LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2020

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $12,274,000 and $2,292,000 at September 30, 2020 and December 31, 2019, respectively.

As an addition to the commercial loans receivable portfolio, the Company may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (“SBA”), United States Department of Agriculture (“USDA”), and the Farm Service Agency (“FSA”). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee (which is supported by the full faith and credit of the U.S. Government) on all principal and the balance of interest accruing through ninety days beyond the date that demand is made to the originating bank for repurchase of the loan. As of September 30, 2020, the Company's balance of GGLs amounted to $5,215,000, compared to $6,150,000 at December 31, 2019.

As a result of the economic impact of the COVID-19 coronavirus pandemic, the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”) was enacted in the United States on March 27, 2020. The Company is approved by the SBA to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. The PPP loans have 1.00% interest rates, lender fees, two or five-year terms (depending on date of origination), and may qualify for forgiveness. These loans funded by the Company are subject to the terms and conditions applicable to all loans made pursuant to the PPP, as administered by the SBA under the CARES Act. The Paycheck Protection Program calls for these loans to be fully guaranteed by the SBA. All PPP loans are carried in the Company’s Commercial and Industrial loan portfolio. As of September 30, 2020, the Company had funded 490 PPP loans, which carried a balance of $31,729,000.

An additional provision of the CARES Act, Section 4013 provides financial institutions the option to suspend requirements to categorize certain loan modifications as troubled debt restructurings (“TDRs”), as long as specific criteria are met. To qualify, the loan modifications must be made on a good-faith basis in response to the COVID-19 pandemic, must occur between March 1, 2020 and the earlier of December 31, 2020 or the 60th day after the end of the COVID-19 pandemic is declared by the President of the United States, and the loans must have been paid current (less than 30 days past due prior to any relief) as of December 31, 2019. In compliance with Section 4013 of the CARES Act, the Company has granted modification requests to defer principal and/or interest payments or modify interest rates on various loans across all portfolio segments. Of the loan modifications that have been granted in compliance with Section 4013 of the CARES Act, there were 189 loan modifications still actively on deferral carrying an aggregate balance of $74,935,000 as of September 30, 2020. See page 26 for additional information regarding the Section 4013 CARES Act modifications.

The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.

Commercial and Industrial Lending

The Company originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for

loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

Commercial Real Estate Lending

The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed twenty years, have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Company’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the Company’s market area.

The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Company offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the Company’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the Company’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Company are appraised by independent appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position, especially to another lender, for the loan collateral.

Consumer Lending

The Company offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the Company’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a Government Guaranteed Loan default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may currently be performing. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan may be reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from Government Guaranteed Loans, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over an eight quarter lookback period that management has determined best represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors across all loan segments were increased by two basis points during the first quarter of 2020 and again by an additional basis point across all loan segments during the second quarter of 2020. The qualitative factor for the Commercial Real Estate portfolio segment was increased by an additional basis point during the third quarter of 2020, as there is still economic uncertainty related to the COVID-19 pandemic, especially in relation to this segment of the Company’s loan portfolio. Modifications granted in compliance with Section 4013 of the CARES Act are highest in the Commercial Real Estate portfolio segment, the long-term effects of which are still very unclear.

Government Guaranteed Loans do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

Although Paycheck Protection Program loans do not require an associated allowance for loan losses due to the program’s call for a full guarantee by the SBA, the Company has taken the conservative approach and has calculated a qualitative allocation for the PPP loans under the general component of the allowance for the Commercial and Industrial portfolio.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of September 30, 2020 and December 31, 2019, the amount of the reserve for unfunded lending commitments was $138,000 and $117,000, respectively.

The Company is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the existing loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s effective interest rate at inception or the fair value of the collateral for certain collateral dependent loans.

From time to time, the Bank may agree to modify/restructure the contractual terms of a borrower's loan. The restructuring of a loan is considered a “troubled debt restructuring” if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the Company has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met. See page 26 for further discussion of the Section 4013 CARES Act modifications.

The Company utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Company’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

Generally, these loans are currently protected, but are “potentially weak.” They constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard.

Assets in this category are protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. No loss of principal or interest is envisioned; however, they constitute an undue credit risk that may be minor but is unwarranted in light of the circumstances surrounding a specific asset. Risk is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Company will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Company management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of September 30, 2020 and December 31, 2019:

	Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate
	September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Grade:
1-6 Pass	$	99,534	$	84,999	$	418,965	$	382,510
7    Special Mention		66		2		11,543		944
8    Substandard		917		1,068		9,827		11,590
9    Doubtful		—		—		—		—
Add (deduct):  Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(220)		643		760		757
Total loans	$	100,297	$	86,712	$	441,095	$	395,801

	Residential Real Estate
	Including Home Equity				Consumer
	September 30,		December 31,		September 30,		December 31,
	2020		2019		2020		2019
Grade:
1-6 Pass	$	156,286	$	158,301	$	5,015	$	5,662
7    Special Mention		153		117		12		83
8    Substandard		1,203		1,048		7		35
9    Doubtful		—		—		—		—
Add (deduct):  Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(103)		(116)		75		89
Total loans	$	157,539	$	159,350	$	5,109	$	5,869

	Total Loans
	September 30,		December 31,
	2020		2019
Grade:
1-6 Pass	$	679,800	$	631,472
7 Special Mention		11,774		1,146
8 Substandard		11,954		13,741
9 Doubtful		—		—
Add (deduct):  Unearned discount and		—		—
Net deferred loan fees and costs		512		1,373
Total loans	$	704,040	$	647,732

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $7,322,000 and $1,885,000 at September 30, 2020 and $17,848,000 and $2,007,000 at December 31, 2019. Commercial and Industrial loans also included $5,215,000 and $6,150,000 of Government Guaranteed Loans and $31,729,000 and $0 of Paycheck Protection Program loans as of September 30, 2020 and December 31, 2019, respectively. Loans held for sale amounted to $12,274,000 at September 30, 2020 and $2,292,000 at December 31, 2019.

The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	823	$	4,215	$	1,608	$	106	$	582	$	7,334
Charge-offs		(15)		(16)		(13)		(13)		—		(57)
Recoveries		4		—		—		4		—		8
Provision (credit)		22		266		37		4		(35)		294
Ending Balance	$	834	$	4,465	$	1,632	$	101	$	547	$	7,579

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine months ended September 30, 2020:
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(39)		(31)		(13)		(35)		—		(118)
Recoveries		4		—		—		6		—		10
Provision (credit)		235		380		(20)		16		71		682
Ending Balance	$	834	$	4,465	$	1,632	$	101	$	547	$	7,579
Ending balance: individually
evaluated for impairment	$	—	$	1	$	1	$	—	$	—	$	2
Ending balance: collectively
evaluated for impairment	$	834	$	4,464	$	1,631	$	101	$	547	$	7,577
Loans Receivable:
Ending Balance	$	100,297	$	441,095	$	157,539	$	5,109	$	—	$	704,040
Ending balance: individually
evaluated for impairment	$	1,101	$	11,775	$	1,096	$	—	$	—	$	13,972
Ending balance: collectively
evaluated for impairment	$	99,196	$	429,320	$	156,443	$	5,109	$	—	$	690,068

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended September 30, 2019:
Allowance for Loan Losses:
Beginning balance	$	643	$	3,899	$	1,641	$	111	$	478	$	6,772
Charge-offs		—		—		(16)		(18)		—		(34)
Recoveries		5		—		—		2		—		7
Provision (credit)		(18)		150		16		15		12		175
Ending Balance	$	630	$	4,049	$	1,641	$	110	$	490	$	6,920

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the nine months ended September 30, 2019:
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		(44)		(43)		—		(151)
Recoveries		6		—		2		5		—		13
Provision (credit)		(100)		413		33		31		(64)		313
Ending Balance	$	630	$	4,049	$	1,641	$	110	$	490	$	6,920
Ending balance: individually
evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively
evaluated for impairment	$	630	$	4,048	$	1,641	$	110	$	490	$	6,919
Loans Receivable:
Ending Balance	$	85,738	$	379,665	$	159,897	$	5,885	$	—	$	631,185
Ending balance: individually
evaluated for impairment	$	1,095	$	11,264	$	805	$	—	$	—	$	13,164
Ending balance: collectively
evaluated for impairment	$	84,643	$	368,401	$	159,092	$	5,885	$	—	$	618,021

(Dollars in thousands)	Commercial		Commercial		Residential
	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2019
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		(69)		(71)		—		(204)
Recoveries		6		—		2		6		—		14
Provision (credit)		(96)		480		82		62		(78)		450
Ending Balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Ending balance: individually
evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively
evaluated for impairment	$	634	$	4,115	$	1,665	$	114	$	476	$	7,004
Loans Receivable:
Ending Balance	$	86,712	$	395,801	$	159,350	$	5,869	$	—	$	647,732
Ending balance: individually
evaluated for impairment	$	1,084	$	11,158	$	712	$	—	$	—	$	12,954
Ending balance: collectively
evaluated for impairment	$	85,628	$	384,643	$	158,638	$	5,869	$	—	$	634,778

Of the $88,000 in foreclosed assets held for resale at September 30, 2020, $38,000 was represented by land and $50,000 was represented by residential real estate. Of the $119,000 in foreclosed assets held for resale at December 31, 2019, $38,000 was represented by land and $81,000 was represented by commercial real estate. At September 30, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $971,000 at September 30, 2020 and $617,000 at December 31, 2019. These balances were not included in foreclosed assets held for resale at September 30, 2020 or December 31, 2019.

The outstanding recorded investment of TDRs as of September 30, 2020 and December 31, 2019 was $8,807,000 and $8,678,000, respectively. The increase in TDRs at September 30, 2020 as compared to December 31, 2019 is mainly attributable to seven loans that were modified as TDRs during the nine months ended September 30, 2020, net against payments, payoffs, and charge-offs on existing TDRs that were completed during the nine months ended September 30, 2020. There were no unfunded commitments on TDRs at September 30, 2020 and December 31, 2019.

During the three months ended September 30, 2020, four loans with a combined post modification balance of $366,000 were modified as TDRs. No loans were modified as TDRs during the three months ended September 30, 2019. The loan modifications for the three months ended September 30, 2020 consisted of one term modification and three payment modifications.

During the nine months ended September 30, 2020, seven loans with a combined post modification balance of $525,000 were modified as TDRs. No loans were modified as TDRs during the nine months ended September 30, 2019. The loan modifications for the nine months ended September 30, 2020 consisted of one term modification and six payment modifications.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:

(Dollars in thousands)	September 30,		December 31,
	2020		2019
Non-accrual TDRs	$	1,675	$	112
Accruing TDRs		7,132		8,566
Total	$	8,807	$	8,678

At September 30, 2020, nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,288,000 and three Commercial and Industrial loans classified as TDRs with a combined recorded investment of $751,000 were not in compliance with the terms of their restructure, compared to September 30, 2019 when nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $661,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $3,000 were not in compliance with the terms of their restructure.

No loans that were modified as TDRs during the twelve months preceding September 30, 2020 experienced payment defaults during the three months ended September 30, 2020. Of the loans that were modified as TDRs during the twelve months preceding September 30, 2020, two Commercial Real Estate loans totaling $62,000 experienced payment defaults during the nine months ended September 30, 2020. No loans that were modified as TDRs during the twelve months preceding September 30, 2019 experienced payment defaults during the three or nine months ended September 30, 2019.

The following table presents information regarding the loan modifications categorized as TDRs during the three and nine months ended September 30, 2020. No loans were modified as TDRs during the three and nine months ended September 30, 2019.

(Dollars in thousands)	For the Three Months Ended September 30, 2020
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial and Industrial	2	$	42	$	42	$	42
Commercial Real Estate	2		324		324		324
Total	4	$	366	$	366	$	366

(Dollars in thousands)	For the Nine Months Ended September 30, 2020
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Recorded
	Contracts	Investment		Investment		Investment
Commercial and Industrial	2	$	42	$	42	$	42
Commercial Real Estate	5		483		483		483
Total	7	$	525	$	525	$	525

The following table provides detail regarding the types of loan modifications made for loans categorized as TDRs during the three and nine months ended September 30, 2020 with the total number of each type of modification performed. No loans were modified as TDRs during the three or the nine months ended September 30, 2020.

	For the Three Months Ended September 30, 2020
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial and Industrial	—	1	1	2
Commercial Real Estate	—	—	2	2
Total	—	1	3	4

	For the Nine Months Ended September 30, 2020
	Rate	Term	Payment	Number
	Modification	Modification	Modification	Modified
Commercial and Industrial	—	1	1	2
Commercial Real Estate	—	—	5	5
Total	—	1	6	7

In the wake of the COVID-19 pandemic, loan modification requests have been granted to defer principal and/or interest payments or modify interest rates. These loans are not classified as TDRs according to Section 4013 of the CARES Act, as long as the specific criteria set forth in the Act are met. The table below presents information related to loan modifications made in compliance with Section 4013 of the CARES Act for the three month period ended September 30, 2020:

(Dollars in thousands)	Commercial and			Commercial			Residential
	Industrial			Real Estate			Real Estate			Consumer			Total
		Recorded			Recorded			Recorded			Recorded			Recorded
	Count	Investment		Count	Investment		Count	Investment		Count	Investment		Count	Investment
Balance at June 30, 2020	66	$	11,540	325	$	143,886	81	$	8,143	18	$	126	490	$	163,695
Additional modifications granted for the three months ended September 30,2020	3		654	9		2,130	2		641	-		-	14		3,425
Section 4013 CARES Act modifications returned to normal payment status (a)	(28)		(4,943)	(192)		(79,525)	(77)		(7,291)	(18)		(126)	(315)		(91,885)
Principal payments net of draws on active deferred loans for the three months ended September 30, 2020 (b)	N/A		-	N/A		(299)	N/A		(1)	N/A		-	N/A		(300)
Balance at September 30, 2020	41	$	7,251	142	$	66,192	6	$	1,492	—	$	—	189	$	74,935
Percent of Total Section 4013 CARES Act modifications			9.68%			88.33%			1.99%			0.00%			100.00%
Percent of Total Section 4013 CARES Act modifications to Total Loans			1.03%			9.40%			0.21%			0.00%			10.64%
Subsequent modifications granted for active deferred loans	2	$	170	24	$	17,220	-	$	-	-	$	-	26	$	17,390

(a) Includes payments made prior to return to normal payment status during the quarter ended September 30, 2020

(b) Draws include those made on lines of credit and other loans contractually allowing draws of principal. No construction loans have experienced a Section 4013 CARES Act modification at the dates indicated

The recorded investment, unpaid principal balance, and the related allowance of the Company’s impaired loans are summarized below at September 30, 2020 and December 31, 2019.

(Dollars in thousands)	September 30, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,101	$	1,101	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate		11,747		15,947		—		11,130		14,147		—
Residential Real Estate		1,071		1,289		—		712		822		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		28		50		1		28		28		1
Residential Real Estate		25		60		1		—		—		—
Total	$	13,972	$	18,447	$	2	$	12,954	$	16,081	$	1
Total consists of:
Commercial and Industrial	$	1,101	$	1,101	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate	$	11,775	$	15,997	$	1	$	11,158	$	14,175	$	1
Residential Real Estate	$	1,096	$	1,349	$	1	$	712	$	822	$	—

At September 30, 2020 and December 31, 2019, $8,807,000 and $8,678,000 of loans classified as TDRs were included in impaired loans with a total allocated allowance of $0 and $1,000, respectively. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Company’s impaired loans are summarized below for the three and nine months ended September 30, 2020 and 2019.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	September 30, 2020				September 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,080	$	4	$	1,101	$	13
Commercial Real Estate		11,640		93		11,167		91
Residential Real Estate		1,076		—		826		2
With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		29		—		131		2
Residential Real Estate		25		—		—		—
Total	$	13,850	$	97	$	13,225	$	108
Total consists of:
Commercial and Industrial	$	1,080	$	4	$	1,101	$	13
Commercial Real Estate	$	11,669	$	93	$	11,298	$	93
Residential Real Estate	$	1,101	$	—	$	826	$	2

Of the $97,000 and $108,000 in interest income recognized on impaired loans for the three months ended September 30, 2020 and 2019, respectively, $0 in interest income was recognized with respect to non-accrual loans for each respective period.

(Dollars in thousands)	For the Nine Months Ended				For the Nine Months Ended
	September 30, 2020				September 30, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,076	$	12	$	1,111	$	40
Commercial Real Estate		11,361		243		12,842		343
Residential Real Estate		1,015		1		573		7
With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		119		5		83		3
Residential Real Estate		22		1		18		—
Total	$	13,593	$	262	$	14,627	$	393
Total consists of:
Commercial and Industrial	$	1,076	$	12	$	1,111	$	40
Commercial Real Estate	$	11,480	$	248	$	12,925	$	346
Residential Real Estate	$	1,037	$	2	$	591	$	7

Of the $262,000 and $393,000 in interest income recognized on impaired loans for the nine months ended September 30, 2020 and 2019, $5,000 in interest income was recognized with respect to non-accrual loans for each respective period.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of September 30, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)	September 30,		December 31,
	2020		2019
Commercial and Industrial	$	751	$	—
Commercial Real Estate		5,012		3,697
Residential Real Estate		1,077		691
Total non-accrual loans		6,840		4,388
Foreclosed assets held for resale		88		119
Loans past-due 90 days or more and still accruing interest		542		100
Total non-performing assets	$	7,470	$	4,607

The following tables present the classes of the loan portfolio summarized by past-due status at September 30, 2020 and December 31, 2019:

(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days					Current-			and Still
	30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
September 30, 2020:
Commercial and Industrial	$	60	$	—	$	716	$	776	$	99,521	$	100,297	$	—
Commercial Real Estate		2,490		242		5,365		8,097		432,998		441,095		542
Residential Real Estate		806		376		1,064		2,246		155,293		157,539		—
Consumer		16		6		—		22		5,087		5,109		—
Total	$	3,372	$	624	$	7,145	$	11,141	$	692,899	$	704,040	$	542

(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days					Current-			and Still
	30-59 Days		60-89 Days		or Greater		Total			29 Days	Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2019:
Commercial and Industrial	$	—	$	26	$	—	$	26	$	86,686	$	86,712	$	—
Commercial Real Estate		880		957		3,502		5,339		390,462		395,801		—
Residential Real Estate		1,118		506		613		2,237		157,113		159,350		100
Consumer		24		5		—		29		5,840		5,869		—
Total	$	2,022	$	1,494	$	4,115	$	7,631	$	640,101	$	647,732	$	100

At this time, there have been no material fluctuations in past-due loans as a result of the COVID-19 pandemic.

At September 30, 2020 and December 31, 2019, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.