Note

- Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, D.C. 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

December

31,

2016

and

2015

are summarized by type as follows:

	December 31, 2016						December 31, 2015
(dollars in thousands)	Amount			%			Amount			%
Commercial	$	1,200,728			21	%	$	1,052,257			21	%
Income producing - commercial real estate		2,509,517			44	%		2,115,478			42	%
Owner occupied - commercial real estate		640,870			12	%		498,103			10	%
Real estate mortgage - residential		152,748			3	%		147,365			3	%
Construction - commercial and residential		932,531			16	%		985,607			20	%
Construction - C&I (owner occupied)		126,038			2	%		79,769			2	%
Home equity		105,096			2	%		112,885			2	%
Other consumer		10,365			-			6,904			-
Total loans		5,677,893			100	%		4,998,368			100	%
Less: Allowance for Credit Losses		(59,074	)					(52,687	)
Net loans	$	5,618,819					$	4,945,681

Unamortized net deferred fees amounted to

$22.3

million and

$18.4

million at

December

31,

2016

and

2015,

of which

$120

thousand and

$144

thousand at

December

31,

2016

and

2015,

respectively, represented net deferred costs on home equity loans.

Loans acquired from Virginia Heritage totaled

$804

million at fair value, comprised of

$801

million of loans that were not considered impaired at the acquisition date and

$3.0

million of loans that were determined to be impaired at the time of acquisition. The impaired loans were accounted for in accordance with ASC Topic

310

“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”

(“ASC

310

30”).

Loans acquired in the Merger that were determined to be purchased credit impaired loans were all considered collateral dependent loans. Therefore, estimated fair value calculations and projected cash flows included only return of principal and no interest income. There was no accretable yield associated with these loans during the year ended

2016.

The Company sold the indirect consumer loan portfolio acquired in the Merger, amounting to approximately

$80.3

million as of the time of sale. The sale of this non-strategic loan class allowed the Company to deploy the funds into commercial and commercial real estate loans, its core competency, improve its yield on earning assets and reduce operating expenses. The estimated loss of approximately

$900

thousand was included as an adjustment to the intangibles established in the Merger. The transaction closed on

July

24,

2015.

As of

December

31,

2016

and

2015,

the Bank serviced

$128.8

million and

$78.8

million, respectively, of SBA loans and other 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

December

31,

2016,

owner occupied commercial real estate and construction - C&I (owner occupied) represent

14%

of the loan portfolio. At

December

31,

2016,

non-owner occupied commercial real estate and real estate construction represented approximately

60%

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

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

December

31,

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

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

of the loan portfolio at

December

31,

2016

consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately

of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was

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 until they are resold to another investor at a later date or mature.

Loans are secured primarily by duly recorded

first

deeds of trust or mortgages. 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:

is or will be developed for building sites for residential structures, and;

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

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

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

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

years or the remaining useful life of the property, whichever is lower. The preferred term is between

years, with amortization to a maximum of

years.

The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to

$1.06

billion at

December

31,

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

67%

of the outstanding ADC loan portfolio at

December

31,

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 years ended

December

31,

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
For the Year Ended December 31, 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		(3,745	)		(2,341	)		-		-		-			(217	)		(37	)		(6,340	)
Recoveries of loans previously charged-off		220			908			3		7		215			12			31			1,396
Net loans charged-off		(3,525	)		(1,433	)		3		7		215			(205	)		(6	)		(4,944	)
Provision for credit losses		6,662			8,416			728		9		(4,816	)		241			91			11,331
Ending balance	$	14,700		$	21,105		$	4,010	$	1,284	$	16,487		$	1,328		$	160		$	59,074
For the Year Ended December 31, 2016
Allowance for credit losses:
Individually evaluated for impairment	$	2,671		$	1,943		$	350	$	-	$	522		$	-		$	113		$	5,599
Collectively evaluated for impairment		12,029			19,162			3,660		1,284		15,965			1,328			47			53,475
Ending balance	$	14,700		$	21,105		$	4,010	$	1,284	$	16,487		$	1,328		$	160		$	59,074

For the Year Ended December 31, 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	)		-		-		(1,884	)		(1,142	)		(228	)		(8,598	)
Recoveries of loans previously charged-off		195			26			3		7		206			25			110			572
Net loans charged-off		(4,498	)		(625	)		3		7		(1,678	)		(1,117	)		(118	)		(8,026	)
Provision for credit losses		2,839			3,305			322		2		7,141			940			89			14,638
Ending balance	$	11,563		$	14,122		$	3,279	$	1,268	$	21,088		$	1,292		$	75		$	52,687
For the Year Ended December 31, 2015
Allowance for credit losses:
Individually evaluated for impairment	$	3,478		$	1,033		$	400	$	-	$	950		$	38		$	3		$	5,902
Collectively evaluated for impairment		8,085			13,089			2,879		1,268		20,138			1,254			72			46,785
Ending balance	$	11,563		$	14,122		$	3,279	$	1,268	$	21,088		$	1,292		$	75		$	52,687

The Company’s recorded investments in loans as of

December

31,

2016

and

December

31,

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

December 31, 2016
Recorded investment in loans:
Individually evaluated for impairment	$	10,437	$	15,057	$	2,093	$	241	$	6,517	$	-	$	126	$	34,471
Collectively evaluated for impairment		1,190,291		2,494,460		638,777		152,507		1,052,052		105,096		10,239		5,643,422
Ending balance	$	1,200,728	$	2,509,517	$	640,870	$	152,748	$	1,058,569	$	105,096	$	10,365	$	5,677,893

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

December

31,

2016,

nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage have a carrying value of

$491

thousand and

$587

thousand, respectively, and an unpaid principal balance of

$548

thousand and

$1.6

million, respectively, 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 discounts. 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

December

31,

2016

and

2015.

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

December 31, 2016
Commercial	$	1,160,185	$	30,106	$	10,437	$	-	$	1,200,728
Income producing - commercial real estate		2,489,407		5,053		15,057		-		2,509,517
Owner occupied - commercial real estate		630,827		7,950		2,093		-		640,870
Real estate mortgage – residential		151,831		676		241		-		152,748
Construction - commercial and residential		1,051,445		607		6,517		-		1,058,569
Home equity		103,484		1,612		-		-		105,096
Other consumer		10,237		2		126		-		10,365
Total	$	5,597,416	$	46,006	$	34,471	$	-	$	5,677,893

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

Non

ccrual 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

December

31,

2016

and

2015.

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

Commercial	$	2,490	$	4,940
Income producing - commercial real estate		10,539		5,961
Owner occupied - commercial real estate		2,093		1,268
Real estate mortgage - residential		555		329
Construction - commercial and residential		2,072		557
Home equity		-		161
Other consumer		126		23
Total nonaccrual loans (1)(2)	$	17,875	$	13,239

(1)

Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling

$3.5

million at

December

31,

2016,

and

$11.8

million at

December

31,

2015.

(2)

Gross interest income of

$1.2

million would have been recorded in

2016

if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans was

$48

thousand. See Note

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

December

31,

2016

and

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

December 31, 2016
Commercial	$	1,634	$	757	$	2,490	$	4,881	$	1,195,847	$	1,200,728
Income producing - commercial real estate		511		-		10,539		11,050		2,498,467		2,509,517
Owner occupied - commercial real estate		3,987		3,328		2,093		9,408		631,462		640,870
Real estate mortgage – residential		1,015		163		555		1,733		151,015		152,748
Construction - commercial and residential		360		1,342		2,072		3,774		1,054,795		1,058,569
Home equity		-		-		-		-		105,096		105,096
Other consumer		101		9		126		236		10,129		10,365
Total	$	7,608	$	5,599	$	17,875	$	31,082	$	5,646,811	$	5,677,893

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 years ended

December

31,

2016

and

2015.

	Unpaid		Recorded		Recorded
	Contractual		Investment		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

December 31, 2016
Commercial	$	8,296	$	2,532	$	3,095	$	5,627	$	2,671	$	12,620	$	12,755	$	79		$	191
Income producing - commercial real estate		14,936		5,048		9,888		14,936		1,943		16,742		17,533		54			198
Owner occupied - commercial real estate		2,483		1,691		792		2,483		350		2,233		2,106		-			13
Real estate mortgage – residential		555		555		-		555		-		246		249		-			-
Construction - commercial and residential		2,072		1,535		537		2,072		522		5,091		5,174		-			-
Home equity		-		-		-		-		-		78		89		-			-
Other consumer		126		-		126		126		113		42		32		2			4
Total	$	28,468	$	11,361	$	14,438	$	25,799	$	5,599	$	37,052	$	37,938	$	135		$	406

December 31, 2015
Commercial	$	9,555	$	2,396	$	3,715	$	6,111	$	3,478	$	9,671	$	10,309	$	21		$	69
Income producing - commercial real estate		11,814		1,190		9,931		11,121		1,033		10,675		10,294		95			354
Owner occupied - commercial real estate		1,753		946		807		1,753		400		1,772		1,810		-			-
Real estate mortgage – residential		329		329		-		329		-		-		-		-			-
Construction - commercial and residential		5,577		-		5,577		5,577		950		8,031		7,594		(93	)		205
Home equity		161		116		45		161		38		411		650		-			-
Other consumer		23		20		3		23		3		47		31		(1	)		1
Total	$	29,212	$	4,997	$	20,078	$	25,075	$	5,902	$	30,607	$	30,688	$	22		$	629

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

December

31,

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 years ended

December

31,

2016

and

2015.

	For the Year Ended December 31, 2016
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructings

Restructured accruing		7	$	3,137	$	4,397	$	390	$	-	$	7,924
Restructured non-accruing		3		434		-		-		4,933		5,367
Total		10	$	3,571	$	4,397	$	390	$	4,933	$	13,291

Specific allowance			$	855	$	920	$	-	$	-	$	1,775

Restructured and subsequently defaulted			$	-	$	-	$	-	$	-	$	-

	For the Year Ended December 31, 2015
	Number of				Income Producing -		Owner Occupied -		Construction -
(dollars in thousands)	Contracts		Commercial		Commercial Real Estate		Commercial Real Estate		Commercial Real Estate		Total
Troubled debt restructings

Restructured accruing		7	$	1,171	$	5,160	$	485	$	5,020	$	11,836
Restructured non-accruing		1		211		-		-		-		211
Total		8	$	1,382	$	5,160	$	485	$	5,020	$	12,047

Specific allowance			$	49	$	6	$	-	$	600	$	655

Restructured and subsequently defaulted			$	-	$	-	$	-	$	-	$	-

The Company had

ten

TDRs at

December

31,

2016,

totaling approximately

$8.9

million, as compared to

eight

TDRs totaling approximately

$12.1

million at

December

31,

2015.

December

31,

2016,

seven

of these TDR loans, totaling approximately

$3.5

million, are performing under their modified terms. During

2016,

there were

four

loans modified in a TDR totaling approximately

$2.2

million. There were

four

loans totaling approximately

$1.9

million modified in a TDR during the year ended

December

31,

2015.

During the year ended

December

31,

2016,

there were

two

performing TDR loans totaling approximately

$5.2

million that experienced defaults on their modified terms, as compared to the year ended

December

31,

2015,

which had no defaults on restructured loans. During

2016,

these

two

previously performing TDRs were reclassified to nonperforming loans. A default is considered to have occurred once the TDR is past due

days or more, or it has been placed on nonaccrual. There were no nonperforming TDRs reclassified to nonperforming loans during the year ended

December

31,

2015.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, 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.

The criteria used to determine if a loan should be considered for charge off relates to its ultimate collectability includes the following:

●

All or a portion of the loan is deemed uncollectible;

●

Repayment is dependent upon

secondary

sources, such as liquidation of collateral, other assets, or judgment liens that

may

require an indefinite time period to collect.

Loans

may

be identified for charge off in whole or in part based upon an impairment analysis consistent with ASC

310.

If all or a portion of a loan is deemed uncollectible, such amount shall be charged off in the month in which the loan or portion thereof is determined to be uncollectible.

Loans approved for non-accrual status, or charge off, should be managed by the Chief Credit Officer or as dictated by the Directors Loan Committee and/or Credit Review Committee. The Chief Credit Officer is expected to position the loan in the best possible posture for recovery, including, among other actions, liquidating collateral, obtaining additional collateral, filing suit to obtain judgment or restructuring of repayment terms. A review of charged off loans should be made on a monthly basis to assess the possibility of recovery from renewed collection efforts. All charged off loans that are deemed to have the possibility of recovery, whether partial or full, shall be actively pursued. Charged off loans that are deemed uncollectible will be placed in an inactive file with documentation supporting the suspension of further collection efforts.

In the process of collecting problem loans the Bank

may

resort to the acquisition of collateral through foreclosure and repossession actions, or

may

accept the transfer of assets in partial or full satisfaction of the debt. These actions

may

in turn result in the necessity of carrying real property or chattels as an asset of the Company pending sale.

For purchased loans acquired that are not deemed impaired at acquisition, credit marks representing the principal losses expected over the life of the loans are a component of the initial fair value. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit mark. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

The following table presents changes in the credit mark accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated.

(dollars in thousands)	2016			2015
Balance at January 1,	$	(6,008	)	$	(10,298	)
Net reclassifications from nonaccretable yield		-			-
Accretion		1,564			4,290
Balance at December 31,	$	(4,444	)	$	(6,008	)

Related Party Loans

Certain directors and executive officers have had loan transactions with the Company. Such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with outsiders. The following table summarizes changes in amounts of loans outstanding, both direct and indirect, to those persons during

2016

and

2015.

(dollars in thousands)	2016			2015
Balance at January 1,	$	29,949		$	17,082
Additions		31,158			23,578
Repayments		(8,537	)		(10,711	)
Balance at December 31,	$	52,570		$	29,949