Note

. Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, DC 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 September 30, 2016, December 31, 2015, and September 30, 2015 are summarized by type as follows:

	September 30, 2016						December 31, 2015						September 30, 2015
(dollars in thousands)	Amount			%			Amount			%			Amount			%
Commercial	$	1,130,042			21	%	$	1,052,257			21	%	$	1,007,659			21	%
Income producing - commercial real estate		2,551,186			46	%		2,115,478			42	%		2,022,950			42	%
Owner occupied - commercial real estate		590,427			11	%		498,103			10	%		489,657			10	%
Real estate mortgage - residential		154,439			3	%		147,365			3	%		147,720			3	%
Construction - commercial and residential		838,137			15	%		985,607			20	%		927,265			20	%
Construction - C&I (owner occupied)		104,676			2	%		79,769			2	%		60,487			1	%
Home equity		106,856			2	%		112,885			2	%		115,346			3	%
Other consumer		6,212			-			6,904			-			5,881			-
Total loans		5,481,975			100	%		4,998,368			100	%		4,776,965			100	%
Less: Allowance for Credit Losses		(56,864	)					(52,687	)					(50,320	)
Net loans	$	5,425,111					$	4,945,681					$	4,726,645

Unamortized net deferred fees amounted to $20.9 million, $18.4 million, and $17.4 million at September 30, 2016, December 31, 2015, and September 30, 2015, respectively.

As of September 30, 2016 and December 31, 2015, the Bank serviced $113.4 million and $78.8 million, respectively, of SBA loans and 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 real estate. At September 30, 2016, owner occupied - commercial real estate and construction - C&I (owner occupied) represent 13% of the loan portfolio. At September 30, 2016, 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 represent 74% of the loan portfolio. 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 are generally 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 21% of the loan portfolio at September 30, 2016 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 2.5% of the commercial loan category of loans. 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.

Approximately 2% of the loan portfolio at September 30, 2016 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately 3% 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.

Loans are secured primarily by duly recorded first deeds of trust. 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 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 1.00. 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 $942.8 million at September 30, 2016. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans containing loan funded interest reserves represent approximately 66.5% of the outstanding ADC loan portfolio at September 30, 2016. 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.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2016 and 2015. 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
Three months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	13,386		$	19,072		$	4,202		$	1,061		$	17,024		$	1,556		$	235		$	56,536
Loans charged-off		(109	)		(1,751	)		-			-			-			(121	)		(12	)		(1,993	)
Recoveries of loans previously charged-off		7			10			-			2			3			3			8			33
Net loans (charged-off) recoveries		(102	)		(1,741	)		-			2			3			(118	)		(4	)		(1,960	)
Provision for credit losses		(523	)		3,178			59			47			(513	)		(69	)		109			2,288
Ending balance	$	12,761		$	20,509		$	4,261		$	1,110		$	16,514		$	1,369		$	340		$	56,864
Nine months ended September 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	11,563		$	14,122		$	3,279		$	1,268		$	21,088		$	1,292		$	75		$	52,687
Loans charged-off		(2,802	)		(2,342	)		-			-			-			(217	)		(37	)		(5,398	)
Recoveries of loans previously charged-off		93			14			2			5			207			11			24			356
Net loans charged-off		(2,709	)		(2,328	)		2			5			207			(206	)		(13	)		(5,042	)
Provision for credit losses		3,907			8,715			980			(163	)		(4,781	)		283			278			9,219
Ending balance	$	12,761		$	20,509		$	4,261		$	1,110		$	16,514		$	1,369		$	340		$	56,864
As of September 30, 2016
Allowance for credit losses:
Individually evaluated for impairment	$	1,997		$	1,714		$	360		$	-		$	300		$	-		$	100		$	4,471
Collectively evaluated for impairment		10,764			18,795			3,901			1,110			16,214			1,369			240			52,393
Ending balance	$	12,761		$	20,509		$	4,261		$	1,110		$	16,514		$	1,369		$	340		$	56,864

Three months ended September 30, 2015
Allowance for credit losses:
Balance at beginning of period	$	12,911		$	12,411		$	3,113		$	1,082		$	17,633		$	1,496		$	275		$	48,921
Loans charged-off		(1,388	)		(254	)		-			-			-			(225	)		(95	)		(1,962	)
Recoveries of loans previously charged-off		60			8			-			2			10			1			18			99
Net loans (charged-off) recoveries		(1,328	)		(246	)		-			2			10			(224	)		(77	)		(1,863	)
Provision for credit losses		57			1,550			(13	)		(18	)		1,281			334			71			3,262
Ending balance	$	11,640		$	13,715		$	3,100		$	1,066		$	18,924		$	1,606		$	269		$	50,320
Nine months ended September 30, 2015
Allowance for credit losses:
Balance at beginning of period	$	13,222		$	11,442		$	2,954		$	1,259		$	15,625		$	1,469		$	104		$	46,075
Loans charged-off		(4,693	)		(651	)		-			-			-			(644	)		(182	)		(6,170	)
Recoveries of loans previously charged-off		135			26			2			5			114			5			85			372
Net loans charged-off		(4,558	)		(625	)		2			5			114			(639	)		(97	)		(5,798	)
Provision for credit losses		2,976			2,898			144			(198	)		3,185			776			262			10,043
Ending balance	$	11,640		$	13,715		$	3,100		$	1,066		$	18,924		$	1,606		$	269		$	50,320
As of September 30, 2015
Allowance for credit losses:
Individually evaluated for impairment	$	2,312		$	827		$	400		$	-		$	350		$	338		$	-		$	4,227
Collectively evaluated for impairment		9,328			12,888			2,700			1,066			18,574			1,268			269			46,093
Ending balance	$	11,640		$	13,715		$	3,100		$	1,066		$	18,924		$	1,606		$	269		$	50,320

The Company’s recorded investments in loans as of September 30, 2016, December 31, 2015 and September 30, 2015 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		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

September 30, 2016
Recorded investment in loans:
Individually evaluated for impairment	$	12,448	$	14,648	$	2,517	$	244	$	4,878	$	113	$	-	$	34,848
Collectively evaluated for impairment		1,117,594		2,536,538		587,910		154,195		937,935		106,743		6,212		5,447,127
Ending balance	$	1,130,042	$	2,551,186	$	590,427	$	154,439	$	942,813	$	106,856	$	6,212	$	5,481,975

December 31, 2015
Recorded investment in loans:
Individually evaluated for impairment	$	13,008	$	6,118	$	1,753	$	-	$	10,454	$	161	$	22	$	31,516
Collectively evaluated for impairment		1,039,249		2,109,360		496,350		147,365		1,054,922		112,724		6,882		4,966,852
Ending balance	$	1,052,257	$	2,115,478	$	498,103	$	147,365	$	1,065,376	$	112,885	$	6,904	$	4,998,368

September 30, 2015
Recorded investment in loans:
Individually evaluated for impairment	$	12,869	$	6,877	$	1,790	$	-	$	17,644	$	661	$	72	$	39,913
Collectively evaluated for impairment		994,790		2,016,073		487,867		147,720		970,108		114,685		5,809		4,737,052
Ending balance	$	1,007,659	$	2,022,950	$	489,657	$	147,720	$	987,752	$	115,346	$	5,881	$	4,776,965

At September 30, 2016, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $495 thousand and $1.1 million, and an unpaid principal balance of $553 thousand and $2.2 million, and were evaluated separately in accordance with ASC Topic 310-30,

“Loans and Debt Securities Acquired with Deteriorated Credit Quality

.” The

various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.

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 - Loans inadequately protected by the current sound 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 company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

	Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified 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. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

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 September 30, 2016, December 31, 2015 and September 30, 2015.

			Watch and						Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans

September 30, 2016
Commercial	$	1,099,894	$	18,599	$	11,549	$	-	$	1,130,042
Income producing - commercial real estate		2,527,318		9,220		14,648		-		2,551,186
Owner occupied - commercial real estate		577,925		10,399		2,103		-		590,427
Real estate mortgage – residential		153,515		680		244		-		154,439
Construction - commercial and residential		937,198		737		4,878		-		942,813
Home equity		105,126		1,617		113		-		106,856
Other consumer		6,209		3		-		-		6,212
Total	$	5,407,185	$	41,255	$	33,535	$	-	$	5,481,975

December 31, 2015
Commercial	$	1,021,427	$	17,822	$	13,008	$	-	$	1,052,257
Income producing - commercial real estate		2,096,032		13,328		6,118		-		2,115,478
Owner occupied - commercial real estate		488,496		7,854		1,753		-		498,103
Real estate mortgage – residential		146,651		714		-		-		147,365
Construction - commercial and residential		1,049,926		4,996		10,454		-		1,065,376
Home equity		110,870		1,854		161		-		112,885
Other consumer		6,877		5		22		-		6,904
Total	$	4,920,279	$	46,573	$	31,516	$	-	$	4,998,368

September 30, 2015
Commercial	$	977,165	$	17,625	$	12,869	$	-	$	1,007,659
Investment - commercial real estate		1,999,509		16,564		6,877		-		2,022,950
Owner occupied - commercial real estate		479,843		8,024		1,790		-		489,657
Real estate mortgage – residential		146,992		728		-		-		147,720
Construction - commercial and residential		964,854		5,254		17,644		-		987,752
Home equity		112,978		1,707		661		-		115,346
Other consumer		5,804		5		72		-		5,881
Total	$	4,687,145	$	49,907	$	39,913	$	-	$	4,776,965

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. When interest accrual is discontinued, all unpaid accrued interest is reversed. 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 September 30, 2016, December 31, 2015 and September 30, 2015.

(dollars in thousands)	September 30, 2016		December 31, 2015		September 30, 2015

Commercial	$	2,986	$	4,940	$	4,828
Income producing - commercial real estate		10,098		5,961		6,721
Owner occupied - commercial real estate		2,103		1,268		1,281
Real estate mortgage - residential		562		329		333
Construction - commercial and residential		6,412		557		571
Home equity		113		161		661
Other consumer		-		23		72
Total nonaccrual loans (1)(2)	$	22,274	$	13,239	$	14,467

(1)

Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $2.9 million at September 30, 2016, $11.8 million at December 31, 2015 and $15.2 million at September 30, 2015.

(2)

Gross interest income of $436 thousand and $1.3 million would have been recorded for the three and nine months ended September 30, 2016, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms. The interest actually recorded on these loans was $97 thousand and $271 thousand for the three and nine months ended September 30, 2016, 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 September 30, 2016 and December 31, 2015.

	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

September 30, 2016
Commercial	$	1,173	$	495	$	2,986	$	4,654	$	1,125,388	$	1,130,042
Income producing - commercial real estate		-		-		10,098		10,098		2,541,088		2,551,186
Owner occupied - commercial real estate		-		3,338		2,103		5,441		584,986		590,427
Real estate mortgage – residential		-		164		562		726		153,713		154,439
Construction - commercial and residential		-		-		6,412		6,412		936,401		942,813
Home equity		562		620		113		1,295		105,561		106,856
Other consumer		8		16		-		24		6,188		6,212
Total	$	1,743	$	4,633	$	22,274	$	28,650	$	5,453,325	$	5,481,975

December 31, 2015
Commercial	$	4,130	$	1,364	$	4,940	$	10,434	$	1,041,823	$	1,052,257
Income producing - commercial real estate		2,841		-		5,961		8,802		2,106,676		2,115,478
Owner occupied - commercial real estate		3,189		902		1,268		5,359		492,744		498,103
Real estate mortgage – residential		-		-		329		329		147,036		147,365
Construction - commercial and residential		-		5,020		557		5,577		1,059,799		1,065,376
Home equity		-		77		161		238		112,647		112,885
Other consumer		56		60		23		139		6,765		6,904
Total	$	10,216	$	7,423	$	13,239	$	30,878	$	4,967,490	$	4,998,368

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 periods ended September 30, 2016, December 31, 2015 and September 30, 2015.

	Unpaid Contractual		Recorded Investment		Recorded Investment		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

September 30, 2016
Commercial	$	15,517	$	2,370	$	10,078	$	12,448	$	1,997	$	12,838	$	12,879	$	54		$	112
Income producing - commercial real estate		14,648		-		14,648		14,648		1,714		17,584		15,298		28			144
Owner occupied - commercial real estate		2,517		-		2,517		2,517		360		2,108		1,923		13			13
Real estate mortgage – residential		244		244		-		244		-		249		271		-			-
Construction - commercial and residential		4,878		4,340		538		4,878		300		5,146		6,542		-			-
Home equity		113		-		113		113		100		117		129		2			2
Other consumer		-		-		-		-		-		-		6		-			-
Total	$	37,917	$	6,954	$	27,894	$	34,848	$	4,471	$	38,042	$	37,048	$	97		$	271

December 31, 2015
Commercial	$	16,123	$	2,396	$	10,612	$	13,008	$	3,478	$	9,671	$	10,309	$	21		$	69
Income producing - commercial real estate		6,811		1,190		4,928		6,118		1,033		10,675		10,294		95			354
Owner occupied - commercial real estate		1,753		946		807		1,753		400		1,772		1,810		-			-
Construction - commercial and residential		10,454		4,877		5,577		10,454		950		8,031		7,594		(93	)		205
Home equity		161		116		45		161		38		411		650		-			-
Other consumer		22		19		3		22		3		47		31		(1	)		1
Total	$	35,324	$	9,544	$	21,972	$	31,516	$	5,902	$	30,607	$	30,688	$	22		$	629

September 30, 2015
Commercial	$	14,041	$	2,663	$	10,206	$	12,869	$	2,312	$	7,978	$	10,047	$	39		$	48
Income producing - commercial real estate		15,389		-		6,877		6,877		827		12,542		11,388		188			259
Owner occupied - commercial real estate		2,299		973		817		1,790		400		1,811		1,844		-			-
Construction - commercial and residential		22,681		5,370		12,274		17,644		350		5,961		7,516		100			298
Home equity		661		116		545		661		338		774		959		-			-
Other consumer		72		72		-		72		-		45		40		1			2
Total	$	55,143	$	9,194	$	30,719	$	39,913	$	4,227	$	29,111	$	31,794	$	328		$	607

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 September 30, 2016, 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 periods ended September 30, 2016 and December 31, 2015.

(dollars in thousands)	Number of Contracts		TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs

September 30, 2016
Commercial		6	$	1,725	$	199	$	1,924
Income producing - commercial real estate		1		742		-		742
Owner occupied - commercial real estate		1		414		-		414
Construction - commercial and residential		1		-		4,948		4,948
Total		9	$	2,881	$	5,147	$	8,028

December 31, 2015
Commercial		4	$	1,171	$	211	$	1,382
Income producing - commercial real estate		2		5,160		-		5,160
Owner occupied - commercial real estate		1		485		-		485
Construction - commercial and residential		1		5,020		-		5,020
Total		8	$	11,836	$	211	$	12,047

During the nine months ended September 30, 2016, there was one default on a $5.0 million restructured loan, as compared to the same period in 2015, which had no defaults on restructured 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. There was one nonperforming TDR totaling $5.0 million reclassified to nonperforming loans during the nine months ended September 30, 2016. There were no nonperforming TDRs reclassified to nonperforming loans during the nine months ended September 30, 2015. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If a loan modified in a TDR subsequently defaults, 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. There was one loan totaling $801 thousand modified in a TDR during the three months ended September 30, 2016, as compared to three loans totaling $1.6 million modified in a TDR during the three months ended September 31, 2015. For the nine months ended September 30, 2016, there were three loans totaling $1.4 million modified in a TDR, as compared to the nine months ended September 30, 2015 which had four loan modified in a TDR totaling $1.9 million.