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 March 31, 2018 and December 31, 2017 (in thousands): March 31, 2018 December 31, 2017 Loans secured by real estate: Commercial real estate - owner occupied $ 399,819 $ 401,847 Commercial real estate - non-owner occupied 471,866 440,700 Secured by farmland 22,974 23,038 Construction and land loans 195,839 197,972 Residential 1-4 family 508,599 483,006 Multi- family residential 74,833 70,892 Home equity lines of credit 147,447 152,829 Total real estate loans 1,821,377 1,770,284 Commercial loans 248,819 253,258 Consumer loans 37,040 39,374 Gross loans 2,107,236 2,062,916 Less deferred fees on loans (493) (588) Loans, net of deferred fees $ 2,106,743 $ 2,062,328 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 $1.0 3 billion, which created an accretable discount of $13.6 million at acquisition . As of March 31, 2018 outstanding loans acquired in the merger with EVBS totaled $885 million. 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”. Covered loans totaled $22.2 million and $23.3 million at March 31, 2018 and December 31, 2017, respectively. Accretable discount on the acquired EVBS, Greater Atlantic Bank, PGFSB, and the HarVest loans totaled $16.3 million and $17.5 million at March 31, 2018 and December 31, 2017, 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): Total Loans Unpaid Recorded Principal Related March 31, 2018 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 670 $ 670 $ - Commercial real estate - non-owner occupied (2) 873 874 - Construction and land development 9,892 9,941 - Commercial loans 4,823 5,928 - Residential 1-4 family (3) 3,501 3,527 - Other consumer loans - - - Total $ 19,759 $ 20,940 $ - With an allowance recorded Commercial real estate - owner occupied $ - $ - $ - Commercial real estate - non-owner occupied (2) - - - Construction and land development - - - Commercial loans 469 6,294 200 Residential 1-4 family (3) - - - Other consumer loans - - - Total $ 469 $ 6,294 $ 200 Grand total $ 20,228 $ 27,234 $ 200 (1) Includes $4.6 million in SBA guarantees. (2) Includes loans secured by farmland and multi-family loans. (3) Includes home equity lines of credit. Total Loans Unpaid Recorded Principal Related December 31, 2017 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 767 $ 781 $ - Commercial real estate - non-owner occupied (2) 766 830 - Construction and land development 9,969 9,984 - Commercial loans 6,035 12,847 - Residential 1-4 family (3) 3,160 3,430 - Other consumer loans - - - Total $ 20,697 $ 27,872 $ - 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 $ 20,697 $ 27,872 $ - (1) Includes $5.0 million in SBA guarantees. (2) Includes loans secured by farmland and multi-family 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 months ended March 31, 2018 and 2017 (in thousands): Total Loans Average Interest Recorded Income Three Months Ended March 31, 2018 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 671 $ 9 Commercial real estate - non-owner occupied (1) 877 14 Construction and land development 9,972 - Commercial loans 4,842 3 Residential 1-4 family (2) 3,548 14 Other consumer loans - - Total $ 19,910 $ 40 With an allowance recorded Commercial real estate - owner occupied $ - $ - Commercial real estate - non-owner occupied (1) - - Construction and land development - - Commercial loans 929 - Residential 1-4 family (2) - - Other consumer loans - - Total $ 929 $ - Grand total $ 20,839 $ 40 Total Loans Average Interest Recorded Income Three Months Ended March 31, 2017 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ - $ - Commercial real estate - non-owner occupied (1) - - Construction and land development - - Commercial loans 2,117 - Residential 1-4 family (2) 1,290 8 Other consumer loans - - Total $ 3,407 $ 8 With an allowance recorded Commercial real estate - owner occupied $ 1,324 $ 8 Commercial real estate - non-owner occupied (1) - - Construction and land development - - Commercial loans 859 - Residential 1-4 family (2) 242 - Other consumer loans - - Total $ 2,425 $ 8 Grand total $ 5,832 $ 16 (1) Includes loans secured by farmland and multi-family 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 March 31, 2018 and December 31, 2017 (in thousands): 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total March 31, 2018 Past Due Past Due or More Past Due Loans Past Due Loans Total loans: Commercial real estate - owner occupied $ 178 $ - $ - $ 178 $ - $ 399,641 $ 399,819 Commercial real estate - non-owner occupied (1) 1,937 - - 1,937 48 567,688 569,673 Construction and land development 159 - - 159 9,892 185,788 195,839 Commercial loans 144 - - 144 4,933 243,742 248,819 Residential 1-4 family (2) 5,005 1,107 - 6,112 2,452 647,482 656,046 Other consumer loans 39 22 - 61 - 36,979 37,040 Total $ 7,462 $ 1,129 $ - $ 8,591 $ 17,325 $ 2,081,320 $ 2,107,236 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total December 31, 2017 Past Due Past Due or More Past Due Loans Past Due Loans Total loans: Commercial real estate - owner occupied $ 687 $ - $ - $ 687 $ - $ 401,160 $ 401,847 Commercial real estate - non-owner occupied (1) 138 50 - 188 - 534,442 534,630 Construction and land development 1,134 149 - 1,283 9,969 186,720 197,972 Commercial loans 496 - - 496 5,664 247,098 253,258 Residential 1-4 family (2) 2,926 361 - 3,287 2,392 630,156 635,835 Other consumer loans 57 1 - 58 - 39,316 39,374 Total $ 5,438 $ 561 $ - $ 5,999 $ 18,025 $ 2,038,892 $ 2,062,916 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Activity in the allowance for non-covered loan and lease losses for the three months ended March 31, 2018 and 2017 is summarized below (in thousands): Commercial Commercial Real Estate Real Estate Non-owner Construction 1-4 Family Other Owner Occupied and Land Commercial Residential Consumer Un- Three Months Ended March 31, 2018 Occupied (1) Development Loans (2) Loans allocated Total Allowance for loan losses: Beginning balance $ 690 $ 1,321 $ 692 $ 4,496 $ 1,586 $ 612 $ - $ 9,397 Charge offs - - - (230) (166) (91) - (487) Recoveries 4 - - 175 64 2 - 245 Provision 165 229 112 831 (34) 297 - 1,600 Ending balance $ 859 $ 1,550 $ 804 $ 5,272 $ 1,450 $ 820 $ - $ 10,755 Three Months Ended March 31, 2017 Allowance for loan losses: Beginning balance $ 905 $ 1,484 $ 752 $ 3,366 $ 1,279 $ 78 $ 746 $ 8,610 Charge offs - - - (500) (12) - - (512) Recoveries 10 - - 16 2 2 - 30 Provision 273 62 49 125 (15) (6) 62 550 Ending balance $ 1,188 $ 1,546 $ 801 $ 3,007 $ 1,254 $ 74 $ 808 $ 8,678 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. 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 March 31, 2018 and December 31, 2017 (in thousands): Commercial Commercial Real Estate Real Estate Non-owner Construction 1-4 Family Other Owner Occupied and Land Commercial Residential Consumer Un- March 31, 2018 Occupied (1) Development Loans (2) Loans allocated Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ 200 $ - $ - $ - $ 200 Collectively evaluated for impairment 859 1,550 804 5,072 1,450 820 - 10,555 Total ending allowance $ 859 $ 1,550 $ 804 $ 5,272 $ 1,450 $ 820 $ - $ 10,755 Loans: Individually evaluated for impairment $ 670 $ 873 $ 9,892 $ 5,292 $ 3,501 $ - $ - $ 20,228 Collectively evaluated for impairment 399,149 568,800 185,947 243,527 652,545 37,040 - 2,087,008 Total ending loan balances $ 399,819 $ 569,673 $ 195,839 $ 248,819 $ 656,046 $ 37,040 $ - $ 2,107,236 December 31, 2017 Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment 690 1,321 692 4,496 1,586 612 - 9,397 Total ending allowance $ 690 $ 1,321 $ 692 $ 4,496 $ 1,586 $ 612 $ - $ 9,397 Loans: Individually evaluated for impairment $ 767 $ 766 $ 9,969 $ 6,035 $ 3,160 $ - $ - $ 20,697 Collectively evaluated for impairment 401,080 533,864 188,003 247,223 632,675 39,374 - 2,042,219 Total ending loan balances $ 401,847 $ 534,630 $ 197,972 $ 253,258 $ 635,835 $ 39,374 $ - $ 2,062,916 (1) Includes loans secured by farmland and multi-family 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 months ending March 31, 2018, 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 $670 thousand , was current as of March 31, 2018. 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 March 31, 2018 or December 31, 2017. 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. Southern National had no loans classified as Doubtful at March 31, 2018 or December 31, 2017. As of March 31, 2018 and December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands): Total Loans Special March 31, 2018 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 6,976 $ 1,564 $ 391,279 $ 399,819 Commercial real estate - non-owner occupied (1) 5,292 873 563,508 569,673 Construction and land development 126 9,892 185,821 195,839 Commercial loans 6,169 5,292 237,358 248,819 Residential 1-4 family (2) 1,251 4,239 650,556 656,046 Other consumer loans 157 - 36,883 37,040 Total $ 19,971 $ 21,860 $ 2,065,405 $ 2,107,236 Total Loans Special December 31, 2017 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 4,178 $ 1,678 $ 395,991 $ 401,847 Commercial real estate - non-owner occupied (1) 5,705 830 528,095 534,630 Construction and land development 128 9,969 187,875 197,972 Commercial loans 5,936 6,035 241,287 253,258 Residential 1-4 family (2) 1,323 3,935 630,577 635,835 Other consumer loans 162 - 39,212 39,374 Total $ 17,432 $ 22,447 $ 2,023,037 $ 2,062,916 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. (3) Includes SBA guarantees of $4.6 million and $5.0 million as of March 31, 2018 and December 31, 2017. The amount of foreclosed residential real estate property held at March 31 , 2018 and December 31, 2017 was $3.1 million and $3.3 million, respectively. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $163 thousand and $939 thou sand at March 31, 2018 and December 31, 2017, respectively. |