrual Current LoansNumber of LoansTotal Non-accrual LoansTotal Number of Loans
Commercial real estate$14,859 14 $2,147 7 $17,006 21 
Residential first mortgages333 2 191 1 524 3 
Residential rentals— — 280 2 280 2 
Home equity and second mortgages229 4 250 2 479 6 
Commercial loans1,807 2 — — 1,807 2 
Commercial equipment— — 52 3 52 3 
 $17,228 22 $2,920 15 $20,148 37 

 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 increased $2.3 million from $17.9 million or 1.23% of total loans at December 31, 2019 to $20.1 million or 1.24% of total loans at September 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.
Non-accrual loans of $2.9 million (14%) were current with all payments of principal and interest with no impairment at September 30, 2020. Delinquent non-accrual loans were $17.2 million (86%) with specific reserves of $468,000 at September 30, 2020. 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 $1.53 million and $1.40 million at September 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 $4.7 million from $13.3 million, or 0.92% of loans, at December 31, 2019 to $18.1 million, or 1.21% of loans, at September 30, 2020.
Non-accrual loans, which did not have a specific allowance for impairment, amounted to $18.0 million and $11.7 million at September 30, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at September 30, 2020 and December 31, 2019 was $692,000 and $318,000, respectively. Non-accrual loans with a specific allowance for impairment amounted to $2.1 million and $6.1 million at September 30, 2020 and December 31, 2019, respectively. Interest due but not recognized on these balances at September 30, 2020 and December 31, 2019 was $179,000 and $302,000, respectively.
The Company considers a loan to be past due or delinquent when the terms of the contractual obligation are not met by the borrower. PCI loans are included as a single category in the table below as management believes, regardless of their age, there is a lower likelihood of aggregate loss related to these loan pools. Additionally, PCI loans are discounted to allow for the accretion of income on a level yield basis over the life of the loan based on expected cash flows. Regardless of payment status, as long as cash flows can be reasonably estimated, the associated discount on these loan pools results in income recognition.
Past due and PCI loans as of September 30, 2020 and December 31, 2019 were as follows:
 September 30, 2020
(dollars in thousands)31-60 Days61-89 Days90 or Greater DaysTotal Past DuePCI LoansCurrentTotal Loan Receivables
Commercial real estate$— $— $14,860 $14,860 $1,581 $1,005,546 $1,021,987 
Residential first mortgages— — 333 333 — 147,423 147,756 
Residential rentals— 297 — 297 — 137,653 137,950 
Construction and land dev.— — — — — 36,061 36,061 
Home equity and second mtg.541 — 230 771 404 30,252 31,427 
Commercial loans— — 1,807 1,807 — 57,087 58,894 
Consumer loans— — — — — 1,081 1,081 
Commercial equipment— — — — — 61,376 61,376 
Total portfolio loans$541 $297 $17,230 $18,068 $1,985 $1,476,479 $1,496,532 
U.S. SBA PPP loans$— $— $— $— $— $131,088 $131,088 

 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 portfolio loans$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 September 30, 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.
Impaired loans, including TDRs, at September 30, 2020 and 2019 and at December 31, 2019 were as follows:
 September 30, 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$18,355 $16,000 $2,148 $18,148 $468 $18,181 $74 $18,243 $299 
Residential first mortgages1,741 1,739 — 1,739 — 1,747 11 1,770 39 
Residential rentals636 636 — 636 — 638 6 648 24 
Home equity and second mtg.552 540 — 540 — 542 3 607 12 
Commercial loans1,807 1,807 — 1,807 — 1,807 — 1,807 — 
Commercial equipment532 476 42 518 42 527 8 536 29 
Total$23,623 $21,198 $2,190 $23,388 $510 $23,442 $102 $23,611 $403 
 September 30, 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$21,159 $16,175 $4,799 $20,974 $444 $21,023 $183 $21,309 $591 
Residential first mortgages2,089 2,089 2,089 2,098 23 2,125 66 
Residential rentals956 956 956 961 14 977 44 
Home equity and second mtg.588 577 577 580 5 579 21 
Commercial loans2,641 1,807 822 2,629 822 2,648 9 2,669 65 
Commercial equipment830 601 210 811 210 822 8 846 32 
Total$28,263 $22,205 $5,831 $28,036 $1,476 $28,132 $242 $28,505 $819 

 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 September 30, 2020 and December 31, 2019 were as follows:
 September 30, 2020December 31, 2019
(dollars in thousands)Dollars Number of LoansDollarsNumber of Loans
Commercial real estate$1,376 2 $1,420 3 
Residential first mortgages254 2 64 1 
Commercial equipment473 2 565 4 
Total TDRs$2,103 6 $2,049 8 
Less: TDRs included in non-accrual loans(1,530)(3)(1,399)(3)
Total accrual TDR loans$573 3 $650 5 
TDRs increased $54,000 during the nine months ended September 30, 2020 due to the addition of one TDR in the amount of $191,000, partially offset by principal paydowns of $49,000 and the disposal of three TDRs in the amount of $88,000. The Company fully reserved three TDRs totaling $1.3 million at September 30, 2020.
The Company had specific reserves of $87,000 on three TDRs 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 ALLL at and for the three and nine months ended September 30, 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.
Three Months EndedSeptember 30, 2020
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$11,268 $(15)$15 $1,852 $13,120 
Residential first mortgages885 — — 225 1,110 
Residential rentals1,059 — — 420 1,479 
Construction and land development428 — — 26 454 
Home equity and second mortgages259 — 7 46 312 
Commercial loans1,161 — 5 (87)1,079 
Consumer loans15 (6)— 11 20 
Commercial equipment1,243 (44)49 7 1,255 
 $16,318 $(65)$76 $2,500 $18,829 
Nine Months EndedSeptember 30, 2020
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$7,398 $(944)$15 $6,651 $13,120 
Residential first mortgages464 — — 646 1,110 
Residential rentals397 — — 1,082 1,479 
Construction and land development273 — — 181 454 
Home equity and second mortgages149 (25)8 180 312 
Commercial loans1,086 (1,027)15 1,005 1,079 
Consumer loans10 (6)— 16 20 
Commercial equipment1,165 (326)77 339 1,255 
$10,942 $(2,328)$115 $10,100 $18,829 
Three Months EndedSeptember 30, 2019
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$7,009 $(144)$— $238 $7,103 
Residential first mortgages709 — — (80)629 
Residential rentals458 — — (51)407 
Construction and land development246 — — (52)194 
Home equity and second mortgages131 — 1 (7)125 
Commercial loans1,402 — 10 189 1,601 
Consumer loans9 — — (1)8 
Commercial equipment954 — 17 214 1,185 
$10,918 $(144)$28 $450 $11,252 
Six Months EndedSeptember 30, 2019
(dollars in thousands)Beginning BalanceCharge-offsRecoveriesProvisionsEnding Balance
Commercial real estate$6,882 $(148)$15 $354 $7,103 
Residential first mortgages755 — — (126)629 
Residential rentals498 (53)46 (84)407 
Construction and land development310 (329)— 213 194 
Home equity and second mortgages133 — 5 (13)125 
Commercial loans1,482 — 20 99 1,601 
Consumer loans6 (4)2 4 8 
Commercial equipment910 (685)82 878 1,185 
$10,976 $(1,219)$170 $1,325 $11,252 
The following tables detail loan receivable and allowance balances disaggregated on the basis of the Company’s impairment methodology at September 30, 2020 and 2019 and December 31, 2019.
 September 30, 2020December 31, 2019September 30, 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$18,148 $1,002,258 $1,581 $1,021,987 $20,707 $942,332 $1,738 $964,777 $20,974 $909,638 $1,732 $932,344 
Residential first mortgages1,739 146,017 — 147,756 1,917 165,793 — 167,710 2,089 161,187 451 163,727 
Residential rentals636 137,314 — 137,950 937 122,369 295 123,601 956 119,897 317 121,170 
Construction and land development— 36,061 — 36,061 — 34,133 — 34,133 — 30,774 — 30,774 
Home equity and second mortgages540 30,483 404 31,427 510 35,197 391 36,098 577 35,302 303 36,182 
Commercial loans1,807 57,087 — 58,894 3,127 59,975 — 63,102 2,629 66,550 — 69,179 
Consumer loans— 1,081 — 1,081 — 1,104 — 1,104 — 937 — 937 
Commercial equipment518 60,858 — 61,376 788 62,859 — 63,647 811 60,293 — 61,104 
$23,388 $1,471,159 $1,985 $1,496,532 $27,986 $1,423,762 $2,424 $1,454,172 $28,036 $1,384,578 $2,803 $1,415,417 
Allowance for loan losses:
Commercial real estate$468 $12,652 $— $13,120 $417 $6,981 $— $7,398 $444 $6,659 $— $7,103 
Residential first mortgages— 1,110 — 1,110 — 464 — 464 — 629 — 629 
Residential rentals— 1,479 — 1,479 — 397 — 397 — 407 — 407 
Construction and land development— 454 — 454 — 273 — 273 — 194 — 194 
Home equity and second mortgages— 312 — 312 — 149 — 149 — 125 — 125 
Commercial loans— 1,079 — 1,079 210 876 — 1,086 822 779 — 1,601 
Consumer loans— 20 — 20 — 10 — 10 — 8 — 8 
Commercial equipment42 1,213 — 1,255 201 964 — 1,165 210 975 — 1,185 
$510 $18,319 $— $18,829 $828 $10,114 $— $10,942 $1,476 $9,776 $— $11,252 
At September 30, 2020 and December 31, 2019, the Bank’s ALLL represented 1.26% and 0.75% of loan balances. Management’s determination of the adequacy of the ALLL 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. The increased provision expense recorded in the first nine months of 2020 was primarily due to the uncertainty surrounding economic conditions and related deferred loans as a result of the COVID-19 pandemic and to a lesser degree growth in the commercial loan portfolio.
Credit Quality Indicators
Credit quality indicators as of September 30, 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)9/30/202012/31/20199/30/202012/31/20199/30/202012/31/2019
Unrated$171,449 $102,695 $2,321 $2,075 $48,014 $38,139 
Pass831,763 840,403 33,740 32,058 89,105 84,811 
Special mention1,041 — — — 831 — 
Substandard17,734 21,679 — — — 651 
Doubtful— — — — — — 
Loss— — — — — — 
Total$1,021,987 $964,777 $36,061 $34,133 $137,950 $123,601 

 Commercial LoansCommercial EquipmentTotal Commercial Portfolios
(dollars in thousands)9/30/202012/31/20199/30/202012/31/20199/30/202012/31/2019
Unrated$13,558 $16,754 $25,938 $26,045 $261,280 $185,708 
Pass43,529 43,221 35,290 37,399 1,033,427 1,037,892 
Special mention— — 106 — 1,978 — 
Substandard1,807 3,127 42 203 19,583 25,660 
Doubtful— — — — — — 
Loss— — — — — — 
Total$58,894 $63,102 $61,376 $63,647 $1,316,268 $1,249,260 

Non-Commercial Portfolios **U.S. SBA PPP LoansTotal All Portfolios
(dollars in thousands)9/30/202012/31/20196/30/202012/31/20199/30/202012/31/2019
Unrated$150,318 $164,991 $131,088 $— $542,686 $350,699 
Pass28,465 38,718 — — 1,061,892 1,076,610 
Special mention462 — — — 2,440 — 
Substandard1,019 1,203 — — 20,602 26,863 
Doubtful— — — — — — 
Loss— — — — — — 
Total$180,264 $204,912 $131,088 $— $1,627,620 $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)9/30/202012/31/20199/30/202012/31/20199/30/202012/31/2019
Performing$147,423 $167,710 $31,197 $35,921 $1,081 $1,104 
Nonperforming333 — 230 177 — — 
Total$147,756 $167,710 $31,427 $36,098 $1,081 $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 non-collectable.
Purchased Credit-Impaired Loans and Acquired Loans
PCI loans had an unpaid principal balance of $2.4 million and a carrying value of $2.0 million at September 30, 2020. The carrying value of PCI loans represented 0.09% of total assets at September 30, 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 and nine months ended September 30, 2020 and 2019 and the year ended December 31, 2019 follows:
 Three Months Ended September 30,Nine Months Ended September 30,
(dollars in thousands)2020201920202019
Accretable yield, beginning of period$415 $779 $677 $734 
Additions— — — — 
Accretion(46)(124)(184)(246)
Reclassification from (to) nonaccretable difference— — 24 156 
Other changes, net— — (148)11 
Accretable yield, end of period$369 $655 $369 $655 
At September 30, 2020 performing acquired loans, which totaled $62.0 million, included a $814,000 net acquisition accounting fair market value adjustment, representing a 1.30% discount; and PCI loans which totaled $2.0 million, included a $380,000 adjustment, representing a 16.06% 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 September 30, 2020 and 2019 there was $111,000 and $242,000, 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 quarter of 2020 and 2019 which resulted in a reclassification of $24,000 and $156,000, respectively, 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 September 30, 2020 and December 31, 2019:
BY ACQUIRED AND NON-ACQUIREDSeptember 30, 2020%December 31, 2019%
Acquired loans - performing$62,002 3.81 %$74,654 5.13 %
Acquired loans - purchase credit impaired ("PCI")1,986 0.12 %2,424 0.17 %
Total acquired loans63,988 3.93 %77,078 5.30 %
U.S. SBA PPP loans131,088 8.05 %— — %
Non-acquired loans**1,432,544 88.01 %1,377,094 94.70 %
Gross loans1,627,620 1,454,172 
Net deferred costs (fees)(1,667)(0.10)%1,879 0.13 %
Total loans, net of deferred costs$1,625,953 $1,456,051 
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**Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.