| Loans and Allowance for Credit Losses | Note 4 - Loans and Allowance for Credit
Losses The Bank makes loans
to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s
loan portfolio consists of loans to businesses secured by real estate and other business assets. Loans, net of unamortized
net deferred fees, at December 31, 2018 and 2017 are summarized by type as follows:
December 31, 2018 December 31, 2017
(dollars in thousands) Amount % Amount %
Commercial $ 1,553,112 22 % $ 1,375,939 21 %
Income producing - commercial real estate 3,256,900 46 % 3,047,094 48 %
Owner occupied - commercial real estate 887,814 13 % 755,444 12 %
Real estate mortgage - residential 106,418 2 % 104,357 2 %
Construction - commercial and residential 1,039,815 15 % 973,141 15 %
Construction - C&I (owner occupied) 57,797 1 % 58,691 1 %
Home equity 86,603 1 % 93,264 1 %
Other consumer 2,988 — 3,598 —
Total loans 6,991,447 100 % 6,411,528 100 %
Less: allowance for credit losses (69,944 ) (64,758 )
Net loans $ 6,921,503 $ 6,346,770 Unamortized net deferred
fees amounted to $26.5 million and $23.9 million at December 31, 2018 and 2017, of which $60 thousand and $93 thousand at December
31, 2018 and 2017, respectively, represented net deferred costs on home equity loans. Loans acquired from
Virginia Heritage Bank (“Virginia Heritage”) totaled $804 million at fair value, comprised of $801 million of loans
that were not considered impaired at the acquisition date and $3.0 million of loans that were determined to be impaired at the
time of acquisition. The impaired loans were accounted for in accordance with ASC Topic 310-30 “Accounting for Certain
Loans or Debt Securities Acquired in a Transfer” As of December 31,
2018 and 2017, the Bank serviced $111.1 million and $195.3 million, respectively, of multifamily FHA loans, SBA loans and other
loan participations, which are not reflected as loan balances on the Consolidated Balance Sheets. Loan Origination/Risk Management The Company’s
goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative
influences. Plans for mitigating inherent risks in managing loan assets include carefully enforcing loan policies and procedures,
evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring
primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation.
Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system
is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations. The composition of
the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing.
At December 31, 2018, owner occupied commercial real estate and construction - C&I (owner occupied) represent approximately
14% of the loan portfolio while non-owner occupied commercial real estate and real estate construction represented approximately
61% of the loan portfolio. The combined owner occupied and commercial real estate loans represented approximately 75% of the loan
portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 85% of all loans being secured
by real estate. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate
values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80%
and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In making
real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years. The Company is also an active traditional
commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing.
This loan category represents approximately 22% of the loan portfolio at December 31, 2018 and was generally variable or adjustable
rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support
debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2% of the commercial
loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit.
The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as
servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA
loans are subject to a maximum loan size established by the SBA as well as internal loan size guidelines. Approximately 1% of
the loan portfolio at December 31, 2018 consists of home equity loans and lines of credit and other consumer loans. These credits,
while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other
types of loans advanced by the Bank. Approximately 2% of
the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 22 months. These credits represent
first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell
(servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet
the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold
to another investor at a later date or mature. Loans are secured primarily
by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general,
borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory
financial condition. Additionally, an equity contribution toward the project is customarily required. Construction loans
require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank.
Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds
for larger scale projects. Loans intended for
residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed
for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential
zoned real properties, including the creation of housing. Residential development and construction loans will finance projects
such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development
and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination. Commercial land acquisition
and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve
appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally
required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and
construction loans generally are underwritten with a maximum term of 24 months. Substantially all construction
draw requests must be presented in writing on American Institute of Architects documents and certified either by the contractor,
the borrower and/or the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown
certified by the borrower or their Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project
to determine that the work has been completed, to justify the draw requisition. Commercial permanent
loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service
coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily
at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis
point increase in interest rates from their current levels. Commercial permanent
loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever
is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years. The Company’s
loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.62
billion at December 31, 2018. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest
reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 70% of the outstanding
ADC loan portfolio at December 31, 2018. The decision to establish a loan-funded interest reserve is made upon origination of the
ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the
project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) borrower equity contribution;
and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the
cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in
other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking
of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent
risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve
is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress
of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the
lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports
detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve
balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly
commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected
real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase
loan funded interest reserves. The following tables
detail activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2018 and 2017. Allocation
of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Income Producing - Owner Occupied - Real Estate Construction -
Commercial Commercial Mortgage Commercial and Home Other
(dollars in thousands) Commercial Real Estate Real Estate Residential Residential Equity Consumer Total
Year Ended December 31, 2018
Allowance for credit losses:
Balance at beginning of period $ 13,102 $ 25,376 $ 5,934 $ 944 $ 18,492 $ 770 $ 140 $ 64,758
Loans charged-off (3,491 ) (121 ) (132 ) — (1,160 ) — (81 ) (4,985 )
Recoveries of loans previously charged-off 340 2 3 6 1,009 133 18 1,511
Net loans (charged-off) recoveries (3,151 ) (119 ) (129 ) 6 (151 ) 133 (63 ) (3,474 )
Provision for credit losses 5,906 2,777 437 15 (166 ) (304 ) (5 ) 8,660
Ending balance $ 15,857 $ 28,034 $ 6,242 $ 965 $ 18,175 $ 599 $ 72 $ 69,944
For the Year Ended December 31, 2018
Allowance for credit losses:
Individually evaluated for impairment $ 4,803 $ 2,465 $ 600 $ — $ 1,050 $ — $ — $ 8,918
Collectively evaluated for impairment 11,054 25,569 5,642 965 17,125 599 72 61,026
Ending balance $ 15,857 $ 28,034 $ 6,242 $ 965 $ 18,175 $ 599 $ 72 $ 69,944
Year Ended December 31, 2017
Allowance for credit losses:
Balance at beginning of period $ 14,700 $ 21,105 $ 4,010 $ 1,284 $ 16,487 $ 1,328 $ 160 $ 59,074
Loans charged-off (747 ) (1,470 ) — — (2,158 ) (100 ) (100 ) (4,575 )
Recoveries of loans previously charged-off 681 80 3 6 492 5 21 1,288
Net loans (charged-off) recoveries (66 ) (1,390 ) 3 6 (1,666 ) (95 ) (79 ) (3,287 )
Provision for credit losses (1,532 ) 5,661 1,921 (346 ) 3,671 (463 ) 59 8,971
Ending balance $ 13,102 $ 25,376 $ 5,934 $ 944 $ 18,492 $ 770 $ 140 $ 64,758
For the Year Ended December 31, 2017
Allowance for credit losses:
Individually evaluated for impairment $ 3,259 $ 2,380 $ 1,382 $ — $ 500 $ — $ 80 $ 7,601
Collectively evaluated for impairment 9,843 22,996 4,552 944 17,992 770 60 57,157
Ending balance $ 13,102 $ 25,376 $ 5,934 $ 944 $ 18,492 $ 770 $ 140 $ 64,758 The
Company’s recorded investments in loans as of December 31, 2018 and December 31, 2017 related to each balance in the allowance
for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:
Income
Producing - Commercial Owner
Occupied - Commercial Real
Estate Construction
- Commercial and Home Other
(dollars
in thousands) Commercial Real
Estate Real
Estate Residential Residential Equity Consumer Total
December
31, 2018
Recorded
investment in loans:
Individually
evaluated for impairment $ 8,738 $ 61,747 $ 5,307 $ 1,228 $ 7,012 $ 487 $ — $ 84,519
Collectively
evaluated for impairment 1,544,374 3,195,153 882,507 105,190 1,090,600 86,116 2,988 6,906,928
Ending
balance $ 1,553,112 $ 3,256,900 $ 887,814 $ 106,418 $ 1,097,612 $ 86,603 $ 2,988 $ 6,991,447
December
31, 2017
Recorded
investment in loans:
Individually
evaluated for impairment $ 8,726 $ 10,192 $ 5,501 $ 478 $ 4,709 $ 494 $ 91 $ 30,191
Collectively
evaluated for impairment 1,367,213 3,036,902 749,943 103,879 1,027,123 92,770 3,507 6,381,337
Ending
balance $ 1,375,939 $ 3,047,094 $ 755,444 $ 104,357 $ 1,031,832 $ 93,264 $ 3,598 $ 6,411,528 At
December 31, 2018, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia
Heritage have a carrying value of $282 thousand and $202 thousand, respectively, and an unpaid principal balance of $332 thousand
and $995 thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities
Acquired with Deteriorated Credit Quality Credit
Quality Indicators The
Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality
indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified
categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics
that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise
the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics,
such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively.
These are typically loans to individuals in the classes which comprise the consumer portfolio segment. The
following are the definitions of the Company’s credit quality indicators:
Pass: Loans
in all classes that comprise the commercial and consumer portfolio segments that are
not adversely rated, are contractually current as to principal and interest, and are
otherwise in compliance with the contractual terms of the loan agreement. Management
believes that there is a low likelihood of loss related to those loans that are considered
pass.
Watch: Loan
paying as agreed with generally acceptable asset quality; however the obligor’s
performance has not met expectations. Balance sheet and/or income statement has shown
deterioration to the point that the obligor could not sustain any further setbacks. Credit
is expected to be strengthened through improved obligor performance and/or additional
collateral within a reasonable period of time.
Special
Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s
close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan.
The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management
believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.
Classified: Classified
(a) Substandard Classified
(b) Doubtful The
Company’s credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually. The following
table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of December
31, 2018 and 2017.
Watch and Total
(dollars in thousands) Pass Special Mention Substandard Doubtful Loans
December 31, 2018
Commercial $ 1,505,477 $ 25,584 $ 22,051 $ — $ 1,553,112
Income producing - commercial real estate 3,182,903 1,536 82,885 — 3,256,900
Owner occupied - commercial real estate 844,286 38,221 5,307 — 887,814
Real estate mortgage 3 residential 104,543 647 1,228 — 106,418
Construction - commercial and residential 1,090,600 — 7,012 — 1,097,612
Home equity 85,434 682 487 — 86,603
Other consumer 2,988 — — — 2,988
Total $ 6,816,231 $ 66,670 $ 118,970 $ — $ 6,991,447
December 31, 2017
Commercial $ 1,333,050 $ 34,163 $ 8,726 $ — $ 1,375,939
Income producing - commercial real estate 3,033,046 3,856 10,192 — 3,047,094
Owner occupied - commercial real estate 696,754 53,189 5,501 — 755,444
Real estate mortgage - residential 103,220 659 478 — 104,357
Construction - commercial and residential 1,027,123 — 4,709 — 1,031,832
Home equity 92,084 686 494 — 93,264
Other consumer 3,505 2 91 — 3,598
Total $ 6,288,782 $ 92,555 $ 30,191 $ — $ 6,411,528 Nonaccrual
and Past Due Loans Loans
are considered past due if the required principal and interest payments have not been received as of the date such payments were
due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations
as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of
whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments
are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably assured. The
following table presents, by class of loan, information related to nonaccrual loans as of December 31, 2018 and 2017.
(dollars in thousands) December 31, 2018 December 31, 2017
Commercial $ 7,115 $ 3,493
Income producing - commercial real estate 1,766 832
Owner occupied - commercial real estate 2,368 5,501
Real estate mortgage - residential 1,510 775
Construction - commercial and residential 3,031 2,052
Home equity 487 494
Other consumer — 91
Total nonaccrual loans (1)(2) $ 16,277 $ 13,238
(1) Excludes
troubled debt restructurings (“TDRs”) that were performing under their restructured
terms totaling $24.0 million at December 31, 2018, and $12.3 million at December 31,
2017.
(2) Gross
interest income of $1.0 million and $939 thousand would have been recorded in 2018 and
2017, respectively, if nonaccrual loans shown above had been current and in accordance
with their original terms, while interest actually recorded on such loans were $265 thousand
and $101 thousand at December 31, 2018 and 2017, respectively. See Note 1 to the Consolidated
Financial Statements for a description of the Company’s policy for placing loans
on nonaccrual status. The
following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of December 31,
2018 and 2017.
Loans Loans Loans Total Recorded
30-59 Days 60-89 Days 90 Days or Total Past Current Investment in
(dollars in thousands) Past Due Past Due More Past Due Due Loans Loans Loans
December 31, 2018
Commercial $ 4,535 $ 2,870 $ 7,115 $ 14,520 $ 1,538,592 $ 1,553,112
Income producing - commercial real estate 5,855 27,479 1,766 35,100 3,221,800 3,256,900
Owner occupied - commercial real estate 5,051 2,370 2,368 9,789 878,025 887,814
Real estate mortgage – residential 2,456 1,698 1,510 5,664 100,754 106,418
Construction - commercial and residential 4,392 — 3,031 7,423 1,090,189 1,097,612
Home equity 630 47 487 1,164 85,439 86,603
Other consumer — — — — 2,988 2,988
Total $ 22,919 $ 34,464 $ 16,277 $ 73,660 $ 6,917,787 $ 6,991,447
December 31, 2017
Commercial $ 2,705 $ 748 $ 3,493 $ 6,946 $ 1,368,993 $ 1,375,939
Income producing - commercial real estate 4,398 6,930 832 12,160 3,034,934 3,047,094
Owner occupied - commercial real estate 522 3,906 5,501 9,929 745,515 755,444
Real estate mortgage – residential 6,993 1,244 775 9,012 95,345 104,357
Construction - commercial and residential — 5,268 2,052 7,320 1,024,512 1,031,832
Home equity 307 — 494 801 92,463 93,264
Other consumer 45 6 91 142 3,456 3,598
Total $ 14,970 $ 18,102 $ 13,238 $ 46,310 $ 6,365,218 $ 6,411,528 Impaired
Loans Loans
are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all
amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest
payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other
loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, 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 the collateral. Interest payments on impaired loans are typically applied to principal unless collectability
of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The
following table presents, by class of loan, information related to impaired loans for the years ended December 31, 2018 and 2017.
Unpaid Recorded Recorded Total Average
Recorded Investment Interest
Income Recognized
Principal With
No With Recorded Related Quarter Year Quarter Year
(dollars
in thousands) Balance Allowance Allowance Investment Allowance To
Date To
Date To
Date To
Date
December
31, 2018
Commercial $ 8,613 $ 2,057 $ 6,084 $ 8,141 $ 4,803 $ 10,306 $ 8,359 $ (126 ) $ 190
Income
producing - commercial real estate 21,402 1,720 19,682 21,402 2,465 15,331 12,309 189 550
Owner
occupied - commercial real estate 5,731 4,361 1,370 5,731 600 5,746 6,011 47 196
Real
estate mortgage – residential 1,510 1,510 — 1,510 — 1,516 1,688 — 2
Construction
- commercial and residential 3,031 3,031 — 3,031 1,050 3,031 2,028 — 68
Home
equity 487 487 — 487 — 487 491 — —
Other
consumer — — — — — 46 69 — —
Total $ 40,774 $ 13,166 $ 27,136 $ 40,302 $ 8,918 $ 36,463 $ 27,836 $ 110 $ 1,006
December
31, 2017
Commercial $ 5,644 $ 1,777 $ 3,748 $ 5,525 $ 3,259 $ 5,764 $ 5,765 $ 48 $ 145
Income
producing - commercial real estate 10,044 781 9,263 10,044 2,380 10,068 10,127 120 493
Owner
occupied - commercial real estate 6,596 1,095 5,501 6,596 1,382 6,743 5,210 27 73
Real
estate mortgage – residential 775 775 — 775 — 538 423 17 17
Construction
- commercial and residential 2,052 1,534 518 2,052 500 3,491 3,731 (14 ) —
Home
equity 494 494 — 494 — 544 346 — 2
Other
consumer 91 — 91 91 80 92 93 — —
Total $ 25,696 $ 6,456 $ 19,121 $ 25,577 $ 7,601 $ 27,240 $ 25,695 $ 198 $ 730 Modifications A
modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes
a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified
in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.
Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in
a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest
rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.
Construction loans modified in a TDR may also involve extending the interest-only payment period. As of December 31, 2018, all
performing TDRs were categorized as interest-only modifications. Loans
modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan.
An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value
of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price,
or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises
significant judgment in developing these estimates. The
following table presents, by class, the recorded investment of loans modified in TDRs held by the Company during the years ended
December 31, 2018 and 2017.
For
the Year Ended December 31, 2018
(dollars
in thousands) Number
of Commercial Income
Producing - Commercial Real Estate Owner
Occupied - Commercial Real Estate Construction
- Commercial Real Estate Total
Troubled
debt restructurings
Restructured
accruing 9 $ 1,026 $ 19,636 $ 3,363 $ — $ 24,025
Restructured
nonaccruing 3 544 — — — 544
Total 12 $ 1,570 $ 19,636 $ 3,363 $ — $ 24,569
Specific
allowance $ — $ 3,000 $ — $ — $ 3,000
Restructured
and subsequently defaulted $ 408 $ 937 $ — $ — $ 1,345
For
the Year Ended December 31, 2017
(dollars
in thousands) Number
of Contracts Commercial Income
Producing - Commercial Real Estate Owner
Occupied - Commercial Real Estate Construction
- Commercial Real Estate Total
Troubled
debt restructings
Restructured
accruing 9 $ 2,032 $ 9,212 $ 1,095 $ — $ 12,339
Restructured
nonaccruing 5 867 121 — — 988
Total 14 $ 2,899 $ 9,333 $ 1,095 $ — $ 13,327
Specific
allowance $ 595 $ 2,350 $ — $ — $ 2,945
Restructured
and subsequently defaulted $ 237 $ — $ — $ — $ 237 The
Company had twelve TDRs at December 31, 2018, totaling approximately $24.6 million, as compared to fourteen TDRs totaling approximately
$13.3 million at December 31, 2017. At December 31, 2018, nine of these TDR loans, totaling approximately $24.0 million,
are performing under their modified terms, as compared to the same period in 2017, there were nine performing TDR loans totaling
approximately $12.3 million. During 2018, there were two performing TDRs totaling $460 thousand that defaulted on their modified
terms which were reclassified to nonperforming loans, as compared to the same period in 2017, there were five performing TDR loans
totaling approximately $988 thousand that defaulted on their modified terms and were reclassified to nonperforming loans. A default
is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. During 2018 there
were four defaulted loans totaling approximately $1.4 million that were charged off during the year, as compared to the same period
in 2017, there was one defaulted loan totaling approximately $237 thousand that was charged off. There were two loan payoffs on
performing loans in 2018 totaling approximately $3.9 million that were modified during the year. During 2018, there was a pay
down of approximately $176 thousand on one nonperforming loan totaling approximately $183 thousand at December 31, 2017. During
2017, there was a pay down of approximately $4.8 million resulting from the sale of the underlying collateral on one nonperforming
loan totaling approximately $4.9 million at December 31, 2016. Commercial and consumer loans modified in a TDR are closely
monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the
Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation
of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. During 2018, there
were two loans modified in a TDR totaling approximately $12.8 million, as compared to the same period in 2017, there were four
loans totaling approximately $5.3 million modified in a TDR. The
criteria used to determine if a loan should be considered for charge off relates to its ultimate collectability includes the following:
● All
or a portion of the loan is deemed uncollectible;
● Repayment
is dependent upon secondary sources, such as liquidation of collateral, other assets,
or judgment liens that may require an indefinite time period to collect. Loans
may be identified for charge off in whole or in part based upon an impairment analysis consistent with ASC 310. If all or a portion
of a loan is deemed uncollectible, such amount shall be charged off in the month in which the loan or portion thereof is determined
to be uncollectible. Loans
approved for non-accrual status, or charge off, are managed by the Chief Credit Officer or as dictated by the Directors Loan Committee
and/or Credit Review Committee. The Chief Credit Officer is expected to position the loan in the best possible posture for
recovery, including, among other actions, liquidating collateral, obtaining additional collateral, filing suit to obtain judgment
or restructuring of repayment terms. A review of charged off loans is made on a monthly basis to assess the possibility of
recovery from renewed collection efforts. All charged off loans that are deemed to have the possibility of recovery, whether partial
or full, shall be actively pursued. Charged off loans that are deemed uncollectible will be placed in an inactive file with documentation
supporting the suspension of further collection efforts. In
the process of collecting problem loans the Bank may resort to the acquisition of collateral through foreclosure and repossession
actions, or may accept the transfer of assets in partial or full satisfaction of the debt. These actions may in turn result
in the necessity of carrying real property or chattels as an asset of the Company pending sale. For
purchased loans acquired that are not deemed impaired at acquisition, credit marks representing the principal losses expected
over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to
estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records
a provision for loan losses only when the required allowance exceeds any remaining credit mark. The differences between the initial
fair value and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans. The
following table presents changes in the credit mark accretable yield, which includes income recognized from contractual interest
cash flows, for the dates indicated.
(dollars in thousands) 2018 2017
Balance at January 1, $ (2,459 ) $ (4,444 )
Net reclassifications from nonaccretable yield — —
Accretion 964 1,985
Balance at December 31, $ (1,495 ) $ (2,459 ) Related
Party Loans Certain
directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of the
Company’s lending business, we |
