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, 2018 and December 31, 2017 (in thousands): September 30, 2018 December 31, 2017 Loans secured by real estate: Commercial real estate - owner occupied $ 400,839 $ 401,847 Commercial real estate - non-owner occupied 494,554 440,700 Secured by farmland 21,354 23,038 Construction and land loans 186,973 197,972 Residential 1-4 family 558,164 483,006 Multi- family residential 85,879 70,892 Home equity lines of credit 131,146 152,829 Total real estate loans 1,878,909 1,770,284 Commercial loans 249,951 253,258 Consumer loans 32,607 39,374 Gross loans 2,161,467 2,062,916 Less deferred fees on loans (61) (588) Loans, net of deferred fees $ 2,161,406 $ 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 , after recognition of certain measurement period adjustments, of $19.7 million and loans held for investment with an unpaid principal balance of $1.05 billion and an estimated fair value , after recognition of certain measurement period adjustments, of $1.0 3 billion, which created an accretable discount of $14.2 million at acquisition. As of September 30, 2018, outstanding loans acquired in the merger with EVBS totaled $778 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 $19.0 million and $23.3 million at September 30, 2018 and December 31, 2017, respectively. Accretable discount on the acquired EVBS, Greater Atlantic Bank (“GAB”), Prince George’s Federal Savings Bank (“PGFSB”), and the HarVest Bank (“HarVest”) loans totaled $14.4 million and $17.5 million at September 30, 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 September 30, 2018 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 663 $ 663 $ - Commercial real estate - non-owner occupied (2) - - - Construction and land development - - - Commercial loans 3,384 4,497 - Residential 1-4 family (3) 1,558 1,823 - Other consumer loans 19 19 - Total $ 5,624 $ 7,002 $ - 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 $ 5,624 $ 7,002 $ - (1) Includes $3.3 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 and nine months ended September 30, 2018 and 2017 (in thousands): Total Loans Average Interest Recorded Income Three Months Ended September 30, 2018 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 663 $ 9 Commercial real estate - non-owner occupied (1) - - Construction and land development - - Commercial loans 4,849 12 Residential 1-4 family (2) 1,821 22 Other consumer loans 19 - Total $ 7,352 $ 43 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 $ 7,352 $ 43 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Total Loans Average Interest Recorded Income Three Months Ended September 30, 2017 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 1,325 $ 8 Commercial real estate - non-owner occupied (1) - - Construction and land development 9,984 153 Commercial loans 8,286 111 Residential 1-4 family (2) 1,807 12 Other consumer loans - - Total $ 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 $ 21,402 $ 284 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Total Loans Average Interest Recorded Income Nine Months Ended September 30, 2018 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 663 $ 26 Commercial real estate - non-owner occupied (1) - - Construction and land development - - Commercial loans 4,732 31 Residential 1-4 family (2) 2,005 52 Other consumer loans 21 - Total $ 7,421 $ 109 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 $ 7,421 $ 109 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Total Loans Average Interest Recorded Income Nine Months Ended September 30, 2017 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 1,328 $ 27 Commercial real estate - non-owner occupied (1) - - Construction and land development 9,934 158 Commercial loans 8,206 323 Residential 1-4 family (2) 1,809 45 Other consumer loans - - Total $ 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 $ 21,277 $ 553 (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 September 30, 2018 and December 31, 2017 (in thousands): 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total September 30, 2018 Past Due Past Due or More Past Due Loans Past Due Loans Total loans: Commercial real estate - owner occupied $ 2,065 $ 678 $ - $ 2,743 $ - $ 398,096 $ 400,839 Commercial real estate - non-owner occupied (1) 42 - - 42 - 601,745 601,787 Construction and land development 84 - - 84 - 186,889 186,973 Commercial loans 853 18 - 871 3,384 245,696 249,951 Residential 1-4 family (2) 3,505 547 - 4,052 1,558 683,700 689,310 Other consumer loans 7 25 - 32 19 32,556 32,607 Total $ 6,556 $ 1,268 $ - $ 7,824 $ 4,961 $ 2,148,682 $ 2,161,467 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 and nine months ended September 30, 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 September 30, 2018 Occupied (1) Development Loans (2) Loans allocated Total Allowance for loan losses: Beginning balance $ 750 $ 1,293 $ 873 $ 6,306 $ 1,579 $ 199 $ - $ 11,000 Charge offs - - - (366) (200) (38) - (604) Recoveries 4 - - 15 4 (18) - 5 Provision 62 (81) 247 375 273 174 - 1,050 Ending balance $ 816 $ 1,212 $ 1,120 $ 6,330 $ 1,656 $ 317 $ - $ 11,451 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 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Commercial Commercial Real Estate Real Estate Non-owner Construction 1-4 Family Other Owner Occupied and Land Commercial Residential Consumer Un- Nine Months Ended September 30, 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 - - - (1,303) (461) (220) - (1,984) Recoveries 11 - - 222 94 11 - 338 Provision 115 (109) 428 2,915 437 (86) - 3,700 Ending balance $ 816 $ 1,212 $ 1,120 $ 6,330 $ 1,656 $ 317 $ - $ 11,451 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 (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 September 30, 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- September 30, 2018 Occupied (1) Development Loans (2) Loans allocated Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment 816 1,212 1,120 6,330 1,656 317 - 11,451 Total ending allowance $ 816 $ 1,212 $ 1,120 $ 6,330 $ 1,656 $ 317 $ - $ 11,451 Loans: Individually evaluated for impairment $ 663 $ - $ - $ 3,384 $ 1,558 $ 19 $ - $ 5,624 Collectively evaluated for impairment 400,176 601,787 186,973 246,567 687,752 32,588 - 2,155,843 Total ending loan balances $ 400,839 $ 601,787 $ 186,973 $ 249,951 $ 689,310 $ 32,607 $ - $ 2,161,467 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 nine months ending September 30, 2018 and 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 $663 thousand, was current as of September 30, 2018. Credit Quality Indicator 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. 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 September 30, 2018 or December 31, 2017. As of September 30, 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 September 30, 2018 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 8,384 $ 1,531 $ 390,924 $ 400,839 Commercial real estate - non-owner occupied (1) 5,172 189 596,426 601,787 Construction and land development - - 186,973 186,973 Commercial loans 5,549 335 244,067 249,951 Residential 1-4 family (2) 851 1,998 686,461 689,310 Other consumer loans 147 - 32,460 32,607 Total $ 20,103 $ 4,053 $ 2,137,311 $ 2,161,467 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 $3.3 million and $5.0 million as of September 30, 2018 and December 31, 2017. The amount of foreclosed residential real estate property held at September 30, 2018 and December 31, 2017 was $1.4 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 $336 thousand and $939 thousand at September 30, 2018 and December 31, 2017, respectively. |