LOANS AND ALLOWANCE FOR LOAN LOSSES | 4 . LOANS AND ALLOWANCE FOR LOAN LOSSES The following table summarizes the composition of our loan portfolio as of June 30, 2019 and December 31, 2018 (in thousands): June 30, 2019 December 31, 2018 Loans secured by real estate: Commercial real estate - owner occupied $ 410,832 $ 407,031 Commercial real estate - non-owner occupied 561,732 540,698 Secured by farmland 18,629 20,966 Construction and land loans 158,956 146,654 Residential 1-4 family (1) 572,715 565,083 Multi- family residential 82,593 82,516 Home equity lines of credit (1) 117,298 128,225 Total real estate loans 1,922,755 1,891,173 Commercial loans 220,566 255,441 Consumer loans 29,310 32,347 Subtotal 2,172,631 2,178,961 Plus (less) deferred costs (fees) on loans 214 (137) Loans, net of deferred fees $ 2,172,845 $ 2,178,824 (1) Includes $15.8 million and $18.3 million of loans as of June 30 , 2019 and December 31, 2018, respectively, acquired in the Greater Atlantic Bank (“GAB”) transaction covered under an FDIC loss-share agreement. The agreement covering single family loans expires in December 2019. In the first quarter of 2019, $33.9 million of commercial loans were reclassified into loans secured by real estate, upon review and validation of collateral and Call Report codes. 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. As part of the GAB acquisition, the Bank and the FDIC entered into loss sharing agreements on approximately $143.4 million (contractual basis) of GAB’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 continue to share in the losses on the loans and foreclosed loan collateral with the FDIC as specified in the loss sharing agreement related to single family loans; 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 $15.8 million and $18.3 million at June 30, 2019 and December 31, 2018, respectively. Accretable discount on the acquired EVBS, GAB, Prince George’s Federal Savings Bank (“PGFSB”), and the HarVest Bank (“HarVest”) loans totaled $13.3 million and $15.1 million at June 30, 2019 and December 31, 2018, respectively. Accretion associated with the acquired loans held for investment of $972 thousand and $1.1 million was recognized in the three months ended June 30, 2019 and 2018, respectively, and $1.8 million and $2.2 million was recognized in the six months ended June 30, 2019 and 2018, respectively. For the three acquisitions subsequent to the GAB 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 June 30, 2019 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 5,279 $ 7,019 $ — Commercial real estate - non-owner occupied (2) 4,868 5,011 — Construction and land development 338 749 — Commercial loans 5,442 9,052 — Residential 1-4 family (3) 1,635 4,127 — Other consumer loans — 20 — Total $ 17,562 $ 25,978 $ — With an allowance recorded Commercial real estate - owner occupied $ — $ — $ — Commercial real estate - non-owner occupied (2) — — — Construction and land development — — — Commercial loans 2,771 2,771 600 Residential 1-4 family (3) 1,179 1,463 5 Other consumer loans — — — Total $ 3,950 $ 4,234 $ 605 Grand total $ 21,512 $ 30,212 $ 605 (1) Recorded investment is after cumulative prior charge offs of $1.3 million. These loans also have aggregate SBA guarantees of $3.2 million. (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, 2018 Investment (1) Balance Allowance With no related allowance recorded Commercial real estate - owner occupied $ 2,795 $ 4,777 $ — Commercial real estate - non-owner occupied (2) 171 333 — Construction and land development — 336 — Commercial loans 3,450 6,013 — Residential 1-4 family (3) 1,591 5,911 — Other consumer loans — — — Total $ 8,007 $ 17,370 $ — With an allowance recorded Commercial real estate - owner occupied $ — $ — $ — Commercial real estate - non-owner occupied (2) — — — Construction and land development — — — Commercial loans 2,626 3,276 612 Residential 1-4 family (3) 1,429 1,476 6 Other consumer loans — — — Total $ 4,055 $ 4,752 $ 618 Grand total $ 12,062 $ 22,122 $ 618 (1) Recorded investment is after cumulative prior charge offs of $1.5 million. These loans also have aggregate SBA guarantees of $ 3.4 million. (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 recognized for impaired loans recognized by class of loans for the three and six months ended June 30, 2019 and 2018 (in thousands): Total Loans Average Interest Recorded Income Three Months Ended June 30, 2019 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 5,433 $ 92 Commercial real estate - non-owner occupied (1) 4,901 100 Construction and land development 357 14 Commercial loans 5,524 98 Residential 1-4 family (2) 1,691 48 Other consumer loans — — Total $ 17,906 $ 352 With an allowance recorded Commercial real estate - owner occupied $ — $ — Commercial real estate - non-owner occupied (1) — — Construction and land development — — Commercial loans 2,787 49 Residential 1-4 family (2) 1,256 20 Other consumer loans — — Total $ 4,043 $ 69 Grand total $ 21,949 $ 421 (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 June 30, 2018 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 668 $ 9 Commercial real estate - non-owner occupied (1) 193 5 Construction and land development — — Commercial loans 5,109 10 Residential 1-4 family (2) 2,894 14 Other consumer loans 21 — Total $ 8,885 $ 38 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 $ 8,885 $ 38 ________________________________________ (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Total Loans Average Interest Recorded Income Six Months Ended June 30, 2019 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 5,459 $ 158 Commercial real estate - non-owner occupied (1) 4,933 137 Construction and land development 362 28 Commercial loans 5,547 109 Residential 1-4 family (2) 1,703 107 Other consumer loans — — Total $ 18,004 $ 539 With an allowance recorded Commercial real estate - owner occupied $ — $ — Commercial real estate - non-owner occupied (1) — — Construction and land development — — Commercial loans 2,819 99 Residential 1-4 family (2) 1,257 38 Other consumer loans — — Total $ 4,076 $ 137 Grand total $ 22,080 $ 676 ________________________________________ (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Total Loans Average Interest Recorded Income Six Months Ended June 30, 2018 Investment Recognized With no related allowance recorded Commercial real estate - owner occupied $ 670 $ 17 Commercial real estate - non-owner occupied (1) 194 10 Construction and land development — — Commercial loans 5,032 25 Residential 1-4 family (2) 2,733 49 Other consumer loans 21 — Total $ 8,650 $ 101 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 $ 8,650 $ 101 (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 June 30, 2019 and December 31, 2018 (in thousands): 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total June 30, 2019 Past Due Past Due or More Past Due Loans Past Due Loans Total loans: Commercial real estate - owner occupied $ 265 $ — $ — $ 265 $ 813 $ 409,754 $ 410,832 Commercial real estate - non-owner occupied (1) 915 — — 915 — 662,039 662,954 Construction and land development 237 — — 237 — 158,719 158,956 Commercial loans 3,052 157 — 3,209 3,207 214,150 220,566 Residential 1-4 family (2) 2,827 2,170 — 4,997 1,180 683,836 690,013 Other consumer loans 135 14 — 149 — 29,161 29,310 Total $ 7,431 $ 2,341 $ — $ 9,772 $ 5,200 $ 2,157,659 $ 2,172,631 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. 30 - 59 60 - 89 Days Days 90 Days Total Nonaccrual Loans Not Total December 31, 2018 Past Due Past Due or More Past Due Loans Past Due Loans Total loans: Commercial real estate - owner occupied $ 577 $ 344 $ — $ 921 $ 1,284 $ 404,826 $ 407,031 Commercial real estate - non-owner occupied (1) 581 617 — 1,198 — 642,982 644,180 Construction and land development 851 — — 851 — 145,803 146,654 Commercial loans 319 168 — 487 3,391 251,563 255,441 Residential 1-4 family (2) 5,523 197 — 5,720 2,055 685,533 693,308 Other consumer loans 142 18 — 160 — 32,187 32,347 Total $ 7,993 $ 1,344 $ — $ 9,337 $ 6,730 $ 2,162,894 $ 2,178,961 (1) Includes loans secured by farmland and multi-family loans. (2) Includes home equity lines of credit. Nonaccrual loans include SBA guaranteed amounts totaling $3.2 million and $3.4 million at June 30, 2019 and December 31, 2018, respectively. Activity in the allowance for non-covered loan and lease losses for the three and six months ended June 30, 2019 and 2018 is summarized below (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer Three Months Ended June 30, 2019 Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Allowance for loan losses: Beginning balance $ 816 $ 1,831 $ 920 $ 6,106 $ 1,170 $ 253 $ 778 $ 11,874 Provision (recovery) 599 56 (118) (481) (237) 105 76 — Charge offs (782) — — — (90) (96) — (968) Recoveries 200 3 — 209 284 11 — 707 Ending balance $ 833 $ 1,890 $ 802 $ 5,834 $ 1,127 $ 273 $ 854 $ 11,613 Three Months Ended June 30, 2018 Allowance for loan losses: Beginning balance $ 859 $ 1,550 $ 804 $ 5,272 $ 1,450 $ 820 $ — $ 10,755 Provision (recovery) (113) (257) 69 1,709 199 (557) — 1,050 Charge offs — — — (707) (95) (91) — (893) Recoveries 4 — — 32 25 27 — 88 Ending balance $ 750 $ 1,293 $ 873 $ 6,306 $ 1,579 $ 199 $ — $ 11,000 (1) Includes loans secured by farmland and multi-family 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 Six Months Ended June 30, 2019 Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Allowance for loan losses: Beginning balance $ 802 $ 1,669 $ 821 $ 7,097 $ 1,106 $ 224 $ 564 $ 12,283 Provision (recovery) 610 680 (19) (1,368) (181) 188 290 200 Charge offs (782) (462) — (167) (90) (156) — (1,657) Recoveries 203 3 — 272 292 17 — 787 Ending balance $ 833 $ 1,890 $ 802 $ 5,834 $ 1,127 $ 273 $ 854 $ 11,613 Six Months Ended June 30, 2018 Allowance for loan losses: Beginning balance $ 690 $ 1,321 $ 692 $ 4,496 $ 1,586 $ 612 $ — $ 9,397 Provision (recovery) 53 (28) 181 2,540 165 (261) — 2,650 Charge offs — — — (937) (261) (182) — (1,380) Recoveries 7 — — 207 89 30 — 333 Ending balance $ 750 $ 1,293 $ 873 $ 6,306 $ 1,579 $ 199 $ — $ 11,000 (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 June 30, 2019 and December 31, 2018 (in thousands): Commercial Commercial Real Estate Real Estate Construction Other Owner Non-owner and Land Commercial 1-4 Family Consumer June 30, 2019 Occupied Occupied (1) Development Loans Residential (2) Loans Unallocated Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ — $ — $ — $ 600 $ — $ — $ — $ 600 Collectively evaluated for impairment 833 1,890 802 5,234 1,127 273 854 11,013 Total ending allowance $ 833 $ 1,890 $ 802 $ 5,834 $ 1,127 $ 273 $ 854 $ 11,613 Loans: Individually evaluated for impairment $ 5,279 $ 4,868 $ 338 $ 5,442 $ 1,635 $ — $ — $ 17,562 Collectively evaluated for impairment 405,553 658,086 158,618 215,124 688,378 29,310 — 2,155,069 Total ending loan balances $ 410,832 $ 662,954 $ 158,956 $ 220,566 $ 690,013 $ 29,310 $ — $ 2,172,631 December 31, 2018 Ending allowance balance attributable to loans: Individually evaluated for impairment $ — $ — $ — $ 600 $ — $ — $ — $ 600 Collectively evaluated for impairment 802 1,669 821 6,497 1,106 224 564 11,683 Total ending allowance $ 802 $ 1,669 $ 821 $ 7,097 $ 1,106 $ 224 $ 564 $ 12,283 Loans: Individually evaluated for impairment $ 2,795 $ 171 $ — $ 3,450 $ 1,591 $ — $ — $ 8,007 Collectively evaluated for impairment 404,236 644,009 146,654 251,991 691,717 32,347 — 2,170,954 Total ending loan balances $ 407,031 $ 644,180 $ 146,654 $ 255,441 $ 693,308 $ 32,347 $ — $ 2,178,961 (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. As of June 30, 2019, we had two loans in TDRs. One loan was modified in TDRs during the year ending December 31, 2018. One TDR which had been modified in 2013 defaulted in 2015. This loan, in the amount of $655 thousand, was current as of June 30, 2019. 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. Special Mention loans are loans that have a potential weakness that deserve 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 Doubtful at June 30, 2019 or December 31, 2018. As of June 30, 2019 and December 31, 2018, 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 June 30, 2019 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 3,939 $ 5,058 $ 401,835 $ 410,832 Commercial real estate - non-owner occupied (1) 4,311 181 658,462 662,954 Construction and land development 731 — 158,225 158,956 Commercial loans 3,439 7,173 209,954 220,566 Residential 1-4 family (2) 471 2,583 686,959 690,013 Other consumer loans 132 — 29,178 29,310 Total $ 13,023 $ 14,995 $ 2,144,613 $ 2,172,631 Total Loans Special December 31, 2018 Mention Substandard (3) Pass Total Commercial real estate - owner occupied $ 6,611 $ 2,810 $ 397,610 $ 407,031 Commercial real estate - non-owner occupied (1) 4,382 189 639,609 644,180 Construction and land development — — 146,654 146,654 Commercial loans 2,373 2,689 250,379 255,441 Residential 1-4 family (2) 395 1,982 690,931 693,308 Other consumer loans 142 — 32,205 32,347 Total $ 13,903 $ 7,670 $ 2,157,388 $ 2,178,961 (1) Includes loans secured by farmland and multi-family residential loans. (2) Includes home equity lines of credit. (3) Includes SBA guarantees of $3.2 million and $3.4 million as of June 30 , 2019 and December 31, 2018, respectively. The amount of foreclosed residential real estate property held at June 30, 2019 and December 31, 2018 was $ $1.2 million. The recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was $0.5 million and $1.5 million at June 30, 2019 and December 31, 2018, respectively. |