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Section 1: 10-Q (FORM 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from           to                 
Commission File Number 0-11204
AmeriServ Financial, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania
25-1424278
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Main & Franklin Streets, P.O. Box 430, Johnstown, PA
15907-0430
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (814) 533-5300
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock
ASRV
The NASDAQ Stock Market LLC
8.45% Beneficial Unsecured Securities, Series A
(AmeriServ Financial Capital Trust I)
ASRVP
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer   ☐
Accelerated Filer   ☐
Non-accelerated Filer   ☒
Smaller Reporting Company   ☒
Emerging growth Company   ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 1, 2020
Common Stock, par value $0.01
17,058,644

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AmeriServ Financial, Inc.
INDEX
Page No.
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
3
4
5
6
7
8
36
57
57
PART II.
OTHER INFORMATION
58
58
58
58
58
58
59
 
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Item 1. Financial Statements
AmeriServ Financial, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
(Unaudited)
June 30, 2020
December 31, 2019
ASSETS
Cash and due from depository institutions
$ 16,521 $ 15,642
Interest bearing deposits
2,779 2,755
Short-term investments
27,440 3,771
Total cash and cash equivalents
46,740 22,168
Investment securities:
Available for sale, at fair value
143,359 141,749
Held to maturity (fair value $43,989 on June 30, 2020 and $41,082 on December 31, 2019)
41,549 39,936
Loans held for sale
8,189 4,868
Loans
921,730 883,090
Less: Unearned income
1,569 384
Allowance for loan losses
9,699 9,279
Net loans
910,462 873,427
Premises and equipment:
Operating lease right-of-use asset
803 846
Financing lease right-of-use asset
3,006 3,078
Other premises and equipment, net
14,572 14,643
Accrued interest income receivable
4,647 3,449
Goodwill
11,944 11,944
Bank owned life insurance
39,193 38,916
Net deferred tax asset
3,151 3,976
Federal Home Loan Bank stock
3,818 3,985
Federal Reserve Bank stock
2,125 2,125
Other assets
8,516 6,074
TOTAL ASSETS
$ 1,242,074 $ 1,171,184
LIABILITIES
Non-interest bearing deposits
$ 189,013 $ 136,462
Interest bearing deposits
844,020 824,051
Total deposits
1,033,033 960,513
Short-term borrowings
7,558 22,412
Advances from Federal Home Loan Bank
62,336 53,668
Operating lease liabilities
821 865
Financing lease liabilities
3,126 3,163
Guaranteed junior subordinated deferrable interest debentures, net
12,962 12,955
Subordinated debt, net
7,522 7,511
Total borrowed funds
94,325 100,574
Other liabilities
12,112 11,483
TOTAL LIABILITIES
1,139,470 1,072,570
SHAREHOLDERS’ EQUITY
Common stock, par value $0.01 per share; 30,000,000 shares authorized; 26,687,463
shares issued and 17,058,644 shares outstanding on June 30, 2020; 26,650,728 shares
issued and 17,057,871 shares outstanding on December 31, 2019
267 267
Treasury stock at cost, 9,628,819 shares on June 30, 2020 and 9,592,857 shares on December 31, 2019
(83,280) (83,129)
Capital surplus
145,965 145,888
Retained earnings
53,723 51,759
Accumulated other comprehensive loss, net
(14,071) (16,171)
TOTAL SHAREHOLDERS’ EQUITY
102,604 98,614
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$ 1,242,074 $ 1,171,184
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
INTEREST INCOME
Interest and fees on loans
$ 10,448 $ 10,994 $ 20,780 $ 21,412
Interest bearing deposits
3 7 7 13
Short-term investments
96 59 168 128
Investment securities:
Available for sale
1,159 1,314 2,342 2,633
Held to maturity
355 391 708 743
Total Interest Income
12,061 12,765 24,005 24,929
INTEREST EXPENSE
Deposits
1,869 2,867 4,327 5,597
Short-term borrowings
4 136 16 238
Advances from Federal Home Loan Bank
276 261 560 496
Financing lease liabilities
28 29 57 59
Guaranteed junior subordinated deferrable interest debentures
281 281 561 561
Subordinated debt
130 130 260 260
Total Interest Expense
2,588 3,704 5,781 7,211
NET INTEREST INCOME
9,473 9,061 18,224 17,718
Provision (credit) for loan losses
450 625 (400)
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES
9,023 9,061 17,599 18,118
NON-INTEREST INCOME
Wealth management fees
2,471 2,419 5,025 4,815
Service charges on deposit accounts
176 317 462 627
Net gains on sale of loans
335 107 572 169
Mortgage related fees
145 77 271 121
Net realized gains on investment securities
30 30
Bank owned life insurance
152 129 277 257
Other income
488 578 992 1,243
Total Non-Interest Income
3,767 3,657 7,599 7,262
NON-INTEREST EXPENSE
Salaries and employee benefits
6,619 6,348 13,323 12,649
Net occupancy expense
606 622 1,277 1,280
Equipment expense
389 387 784 748
Professional fees
1,331 1,249 2,485 2,369
Supplies, postage and freight
222 140 401 313
Miscellaneous taxes and insurance
289 294 564 571
Federal deposit insurance expense
130 80 156 160
Other expense
1,420 1,336 2,649 2,659
Total Non-Interest Expense
11,006 10,456 21,639 20,749
PRETAX INCOME
1,784 2,262 3,559 4,631
Provision for income tax expense
365 470 731 961
NET INCOME
1,419 1,792 2,828 3,670
PER COMMON SHARE DATA:
Basic:
Net income
$ 0.08 $ 0.10 $ 0.17 $ 0.21
Average number of shares outstanding
17,052 17,476 17,047 17,527
Diluted:
Net income
$ 0.08 $ 0.10 $ 0.17 $ 0.21
Average number of shares outstanding
17,056 17,560 17,070 17,611
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
COMPREHENSIVE INCOME
Net income
$ 1,419 $ 1,792 $ 2,828 $ 3,670
Other comprehensive income (loss), before tax:
Pension obligation change for defined benefit plan
403 528 (1,433)
Income tax effect
(85) (111) 301
Unrealized holding gains on available for sale securities arising during period
961 1,820 2,131 3,583
Income tax effect
(202) (382) (448) (752)
Reclassification adjustment for gains on available for sale securities
included in net income
(30) (30)
Income tax effect
6 6
Other comprehensive income
759 1,732 2,100 1,675
Comprehensive income
$ 2,178 $ 3,524 $ 4,928 $ 5,345
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
COMMON STOCK
Balance at beginning of period
267 266 267 266
New common shares issued for exercise of stock options
(15,000 and 5,233 shares for the three months ended
June 30, 2020 and 2019, respectively and 36,735 and
38,917 shares for the six months ended June 30, 2020 and
2019, respectively)
Balance at end of period
267 266 267 266
TREASURY STOCK
Balance at beginning of period
(83,280) (81,055) (83,129) (80,579)
Treasury stock, purchased at cost (161,554 shares for the
three months ended June 30, 2019 and 35,962 and 273,865
shares for the six months ended June 30, 2020 and 2019,
respectively)
(686) (151) (1,162)
Balance at end of period
(83,280) (81,741) (83,280) (81,741)
CAPITAL SURPLUS
Balance at beginning of period
145,938 145,870 145,888 145,782
New common shares issued for exercise of stock options
(15,000 and 5,233 shares for the three months ended
June 30, 2020 and 2019, respectively and 36,735 and
38,917 shares for the six months ended June 30, 2020 and
2019, respectively)
26 11 75 96
Stock option expense
1 2 2 5
Balance at end of period
145,965 145,883 145,965 145,883
RETAINED EARNINGS
Balance at beginning of period
52,745 48,262 51,759 46,733
Net income
1,419 1,792 2,828 3,670
Cash dividend declared on common stock ($0.025 per share
for the three months ended June 30, 2020 and 2019 and
$0.050 and $0.045 per share for the six months ended
June 30, 2020 and 2019, respectively)
(441) (436) (864) (785)
Balance at end of period
53,723 49,618 53,723 49,618
ACCUMULATED OTHER COMPREHENSIVE LOSS, NET
Balance at beginning of period
(14,830) (14,282) (16,171) (14,225)
Other comprehensive income
759 1,732 2,100 1,675
Balance at end of period
(14,071) (12,550) (14,071) (12,550)
TOTAL STOCKHOLDERS’ EQUITY
$ 102,604 $ 101,476 $ 102,604 $ 101,476
See accompanying notes to unaudited consolidated financial statements.
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AmeriServ Financial, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
June 30,
2020
2019
OPERATING ACTIVITIES
Net income
$ 2,828 $ 3,670
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision (credit) for loan losses
625 (400)
Depreciation and amortization expense
993 927
Net amortization of investment securities
120 133
Net realized gains on investment securities – available for sale
(30)
Net gains on loans held for sale
(572) (169)
Amortization of deferred loan fees
(149) (60)
Origination of mortgage loans held for sale
(44,171) (11,437)
Sales of mortgage loans held for sale
41,422 11,129
Increase in accrued interest receivable
(1,198) (427)
Increase (decrease) in accrued interest payable
(347) 167
Earnings on bank owned life insurance
(277) (257)
Deferred income taxes
704 685
Stock compensation expense
2 5
Net change in operating leases
(44) (25)
Other, net
(1,378) 214
Net cash provided by (used in) operating activities
(1,442) 4,125
INVESTING ACTIVITIES
Purchase of investment securities – available for sale
(16,229) (10,663)
Purchase of investment securities – held to maturity
(3,268)
Proceeds from sales of investment securities – available for sale
530
Proceeds from maturities of investment securities – available for sale
16,664 9,263
Proceeds from maturities of investment securities – held to maturity
1,620 971
Purchase of regulatory stock
(4,635) (8,977)
Proceeds from redemption of regulatory stock
4,802 8,734
Long-term loans originated
(147,844) (126,641)
Principal collected on long-term loans
110,333 99,982
Proceeds from sale of other real estate owned
21 198
Purchase of premises and equipment
(744) (2,214)
Net cash used in investing activities
(39,280) (28,817)
FINANCING ACTIVITIES
Net increase in deposit balances
72,520 19,309
Net decrease in other short-term borrowings
(14,854) (5,839)
Principal borrowings on advances from Federal Home Loan Bank
19,210 8,403
Principal repayments on advances from Federal Home Loan Bank
(10,542) (2,000)
Principal payments on financing lease liabilities
(100) (83)
Stock options exercised
75 96
Purchase of treasury stock
(151) (1,162)
Common stock dividends
(864) (785)
Net cash provided by financing activities
65,294 17,939
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
24,572 (6,753)
CASH AND CASH EQUIVALENTS AT JANUARY 1
22,168 34,894
CASH AND CASH EQUIVALENTS AT JUNE 30
$ 46,740 $ 28,141
See accompanying notes to unaudited consolidated financial statements.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of AmeriServ Financial, Inc. (the Company) and its wholly-owned subsidiaries, AmeriServ Financial Bank (the Bank), AmeriServ Trust and Financial Services Company (the Trust Company), and AmeriServ Life Insurance Company (AmeriServ Life). The Bank is a Pennsylvania state-chartered full service bank with 15 locations in Pennsylvania and 1 location in Maryland. The Trust Company offers a complete range of trust and financial services and administers assets valued at $2.2 billion that are not reported on the Company’s Consolidated Balance Sheets at June 30, 2020. AmeriServ Life is a captive insurance company that engages in underwriting as a reinsurer of credit life and disability insurance.
In addition, the Parent Company is an administrative group that provides support in such areas as audit, finance, investments, loan review, general services, and marketing. Intercompany accounts and transactions have been eliminated in preparing the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles, or GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from these estimates and the differences may be material to the Consolidated Financial Statements. The Company’s most significant estimates relate to the allowance for loan losses, goodwill, income taxes, investment securities, pension, and the fair value of financial instruments.
2.
Basis of Preparation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. In the opinion of management, all adjustments consisting of normal recurring entries considered necessary for a fair presentation have been included. They are not, however, necessarily indicative of the results of consolidated operations for a full-year.
For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
3.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company, as a smaller reporting company, continues to evaluate the impact that the Update will have on our consolidated financial statements. We are currently working with an industry leading third-party consultant and software provider to assist us in the implementation of this standard. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning
 
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of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. The overall impact of the amendment will be affected by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.
4.
Revenue Recognition
ASU 2014-09, Revenue from Contracts with Customers — Topic 606, requires the Company to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at the time the transfer of goods or services takes place. Management determined that the primary sources of revenue associated with financial instruments, including interest and fee income on loans and interest on investments, along with certain noninterest revenue sources including net realized gains (losses) on investment securities, mortgage related fees, net gains on loans held for sale, and bank owned life insurance are not within the scope of Topic 606. These sources of revenue cumulatively comprise 80.2% of the total revenue of the Company.
Non-interest income within the scope of Topic 606 are as follows:

Wealth management fees — Wealth management fee income is primarily comprised of fees earned from the management and administration of trusts and customer investment portfolios. The Company’s performance obligation is generally satisfied over a period of time and the resulting fees are billed monthly or quarterly, based upon the month end market value of the assets under management. Payment is generally received after month end through a direct charge to customers’ accounts. Due to this delay in payment, a receivable of $825,000 has been established as of June 30, 2020 and is included in other assets on the Consolidated Balance Sheets in order to properly recognize the revenue earned but not yet received. Other performance obligations (such as delivery of account statements to customers) are generally considered immaterial to the overall transactions’ price. Commissions on transactions are recognized on a trade-date basis as the performance obligation is satisfied at the point in time in which the trade is processed. Also included within wealth management fees are commissions from the sale of mutual funds, annuities, and life insurance products. Commissions on the sale of mutual funds, annuities, and life insurance products are recognized when sold, which is when the Company has satisfied its performance obligation.

Service charges on deposit accounts — The Company has contracts with its deposit account customers where fees are charged for certain items or services. Service charges include account analysis fees, monthly service fees, overdraft fees, and other deposit account related fees. Revenue related to account analysis fees and service fees is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. Fees attributable to specific performance obligations of the Company (i.e. overdraft fees, etc.) are recognized at a defined point in time based on completion of the requested service or transaction.

Other non-interest income — Other non-interest income consists of other recurring revenue streams such as safe deposit box rental fees, gain (loss) on sale of other real estate owned and other miscellaneous revenue streams. Safe deposit box rental fees are charged to the customer on an annual basis and recognized when billed. However, if the safe deposit box rental fee is prepaid (i.e. paid prior to issuance of annual bill), the revenue is recognized upon receipt of payment. The Company has determined that since rentals and renewals occur consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Gains and losses on the sale of other real estate owned are recognized at the completion of the property sale when the buyer obtains control of the real estate and all the performance obligations of the Company have been satisfied.
The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six month periods ending June 30, 2020 and 2019 (in thousands).
 
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Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
Non-interest income:
In-scope of Topic 606
Wealth management fees
$ 2,471 $ 2,419 $ 5,025 $ 4,815
Service charges on deposit accounts
176 317 462 627
Other
396 435 786 854
Non-interest income (in-scope of Topic 606)
3,043 3,171 6,273 6,296
Non-interest income (out-of-scope of Topic 606)
724 486 1,326 966
Total non-interest income
$ 3,767 $ 3,657 $ 7,599 $ 7,262
5.
Earnings Per Common Share
Basic earnings per share include only the weighted average common shares outstanding. Diluted earnings per share include the weighted average common shares outstanding and any potentially dilutive common stock equivalent shares in the calculation. Treasury shares are excluded for earnings per share purposes. For the three month periods ending June 30, 2020 and 2019, options to purchase 216,759 common shares, with an exercise price of $2.96 to $4.22, and options to purchase 12,000 common shares, with an exercise price of $4.19 to $4.22, respectively, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive. For the six month periods ending June 30, 2020 and 2019, options to purchase 29,500 common shares, with an exercise price of $3.90 to $4.22, and options to purchase 12,000 common shares, with an exercise price of $4.19 to $4.22, respectively, were outstanding but were not included in the computation of diluted earnings per common share because to do so would be antidilutive.
Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
(In thousands, except per share data)
Numerator:
Net income
$ 1,419 $ 1,792 $ 2,828 $ 3,670
Denominator:
Weighted average common shares outstanding (basic)
17,052 17,476 17,047 17,527
Effect of stock options
4 84 23 84
Weighted average common shares outstanding (diluted)
17,056 17,560 17,070 17,611
Earnings per common share:
Basic
$ 0.08 $ 0.10 $ 0.17 $ 0.21
Diluted
0.08 0.10 0.17 0.21
6.
Consolidated Statement of Cash Flows
On a consolidated basis, cash and cash equivalents include cash and due from depository institutions, interest bearing deposits and short-term investments in both money market funds and commercial paper. The Company made no income tax payments in the first six months of 2020 and $300,000 in the same 2019 period. The Company made total interest payments of $6,128,000 in the first six months of 2020 compared to $7,044,000 in the same 2019 period. The Company had no non-cash transfers to other real estate owned (OREO) in the first six months of 2020 compared to $75,000 non-cash transfers in the same 2019 period. During the first six months of 2020, the Company entered into a new financing lease related to office equipment and recorded a right-of-use asset and lease liability of $63,000. As a result of the adoption of ASU 2016-02, Leases (Topic 842) as of January 1, 2019, the Company had non-cash transactions associated with the recognition of the right-of-use assets and lease liabilities. Specifically, the Company recognized a
 
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right-of-use asset and lease liability of $932,000 related to operating leases and a right-of-use asset and lease liability of $3.3 million related to financing leases during the first six months of 2019.
7.
Investment Securities
The cost basis and fair values of investment securities are summarized as follows (in thousands):
Investment securities available for sale (AFS):
June 30, 2020
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency
$ 3,175 $ 182 $ $ 3,357
US Agency mortgage-backed securities
72,802 3,238 (2) 76,038
Municipal
15,222 1,086 16,308
Corporate bonds
47,857 443 (644) 47,656
Total
$ 139,056 $ 4,949 $ (646) $ 143,359
Investment securities held to maturity (HTM):
June 30, 2020
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency mortgage-backed securities
$ 9,852 $ 472 $ $ 10,324
Municipal
25,668 1,918 (51) 27,535
Corporate bonds and other securities
6,029 107 (6) 6,130
Total
$ 41,549 $ 2,497 $ (57) $ 43,989
Investment securities available for sale (AFS):
December 31, 2019
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency
$ 5,084 $ 32 $ $ 5,116
US Agency mortgage-backed securities
80,046 1,681 (94) 81,633
Municipal
14,678 509 (17) 15,170
Corporate bonds
39,769 342 (281) 39,830
Total
$ 139,577 $ 2,564 $ (392) $ 141,749
Investment securities held to maturity (HTM):
December 31, 2019
Cost
Basis
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
US Agency mortgage-backed securities
$ 9,466 $ 251 $ (4) $ 9,713
Municipal
24,438 941 (53) 25,326
Corporate bonds and other securities
6,032 58 (47) 6,043
Total
$ 39,936 $ 1,250 $ (104) $ 41,082
 
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Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At June 30, 2020, 48.2% of the portfolio was rated “AAA” as compared to 53.4% at December 31, 2019. Approximately 13.8% of the portfolio was either rated below “A” or unrated at June 30, 2020 as compared to 9.1% at December 31, 2019.
The Company sold no AFS securities during the second quarter or first six months of 2020. Total proceeds from the sale of AFS securities for the second quarter and first six months of 2019 were $530,000 resulting in $30,000 of gross investment security gains.
The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $115,585,000 at June 30, 2020 and $117,076,000 at December 31, 2019.
The following tables present information concerning investments with unrealized losses as of June 30, 2020 and December 31, 2019 (in thousands):
Total investment securities:
June 30, 2020
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US Agency
$ $ $ $ $ $
US Agency mortgage-backed securities
559 (1) 151 (1) 710 (2)
Municipal
754 (51) 754 (51)
Corporate bonds and other securities
17,591 (487) 6,337 (163) 23,928 (650)
Total
$ 18,150 $ (488) $ 7,242 $ (215) $ 25,392 $ (703)
Total investment securities:
December 31, 2019
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
US Agency
$ $ $ $ $ $
US Agency mortgage-backed securities
7,084 (23) 8,562 (75) 15,646 (98)
Municipal
2,269 (18) 1,123 (52) 3,392 (70)
Corporate bonds and other securities
7,797 (85) 11,783 (243) 19,580 (328)
Total
$ 17,150 $ (126) $ 21,468 $ (370) $ 38,618 $ (496)
The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 34 positions that are considered temporarily impaired at June 30, 2020. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value or mature.
Contractual maturities of securities at June 30, 2020 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration of the total investment securities portfolio at June 30, 2020 is 23.0 months and is lower than the duration at December 31, 2019 which was 36.9 months. The duration remains within our internally established guideline to not exceed 60 months
 
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which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.
Total investment securities:
June 30, 2020
Available for sale
Held to maturity
Cost Basis
Fair Value
Cost Basis
Fair Value
Within 1 year
$ 3,502 $ 3,511 $ 400 $ 405
After 1 year but within 5 years
22,384 22,576 7,968 8,227
After 5 years but within 10 years
46,234 47,401 19,486 20,957
After 10 years but within15 years
20,122 21,076 7,493 7,962
Over 15 years
46,814 48,795 6,202 6,438
Total
$ 139,056 $ 143,359 $ 41,549 $ 43,989
As of June 30, 2020 and December 31, 2019, the Company reported $391,000 and $366,000, respectively, of equity securities within other assets on the Consolidated Balance Sheets. These equity securities are held within a nonqualified deferred compensation plan in which a select group of executives of the Company can participate. An eligible executive can defer a certain percentage of their current salary to be placed into the plan and held within a rabbi trust. The assets of the rabbi trust are invested in various publicly listed mutual funds. The gain or loss on the equity securities (both realized and unrealized) is reported within other income on the Consolidated Statements of Operations. For the second quarter and first six months of 2020, the Company recorded a realized loss of $21,000 and $15,000, respectively, and an unrealized gain was recognized in income on these equity securities of $9,000 and $3,000, respectively. No gain or loss on equity securities (both realized and unrealized) was recognized during the second quarter or first six months of 2019. Additionally, the Company has recognized a deferred compensation liability, which is equal to the balance of the equity securities and is reported within other liabilities on the Consolidated Balance Sheets.
8.
Loans
The loan portfolio of the Company consists of the following (in thousands):
June 30, 2020
December 31, 2019
Commercial:
Commercial and industrial (non-PPP)
$ 154,379 $ 173,922
Paycheck Protection Program (PPP)
66,933
Commercial loans secured by owner occupied real estate
86,080 91,655
Commercial loans secured by non-owner occupied real estate
365,250 363,635
Real estate – residential mortgage
230,509 235,239
Consumer
17,010 18,255
Loans, net of unearned income
$ 920,161 $ 882,706
Loan balances at June 30, 2020 and December 31, 2019 are net of unearned income of $1,569,000 and $384,000, respectively.The unearned income balance at June 30, 2020 includes $1,184,000 of unrecognized fee income from the PPP loan originations. Real estate construction loans comprised 5.6% and 4.9% of total loans, net of unearned income at June 30, 2020 and December 31, 2019, respectively.
The second quarter of 2020 represented the first full quarter’s impact of the COVID-19 pandemic. Certain loans within our commercial and commercial real estate portfolios have been disproportionately adversely affected by the pandemic. Due to mandatory lockdowns and travel restrictions, certain industries, such as hospitality, travel, food service and restaurants and bars, have suffered as a result of COVID-19. The following table provides information regarding our potential COVID-19 risk concentrations for commercial and commercial real estate loans by industry type at June 30, 2020 (in thousands).
 
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Commercial
and industrial
Paycheck
Protection
Program
Commercial loans
secured by owner
occupied real estate
Commercial loans
secured by non-owner
occupied real estate
Total
1-4 unit residential
$ 1,528 $ $ 195 $ 4,782 $ 6,505
Multifamily/apartments/student
housing
309 50,826 51,135
Office
32,380 9,545 9,791 37,171 88,887
Retail
8,406 1,782 19,629 105,085 134,902
Industrial/manufacturing/warehouse
90,727 28,618 17,408 40,112 176,865
Hotels
440 1,287 45,721 47,448
Eating and drinking places
878 13,608 4,430 575 19,491
Amusement and recreation
218 100 3,363 52 3,733
Mixed use
2,798 65,952 68,750
Other
19,802 11,993 28,157 14,974 74,926
Total
$ 154,379 $ 66,933 $ 86,080 $ 365,250 $ 672,642
The significant increase from the prior quarter in the concentration within several industries (i.e. hotels, eating and drinking places, retail, office, and industrial/manufacturing/warehouse) relates, primarily, to the origination of Paycheck Protection Program loans to assist businesses within these hardest hit industries.
Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans.
An eligible business can apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year (if originated prior to June 5, 2020) or five-year (if originated after June 5, 2020) loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers pursuant to standards as defined by the SBA. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and at least 60% of the loan proceeds are used for payroll expenses, with the remaining loan proceeds being used for other qualifying expenses such as interest on mortgages, rent, and utilities.
As of June 30, 2020, the Company has originated 437 PPP loans totaling $66.9 million and has recorded a total of $1.0 million of processing fee income and interest income from PPP lending activity.
 
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9.
Allowance for Loan Losses
The following tables summarize the rollforward of the allowance for loan losses by portfolio segment for the three and six month periods ending June 30, 2020 and 2019 (in thousands).
Three months ended June 30, 2020
Balance at
March 31, 2020
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
June 30, 2020
Commercial
$ 3,860 $ $ $ (76) $ 3,784
Commercial loans secured by non-owner occupied real estate
3,288 7 324 3,619
Real estate-residential mortgage
1,141 (90) 16 149 1,216
Consumer
120 (29) 11 17 119
Allocation for general risk
925 36 961
Total
$ 9,334 $ (119) $ 34 $ 450 $ 9,699
Three months ended June 30, 2019
Balance at
March 31, 2019
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
June 30, 2019
Commercial
$ 2,614 $ $ $ (76) $ 2,538
Commercial loans secured by non-owner occupied real estate
3,373 13 39 3,425
Real estate-residential mortgage
1,213 (10) 68 (53) 1,218
Consumer
125 (88) 12 75 124
Allocation for general risk
782 15 797
Total
$ 8,107 $ (98) $ 93 $ $ 8,102
Six months ended June 30, 2020
Balance at
December 31, 2019
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
June 30, 2020
Commercial
$ 3,951 $ $ $ (167) $ 3,784
Commercial loans secured by non-owner occupied real estate
3,119 21 479 3,619
Real estate-residential mortgage
1,159 (182) 22 217 1,216
Consumer
126 (91) 25 59 119
Allocation for general risk
924 37 961
Total
$ 9,279 $ (273) $ 68 $ 625 $ 9,699
Six months ended June 30, 2019
Balance at
December 31, 2018
Charge-
Offs
Recoveries
Provision
(Credit)
Balance at
June 30, 2019
Commercial
$ 3,057 $ $ 5 $ (524) $ 2,538
Commercial loans secured by non-owner occupied real estate
3,389 (63) 24 75 3,425
Real estate-residential mortgage
1,235 (71) 76 (22) 1,218
Consumer
127 (170) 30 137 124
Allocation for general risk
863 (66) 797
Total
$ 8,671 $ (304) $ 135 $ (400) $ 8,102
The Company recorded a $450,000 provision expense for loan losses in the second quarter of 2020 compared to a zero provision recorded in the second quarter of 2019. For the first six months of 2020, the
 
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Company recorded a $625,000 provision expense for loan losses compared to a $400,000 provision recovery recorded in the first six months of 2019, which represents a net unfavorable shift of $1,025,000. The 2020 provision reflects management’s decision to strengthen certain qualitative factors within our allowance for loan losses calculation due to the economic uncertainty caused by the COVID-19 pandemic. The increase in the allowance for the commercial loans secured by non-owner occupied real estate portfolio for both the three and six months ended June 30, 2020 stems from the risk rating downgrades of several hospitality related credits, which have been most significantly impacted by COVID-19. In addition, the growth in the allowance balance for residential mortgage loans is the result of the increased origination activity experienced within this portfolio given the lower interest rate environment. It should be noted that the 100% SBA guarantee on PPP loans minimizes the level of credit risk associated with the loans. As a result, such loans are assigned a 0% risk weight for purposes of calculating the Bank’s risk-based capital ratios. Therefore, it was deemed appropriate to not allocate any portion of the loan loss reserve for the PPP loans for the second quarter of 2020.
For the first six months of 2020, the Company experienced net loan charge-offs of $205,000, or 0.05% of total loans, compared to net loan charge-offs of $169,000, or 0.04% of total loans, in the first six months of 2019. Overall, the Company’s asset quality remains strong as its non-performing assets totaled $3.1 million, or only 0.34% of total loans, at June 30, 2020 and are below industry levels. The allowance for loan losses provided 311% coverage of non-performing assets, and 1.04% of total loans, at June 30, 2020, compared to 397% coverage of non-performing assets, and 1.05% of total loans, at December 31, 2019. The reserve coverage of total loans, excluding PPP loans, is 1.13% (non-GAAP) at June 30, 2020, as compared to 0.91% at June 30, 2019. See the reconciliation of the non-GAAP measure of the reserve coverage of total loans, excluding PPP loans, within the Allowance for Loan Losses section of the MD&A.
The following tables summarize the loan portfolio and allowance for loan loss by the primary segments of the loan portfolio (in thousands).
At June 30, 2020
Commercial
Commercial Loans
Secured by
Non-Owner
Occupied
Real Estate
Real Estate-
Residential
Mortgage
Consumer
Allocation for
General Risk
Total
Loans:
Individually evaluated for impairment
$ 818 $ 8 $ $ $ 826
Collectively evaluated for impairment
306,574 365,242 230,509 17,010 919,335
Total loans
$ 307,392 $ 365,250 $ 230,509 $ 17,010 $ 920,161
Allowance for loan losses:
Specific reserve allocation
$ 78 $ 8 $ $ $ $ 86
General reserve allocation
3,706 3,611 1,216 119 961 9,613
Total allowance for loan losses
$ 3,784 $ 3,619 $ 1,216 $ 119 $ 961 $ 9,699
 
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At December 31, 2019
Commercial
Commercial Loans
Secured by
Non-Owner
Occupied
Real Estate
Real Estate-
Residential
Mortgage
Consumer
Allocation for
General Risk
Total
Loans:
Individually evaluated for impairment
$ 816 $ 8 $ $ $ 824
Collectively evaluated for impairment
264,761 363,627 235,239 18,255 881,882
Total loans
$ 265,577 $ 363,635 $ 235,239 $ 18,255 $ 882,706
Allowance for loan losses:
Specific reserve allocation
$ 84 $ 8 $ $ $ $ 92
General reserve allocation
3,867 3,111 1,159 126 924 9,187
Total allowance for loan losses
$ 3,951 $ 3,119 $ 1,159 $ 126 $ 924 $ 9,279
The segments of the Company’s loan portfolio are disaggregated into classes that allows management to monitor risk and performance. The loan classes used are consistent with the internal reports evaluated by the Company’s management and Board of Directors to monitor risk and performance within various segments of its loan portfolio. The commercial loan segment includes both the commercial and industrial and the owner occupied commercial real estate loan classes while the remaining segments are not separated into classes as management monitors risk in these loans at the segment level. The residential mortgage loan segment is comprised of first lien amortizing residential mortgage loans and home equity loans secured by residential real estate. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.
Management evaluates for possible impairment any individual loan in the commercial or commercial real estate segment that is in nonaccrual status or classified as a Troubled Debt Restructure (TDR). In addition, consumer and residential mortgage loans with a balance of $150,000 or more are evaluated for impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. 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.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of three methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs for collateral dependent loans. The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The need for an updated appraisal on collateral dependent loans is determined on a case-by-case basis. The useful life of an appraisal or evaluation will vary depending upon the circumstances of the property and the economic conditions in the marketplace. A new appraisal is not required if there is an existing appraisal which, along with other information, is sufficient to determine a reasonable value for the property
 
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and to support an appropriate and adequate allowance for loan losses. At a minimum, annual documented reevaluation of the property is completed by the Bank’s internal Assigned Risk Department to support the value of the property.
When reviewing an appraisal associated with an existing real estate collateral dependent transaction, the Bank’s internal Assigned Risk Department must determine if there have been material changes to the underlying assumptions in the appraisal which affect the original estimate of value. Some of the factors that could cause material changes to reported values include:

the passage of time;

the volatility of the local market;

the availability of financing;

natural disasters;

the inventory of competing properties;

new improvements to, or lack of maintenance of, the subject property or competing properties upon physical inspection by the Bank;

changes in underlying economic and market assumptions, such as material changes in current and projected vacancy, absorption rates, capitalization rates, lease terms, rental rates, sales prices, concessions, construction overruns and delays, zoning changes, etc.; and/or

environmental contamination.
The value of the property is adjusted to appropriately reflect the above listed factors and the value is discounted to reflect the value impact of a forced or distressed sale, any outstanding senior liens, any outstanding unpaid real estate taxes, transfer taxes and closing costs that would occur with sale of the real estate. If the Assigned Risk Department personnel determine that a reasonable value cannot be derived based on available information, a new appraisal is ordered. The determination of the need for a new appraisal, versus completion of a property valuation by the Bank’s Assigned Risk Department personnel, rests with the Assigned Risk Department and not the originating account officer.
The following tables present impaired loans by portfolio segment, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands).
June 30, 2020
Impaired Loans with
Specific Allowance
Impaired Loans
with no
Specific
Allowance
Total Impaired
Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
Unpaid
Principal
Balance
Commercial
$ 818 $ 78 $    — $ 818 $ 818
Commercial loans secured by non-owner occupied real estate
8 8 8 30
Total impaired loans
$ 826 $ 86 $ $ 826 $ 848
 
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December 31, 2019
Impaired Loans with
Specific Allowance
Impaired Loans
with no
Specific
Allowance
Total Impaired
Loans
Recorded
Investment
Related
Allowance
Recorded
Investment
Recorded
Investment
Unpaid
Principal
Balance
Commercial
$ 816 $ 84 $    — $ 816 $ 816
Commercial loans secured by non-owner occupied real estate
8 8 8 30
Total impaired loans
$ 824 $ 92 $ $ 824 $ 846
The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated (in thousands).
Three months ended
June 30,
Six months ended
June 30,
Average loan balance:
2020
2019
2020
2019
Commercial
$ 826 $ 375 $ 822 $ 250
Commercial loans secured by non-owner occupied real estate
8 11 8 11
Average investment in impaired loans
$ 834 $ 386 $ 830 $ 261
Interest income recognized:
Commercial
$ 10 $ 4 $ 22 $ 4
Commercial loans secured by non-owner occupied real estate
Interest income recognized on a cash basis on impaired loans
$ 10 $ 4 $ 22 $ 4
Management uses a nine-point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized. The first five “Pass” categories are aggregated, while the Pass-6, Special Mention, Substandard and Doubtful categories are disaggregated to separate pools. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due, or for which any portion of the loan represents a specific allocation of the allowance for loan losses are placed in Substandard or Doubtful.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process, which dictates that, at a minimum, credit reviews are mandatory for all commercial and commercial mortgage loan relationships with aggregate balances in excess of $1,000,000 within a 12-month period. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, delinquency, or death occurs to raise awareness of a possible credit event. The Company’s commercial relationship managers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. Risk ratings are assigned by the account officer, but require independent review and rating concurrence from the Company’s internal Loan Review Department. The Loan Review Department is an experienced, independent function which reports directly to the Board’s Audit Committee. The scope of commercial portfolio coverage by the Loan Review Department is defined and presented to the Audit Committee for approval on an annual basis. The approved scope of coverage for 2020 requires review of a minimum of 40% of the commercial loan portfolio.
In addition to loan monitoring by the account officer and Loan Review Department, the Company also requires presentation of all credits rated Pass-6 with aggregate balances greater than $2,000,000, all credits rated Special Mention or Substandard with aggregate balances greater than $250,000, and all credits
 
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rated Doubtful with aggregate balances greater than $100,000 on an individual basis to the Company’s Loan Loss Reserve Committee on a quarterly basis. Additionally, the Asset Quality Task Force, which is a group comprised of senior level personnel, meets monthly to monitor the status of problem loans.
The following table presents the classes of the commercial and commercial real estate loan portfolios summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system (in thousands).
June 30, 2020
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
$ 209,144 $ 725 $ 11,443 $ $ 221,312
Commercial loans secured by owner occupied real estate
83,485 1,306 1,289 86,080
Commercial loans secured by non-owner occupied real estate
363,682 1,560 8 365,250
Total
$ 656,311 $ 2,031 $ 14,292 $ 8 $ 672,642
December 31, 2019
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
$ 161,147 $ 853 $ 11,922 $ $ 173,922
Commercial loans secured by owner occupied real estate
88,942 1,384 1,329 91,655
Commercial loans secured by non-owner occupied real estate
362,027 1,600 8 363,635
Total
$ 612,116 $ 2,237 $ 14,851 $ 8 $ 629,212
It is generally the policy of the Bank that the outstanding balance of any residential mortgage loan that exceeds 90-days past due as to principal and/or interest is transferred to non-accrual status and an evaluation is completed to determine the fair value of the collateral less selling costs, unless the balance is minor. A charge down is recorded for any deficiency balance determined from the collateral evaluation. The remaining non-accrual balance is reported as impaired with no specific allowance. It is generally the policy of the Bank that the outstanding balance of any consumer loan that exceeds 90-days past due as to principal and/or interest is charged off. The following tables present the performing and non-performing outstanding balances of the residential and consumer portfolio classes (in thousands).
June 30, 2020
Performing
Non-Performing
Total
Real estate – residential mortgage
$ 228,213 $ 2,296 $ 230,509
Consumer
17,010 17,010
Total
$ 245,223 $ 2,296 $ 247,519
December 31, 2019
Performing
Non-Performing
Total
Real estate – residential mortgage
$ 233,760 $ 1,479 $ 235,239
Consumer
18,255 18,255
Total
$ 252,015 $ 1,479 $ 253,494
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans (in thousands).
 
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June 30, 2020
Current
30 – 59 Days
Past Due
60 – 89 Days
Past Due
90 Days
Past Due
Total
Past Due
Total
Loans
90 Days
Past Due
and Still
Accruing
Commercial and industrial
$ 221,251 $ 40 $ 21 $ $ 61 $ 221,312 $    —
Commercial loans secured by owner occupied real estate
85,267 813 813 86,080
Commercial loans secured by non-owner occupied real estate
365,250 365,250
Real estate – residential mortgage
224,654 1,792 967 3,096 5,855 230,509 1,581
Consumer
16,988 17 5 22 17,010
Total
$ 913,410 $ 1,849 $ 1,806 $ 3,096 $ 6,751 $ 920,161 $ 1,581
December 31, 2019
Current
30 – 59 Days
Past Due
60 – 89 Days
Past Due
90 Days
Past Due
Total
Past Due
Total
Loans
90 Days
Past Due
and Still
Accruing
Commercial and industrial
$ 173,922 $ $ $ $ $ 173,922 $    —
Commercial loans secured by owner occupied real estate
91,538 117 117 91,655
Commercial loans secured by non-owner occupied real estate
363,635 363,635
Real estate — residential mortgage
231,022 2,331 864 1,022 4,217 235,239
Consumer
18,190 42 23 65 18,255
Total
$ 878,307 $ 2,490 $ 887 $ 1,022 $ 4,399 $ 882,706 $
An allowance for loan losses (“ALL”) is maintained to support loan growth and cover charge-offs from the loan portfolio. The ALL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are complemented by consideration of other qualitative factors.
Management tracks the historical net charge-off activity at each risk rating grade level for the entire commercial portfolio and at the aggregate level for the consumer, residential mortgage and small business portfolios. A historical charge-off factor is calculated utilizing a rolling 12 consecutive historical quarters for the commercial portfolios. This historical charge-off factor for the consumer, residential mortgage and small business portfolios are based on a three-year historical average of actual loss experience.
The Company uses a comprehensive methodology and procedural discipline to maintain an ALL to absorb inherent losses in the loan portfolio. The Company believes this is a critical accounting policy since it involves significant estimates and judgments. The allowance consists of three elements: (1) an allowance established on specifically identified problem loans, (2) formula driven general reserves established for loan categories based upon historical loss experience and other qualitative factors which include delinquency, non-performing and TDR loans, loan trends, economic trends, concentrations of credit, trends in loan volume, experience and depth of management, examination and audit results, effects of any changes in lending policies, and trends in policy, financial information, and documentation exceptions, and (3) a general risk reserve which provides support for variance from our assessment of the previously listed qualitative factors, provides protection against credit risks resulting from other inherent risk factors contained in the Company’s loan portfolio, and recognizes the model and estimation risk associated with the specific and
 
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formula driven allowances. The qualitative factors used in the formula driven general reserves are evaluated quarterly (and revised if necessary) by the Company’s management to establish allocations which accommodate each of the listed risk factors.
“Pass” rated credits are segregated from “Criticized” and “Classified” credits for the application of qualitative factors.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
10.
Non-Performing Assets Including Troubled Debt Restructurings (TDR)
The following table presents information concerning non-performing assets including TDR (in thousands, except percentages):
June 30, 2020
December 31, 2019
Non-accrual loans
Commercial and industrial
$ 21 $
Commercial loans secured by non-owner occupied real estate
8 8
Real estate-residential mortgage
2,296 1,479
Total
2,325 1,487
Other real estate owned
Real estate-residential mortgage
37
Total
37
TDR’s not in non-accrual
Commercial and industrial
797 815
Total
797 815
Total non-performing assets including TDR
$ 3,122 $ 2,339
Total non-performing assets as a percent of loans, net of unearned income, and other real estate owned
0.34% 0.26%
The Company had $1,581,000 of loans at June 30, 2020 compared to no loans at December 31, 2019 past due 90 days or more which were accruing interest.
The following table sets forth, for the periods indicated, (1) the gross interest income that would have been recorded if non-accrual loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination if held for part of the period, (2) the amount of interest income actually recorded on such loans, and (3) the net reduction in interest income attributable to such loans (in thousands).
Three months ended
June 30,
Six months ended
June 30,
2020
2019
2020
2019
Interest income due in accordance with original terms
$ 21 $ 14 $ 38 $ 29
Interest income recorded
Net reduction in interest income
$ 21 $ 14 $ 38 $ 29
Consistent with accounting and regulatory guidance, the Bank recognizes a TDR when the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not normally be considered. Regardless of the form of concession granted, the Bank’s objective in offering a TDR is to increase the probability of repayment of the borrower’s loan.
The Company had no loans modified as TDRs during the three-month period ending June 30, 2020. The following table details the loan modified as a TDR during the six-month period ended June 30, 2020 (dollars in thousands).
 
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Loans in accrual status
# of Loans
Current Balance
Concession Granted
Commercial and industrial
1 $ 750 Subsequent modification of a TDR — extension of maturity date with a below market interest rate
The following table details the loan modified as a TDR during the three and six month periods ended June 30, 2019 (dollars in thousands).
Loans in accrual status
# of Loans
Current Balance
Concession Granted
Commercial and industrial
1