LOANS AND ALLOWANCE FOR LOAN LOSSES | 5. LOANS AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the composition of our loan portfolio as of September 30, 2017 and December 31, 2016: Covered Non-covered Total Covered Non-covered Total Loans (1) Loans Loans Loans (1) Loans Loans September 30, 2017 December 31, 2016 Loans secured by real estate: Commercial real estate - owner-occupied $ - $ 399,799 $ 399,799 $ - $ 154,807 $ 154,807 Commercial real estate - non-owner-occupied - 452,797 452,797 - 279,634 279,634 Secured by farmland - 13,270 13,270 - 541 541 Construction and land loans - 198,328 198,328 - 91,067 91,067 Residential 1-4 family 9,356 462,545 471,901 10,519 220,291 230,810 Multi- family residential - 73,547 73,547 - 30,021 30,021 Home equity lines of credit 14,623 137,681 152,304 17,661 11,542 29,203 Total real estate loans 23,979 1,737,967 1,761,946 28,180 787,903 816,083 Commercial loans - 235,171 235,171 - 115,365 115,365 Consumer loans - 39,460 39,460 - 856 856 Gross loans 23,979 2,012,598 2,036,577 28,180 904,124 932,304 Less deferred fees on loans - (1,396 ) (1,396 ) - (1,889 ) (1,889 ) Loans, net of deferred fees $ 23,979 $ 2,011,202 $ 2,035,181 $ 28,180 $ 902,235 $ 930,415 (1) Covered Loans were acquired in the Greater Atlantic transaction and are covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019. Accounting policy related to the allowance for loan losses is considered a critical policy given the level of estimation, judgment, and uncertainty in the levels of the allowance required to account for the inherent probable losses in the loan portfolio and the material effect such estimation, judgment, and uncertainty can have on the consolidated financial results. On June 23, 2017, in connection with the merger with EVBS, SNBV acquired loans held for sale with a fair value of $19.7 million and loans held for investment with an unpaid principal balance of $1.05 billion and an estimated fair value of $1.04 billion, which created an accretable discount of $15.4 million at acquisition. Accretion of $1.1 million and $1.2 million associated with these acquired loans held for investment was recognized in the three and nine months ended September 30, 2017, respectively. As part of the Greater Atlantic Bank acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of Greater Atlantic Bank’s assets. There were two agreements with the FDIC: one for single family loans which is a 10-year agreement expiring in December 2019, and one for non-single family (commercial) assets which was a 5-year agreement which expired in December 2014. The Bank will share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreements; we refer to these assets collectively as “covered assets.” Loans that are not covered in the loss sharing agreement are referred to as “non-covered loans”. As of September 30, 2017, non-covered loans included $22.6 million of loans acquired in the HarVest acquisition, $37.3 million acquired in the Prince Georges Federal Savings Bank (“PGFSB”) acquisition and $990.4 million acquired in the EVBS acquisition. Accretable discount on the acquired EVBS, Greater Atlantic Bank, PGFSB, and the HarVest loans totaled $19.6 million and $6.5 million at September 30, 2017 and December 31, 2016, respectively. For the three acquisitions subsequent to the Greater Atlantic Bank acquisition noted above, management sold the majority of the purchased credit impaired loans immediately after closing of the acquisition. Impaired loans for the covered and non-covered portfolios were as follows (in thousands): Covered Loans Non-covered Loans Total Loans Unpaid Unpaid Unpaid Recorded Principal Related Recorded Principal Related Recorded Principal Related September 30, 2017 Investment Balance Allowance Investment (1) Balance Allowance Investment Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ 1,218 $ 1,324 $ - $ 1,218 $ 1,324 $ - Commercial real estate - non-owner occupied (2) - - - - - - - - - Construction and land development - - - 9,984 9,984 - 9,984 9,984 - Commercial loans - - - 4,128 9,126 - 4,128 9,126 - Residential 1-4 family (3) 1,285 1,495 - 376 517 - 1,661 2,012 - Other consumer loans - - - - - - - - - Total $ 1,285 $ 1,495 $ - $ 15,706 $ 20,951 $ - $ 16,991 $ 22,446 $ - With an allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ - $ - $ - Commercial real estate - non-owner occupied (2) - - - - - - - - - Construction and land development - - - - - - - - - Commercial loans - - - - - - - - - Residential 1-4 family (3) - - - - - - - - - Other consumer loans - - - - - - - - - Total $ - $ - $ - $ - $ - $ - $ - $ - $ - Grand total $ 1,285 $ 1,495 $ - $ 15,706 $ 20,951 $ - $ 16,991 $ 22,446 $ - (1) Recorded investment is after cumulative prior charge offs of $5.2 million. These loans also have aggregate SBA guarantees of $1.7 million. (2) Includes loans secured by farmland and multi-family residential loans. (3) Includes home equity lines of credit. Covered Loans Non-covered Loans Total Loans Unpaid Unpaid Unpaid Recorded Principal Related Recorded Principal Related Recorded Principal Related December 31, 2016 Investment Balance Allowance Investment (1) Balance Allowance Investment Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ 5,583 $ 5,592 $ - $ 5,583 $ 5,592 $ - Commercial real estate - non-owner occupied (2) - - - - - - - - - Construction and land development - - - - - - - - - Commercial loans - - - 3,002 3,603 - 3,002 3,603 - Residential 1-4 family (3) 963 1,113 - - - - 963 1,113 - Other consumer loans - - - - - - - - - Total $ 963 $ 1,113 $ - $ 8,585 $ 9,195 $ - $ 9,548 $ 10,308 $ - With an allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ 688 $ 688 $ 150 $ 688 $ 688 $ 150 Commercial real estate - non-owner occupied (2) - - - - - - - - - Construction and land development - - - - - - - - - Commercial loans - - - 3,378 5,798 750 3,378 5,798 750 Residential 1-4 family (3) - - - - - - - - - Other consumer loans - - - - - - - - - Total $ - $ - $ - $ 4,066 $ 6,486 $ 900 $ 4,066 $ 6,486 $ 900 Grand total $ 963 $ 1,113 $ - $ 12,651 $ 15,681 $ 900 $ 13,614 $ 16,794 $ 900 (1) Recorded investment is after cumulative prior charge offs of $3.0 million. These loans also have aggregate SBA guarantees of $2.2 million. (2) Includes loans secured by farmland and multi-family residential loans. (3) Includes home equity lines of credit. The following tables present the average recorded investment and interest income for impaired loans recognized by class of loans for the three and nine months ended September 30, 2017 and 2016 (in thousands): Covered Loans Non-covered Loans Total Loans Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Three months ended September 30, 2017 Investment Recognized Investment Recognized Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ 1,325 $ 8 $ 1,325 $ 8 Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - 9,984 153 9,984 153 Commercial loans - - 8,286 111 8,286 111 Residential 1-4 family (2) 1,290 12 517 - 1,807 12 Other consumer loans - - - - - - Total $ 1,290 $ 12 $ 20,112 $ 272 $ 21,402 $ 284 With an allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - - - - - Commercial loans - - - - - - Residential 1-4 family (2) - - - - - - Other consumer loans - - - - - - Total $ - $ - $ - $ - $ - $ - Grand total $ 1,290 $ 12 $ 20,112 $ 272 $ 21,402 $ 284 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Covered Loans Non-covered Loans Total Loans Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Three months ended September 30, 2016 Investment Recognized Investment Recognized Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ 7,984 $ 73 $ 7,984 $ 73 Commercial real estate - non-owner occupied (1) - - 132 3 132 3 Construction and land development - - - - - - Commercial loans - - 2,600 13 2,600 13 Residential 1-4 family (2) 959 7 - - 959 7 Other consumer loans - - - - - - Total $ 959 $ 7 $ 10,716 $ 89 $ 11,675 $ 96 With an allowance recorded Commercial real estate - owner occupied $ - $ - $ 693 $ 8 $ 693 $ 8 Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - - - - - Commercial loans - - 4,140 39 4,140 39 Residential 1-4 family (2) - - - - - - Other consumer loans - - - - - - Total $ - $ - $ 4,833 $ 47 $ 4,833 $ 47 Grand total $ 959 $ 7 $ 15,549 $ 136 $ 16,508 $ 143 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Covered Loans Non-covered Loans Total Loans Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Nine months ended September 30, 2017 Investment Recognized Investment Recognized Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ 1,328 $ 27 $ 1,328 $ 27 Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - 9,934 158 9,934 158 Commercial loans - - 8,206 323 8,206 323 Residential 1-4 family (2) 1,292 45 517 - 1,809 45 Other consumer loans - - - - - - Total $ 1,292 $ 45 $ 19,985 $ 508 $ 21,277 $ 553 With an allowance recorded Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - - - - - Commercial loans - - - - - - Residential 1-4 family (2) - - - - - - Other consumer loans - - - - - - Total $ - $ - $ - $ - $ - $ - Grand total $ 1,292 $ 45 $ 19,985 $ 508 $ 21,277 $ 553 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Covered Loans Non-covered Loans Total Loans Average Interest Average Interest Average Interest Recorded Income Recorded Income Recorded Income Nine months ended September 30, 2016 Investment Recognized Investment Recognized Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ - $ - $ 6,711 $ 220 $ 6,711 $ 220 Commercial real estate - non-owner occupied (1) - - 134 8 134 8 Construction and land development - - - - - - Commercial loans - - 2,852 - 2,852 - Residential 1-4 family (2) 996 24 - - 996 24 Other consumer loans - - - - - - Total $ 996 $ 24 $ 9,697 $ 228 $ 10,693 $ 252 With an allowance recorded Commercial real estate - owner occupied $ - $ - $ 696 $ 24 $ 696 $ 24 Commercial real estate - non-owner occupied (1) - - - - - - Construction and land development - - - - - - Commercial loans - - 3,301 117 3,301 117 Residential 1-4 family (2) - - - - - - Other consumer loans - - - - - - Total $ - $ - $ 3,997 $ 141 $ 3,997 $ 141 Grand total $ 996 $ 24 $ 13,694 $ 369 $ 14,690 $ 393 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2017 and December 31, 2016 (in thousands): 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total September 30, 2017 Past Due Past Due or More Past Due Loans Past Due Loans Covered loans: Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ - Commercial real estate - non-owner occupied (1) - - - - - - - Construction and land development - - - - - - - Commercial loans - - - - - - - Residential 1-4 family (2) 23 193 - 216 1,109 22,654 23,979 Other consumer loans - - - - - - - Total $ 23 $ 193 $ - $ 216 $ 1,109 $ 22,654 $ 23,979 Non-covered loans: Commercial real estate - owner occupied $ 4,491 $ 40 $ - $ 4,531 $ 636 $ 394,632 $ 399,799 Commercial real estate - non-owner occupied (1) 1,934 39 - 1,973 - 537,641 539,614 Construction and land development 1,604 - - 1,604 9,984 186,740 198,328 Commercial loans 5,994 250 - 6,244 1,732 227,195 235,171 Residential 1-4 family (2) 3,565 1,119 - 4,684 639 594,903 600,226 Other consumer loans 37 8 - 45 - 39,415 39,460 Total $ 17,625 $ 1,456 $ - $ 19,081 $ 12,991 $ 1,980,526 $ 2,012,598 Total loans: Commercial real estate - owner occupied $ 4,491 $ 40 $ - $ 4,531 $ 636 $ 394,632 $ 399,799 Commercial real estate - non-owner occupied (1) 1,934 39 - 1,973 - 537,641 539,614 Construction and land development 1,604 - - 1,604 9,984 186,740 198,328 Commercial loans 5,994 250 - 6,244 1,732 227,195 235,171 Residential 1-4 family (2) 3,588 1,312 - 4,900 1,748 617,557 624,205 Other consumer loans 37 8 - 45 - 39,415 39,460 Total $ 17,648 $ 1,649 $ - $ 19,297 $ 14,100 $ 2,003,180 $ 2,036,577 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total December 31, 2016 Past Due Past Due or More Past Due Loans Past Due Loans Covered loans: Commercial real estate - owner occupied $ - $ - $ - $ - $ - $ - $ - Commercial real estate - non-owner occupied (1) - - - - - - - Construction and land development - - - - - - - Commercial loans - - - - - - - Residential 1-4 family (2) 221 95 - 316 850 27,014 28,180 Other consumer loans - - - - - - - Total $ 221 $ 95 $ - $ 316 $ 850 $ 27,014 $ 28,180 Non-covered loans: Commercial real estate - owner occupied $ - $ - $ - $ - $ 637 $ 154,170 $ 154,807 Commercial real estate - non-owner occupied (1) - - - - - 310,196 310,196 Construction and land development - - - - - 91,067 91,067 Commercial loans 1,349 - - 1,349 3,158 110,858 115,365 Residential 1-4 family (2) 1,011 - - 1,011 - 230,822 231,833 Other consumer loans - - - - - 856 856 Total $ 2,360 $ - $ - $ 2,360 $ 3,795 $ 897,969 $ 904,124 Total loans: Commercial real estate - owner occupied $ - $ - $ - $ - $ 637 $ 154,170 $ 154,807 Commercial real estate - non-owner occupied (1) - - - - - 310,196 310,196 Construction and land development - - - - - 91,067 91,067 Commercial loans 1,349 - - 1,349 3,158 110,858 115,365 Residential 1-4 family (2) 1,232 95 - 1,327 850 257,836 260,013 Other consumer loans - - - - - 856 856 Total $ 2,581 $ 95 $ - $ 2,676 $ 4,645 $ 924,983 $ 932,304 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Non-covered nonaccrual loans include SBA guaranteed amounts totaling $1.7 million and $2.2 million at September 30, 2017 and December 31, 2016, respectively. Activity in the allowance for non-covered loan and lease losses for the three and nine months ended September 30, 2017 and 2016 is summarized below (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Non-covered loans: Three months ended September 30, 2017 Allowance for loan losses: Beginning balance $ 938 $ 1,790 $ 1,096 $ 2,691 $ 1,423 $ 84 $ 1,175 $ 9,197 Charge offs - - - (5,316 ) - (57 ) - (5,373 ) Recoveries 7 - - 170 2 1 - 180 Provision (129 ) (260 ) (293 ) 6,629 15 297 (1,009 ) 5,250 Ending balance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254 Three months ended September 30, 2016 Allowance for loan losses: Beginning balance $ 721 $ 1,403 $ 855 $ 3,345 $ 1,262 $ 122 $ 713 $ 8,421 Charge offs (798 ) - - (1,363 ) - - - (2,161 ) Recoveries - - 120 33 4 2 - 159 Provision 916 196 (328 ) 1,257 95 (41 ) (45 ) 2,050 Ending balance $ 839 $ 1,599 $ 647 $ 3,272 $ 1,361 $ 83 $ 668 $ 8,469 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Non-covered loans: Nine months ended September 30, 2017 Allowance for loan losses: Beginning balance $ 905 $ 1,484 $ 752 $ 3,366 $ 1,279 $ 78 $ 746 $ 8,610 Charge offs - (100 ) - (6,283 ) (319 ) (63 ) - (6,765 ) Recoveries 28 299 - 221 6 5 - 559 Provision (117 ) (153 ) 51 6,870 474 305 (580 ) 6,850 Ending balance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254 Nine months ended September 30, 2016 Allowance for loan losses: Beginning balance $ 1,185 $ 1,222 $ 865 $ 3,041 $ 1,408 $ 48 $ 652 $ 8,421 Charge offs (798 ) - (450 ) (2,633 ) (22 ) (322 ) - (4,225 ) Recoveries - 1 120 78 8 4 - 211 Provision 452 376 112 2,786 (33 ) 353 16 4,062 Ending balance $ 839 $ 1,599 $ 647 $ 3,272 $ 1,361 $ 83 $ 668 $ 8,469 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. No activity in the allowance for covered loan and lease losses was recorded during the three and nine months ended September 30, 2017 and 2016. The following tables present the balance in the allowance for loan losses and the recorded investment in non-covered loans by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016 (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Non-covered loans: September 30, 2017 Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment 816 1,530 803 4,174 1,440 325 166 9,254 Total ending allowance $ 816 $ 1,530 $ 803 $ 4,174 $ 1,440 $ 325 $ 166 $ 9,254 Loans: Individually evaluated for impairment $ 1,218 $ - $ 9,984 $ 4,128 $ 376 $ - $ - $ 15,706 Collectively evaluated for impairment 398,581 539,614 188,344 231,043 599,850 39,460 - 1,996,892 Total ending loan balances $ 399,799 $ 539,614 $ 198,328 $ 235,171 $ 600,226 $ 39,460 $ - $ 2,012,598 December 31, 2016 Ending allowance balance attributable to loans: Individually evaluated for impairment $ 150 $ - $ - $ 750 $ - $ - $ - $ 900 Collectively evaluated for impairment 755 1,484 752 2,616 1,279 78 746 7,710 Total ending allowance $ 905 $ 1,484 $ 752 $ 3,366 $ 1,279 $ 78 $ 746 $ 8,610 Loans: Individually evaluated for impairment $ 6,271 $ - $ - $ 6,380 $ - $ - $ - $ 12,651 Collectively evaluated for impairment 148,536 310,196 91,067 108,985 231,833 856 - 891,473 Total ending loan balances $ 154,807 $ 310,196 $ 91,067 $ 115,365 $ 231,833 $ 856 $ - $ 904,124 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. The following tables present the balance in the allowance for covered loan losses and the recorded investment in covered loans by portfolio segment and based on impairment method as of September 30, 2017 and December 31, 2016 (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Covered loans: September 30, 2017 Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment - - - - - - - - Total ending allowance $ - $ - $ - $ - $ - $ - $ - $ - Loans: Individually evaluated for impairment $ - $ - $ - $ - $ 1,285 $ - $ - $ 1,285 Collectively evaluated for impairment - - - - 22,694 - - 22,694 Total ending loan balances $ - $ - $ - $ - $ 23,979 $ - $ - $ 23,979 December 31, 2016 Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment - - - - - - - - Total ending allowance $ - $ - $ - $ - $ - $ - $ - $ - Loans: Individually evaluated for impairment $ - $ - $ - $ - $ 963 $ - $ - $ 963 Collectively evaluated for impairment - - - - 27,217 - - 27,217 Total ending loan balances $ - $ - $ - $ - $ 28,180 $ - $ - $ 28,180 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. Troubled Debt Restructurings A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Bank has granted a concession to the borrower. The Bank determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Bank is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future. Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures. Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness. When evaluating whether a concession has been granted, the Bank also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Bank for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers. The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR. Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity. During the three and nine months ending September 30, 2017, there were no loans modified in TDRs. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $677 thousand, was current as of September 30, 2017. During the three and nine months ending September 30, 2016, there were no loans modified in TDRs. One TDR which had been modified in 2013 defaulted during the second quarter of 2015. This loan, in the amount of $692 thousand, was current as of September 30, 2016. Credit Quality Indicators Through its system of internal controls, Southern National evaluates and segments loan portfolio credit quality on a quarterly basis using regulatory definitions for Special Mention, Substandard and Doubtful. Special Mention loans are considered to be criticized. Substandard and Doubtful loans are considered to be classified. Southern National had no loans classified Doubtful at September 30, 2017 or December 31, 2016. Special Mention loans are loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position. Substandard loans may be inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful loans have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. As of September 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands): Covered Loans Non-covered Loans Total Loans Classified/ Special Classified/ September 30, 2017 Criticized (1) Pass Total Mention Substandard (3) Pass Total Criticized Pass Total Commercial real estate - owner occupied $ - $ - $ - $ - $ 1,218 $ 398,581 $ 399,799 $ 1,218 $ 398,581 $ 399,799 Commercial real estate - non-owner occupied (2) - - - - 9,984 529,630 539,614 9,984 529,630 539,614 Construction and land development - - - - - 198,328 198,328 - 198,328 198,328 Commercial loans - - - 3,258 4,128 227,785 235,171 7,386 227,785 235,171 Residential 1-4 family (4) 1,285 22,694 23,979 - 376 599,850 600,226 1,661 622,544 624,205 Other consumer loans - - - - - 39,460 39,460 - 39,460 39,460 Total $ 1,285 $ 22,694 $ 23,979 $ 3,258 $ 15,706 $ 1,993,634 $ 2,012,598 $ 20,249 $ 2,016,328 $ 2,036,577 Covered Loans Non-covered Loans Total Loans Classified/ Special Classified/ December 31, 2016 Criticized (1) Pass Total Mention Substandard (3) Pass Total Criticized Pass Total Commercial real estate - owner occupied $ - $ - $ - $ - $ 6,271 $ 148,536 $ 154,807 $ 6,271 $ 148,536 $ 154,807 Commercial real estate - non-owner occupied (2) - - - - - 310,196 310,196 - 310,196 310,196 Construction and land development - - - - - 91,067 91,067 - 91,067 91,067 Commercial loans - - - 28 6,380 108,957 115,365 6,408 108,957 115,365 Residential 1-4 family (4) 963 27,217 28,180 - - 231,833 231,833 963 259,050 260,013 Other consumer loans - - - - - 856 856 - 856 856 Total $ 963 $ 27,217 $ 28,180 $ 28 $ 12,651 $ 891,445 $ 904,124 $ 13,642 $ 918,662 $ 932,304 (1) Credit quality is enhanced by a loss sharing agreement with the FDIC in the covered portfolio. The same credit quality indicators used in the non-covered portfolio are combined. (2) Includes loans secured by farmland and multi-family residential loans. (3) Includes SBA guarantees of $1.7 million and $2.2 million as of September 30, 2017 and December 31, 2016. (4) Includes home equity lines of credit. The amount of foreclosed residential real estate property held at September 30, 2017 and December 31, 2016 was $2.0 million and $3.4 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $1.4 million and $1.8 million at September 30, 2017 and December 31, 2016, respectively. |