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Loans and Allowance for Credit Losses

12 Months Ended

Dec. 31, 2017

Note 4 - 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, 2017 and 2016 are summarized by type as follows:

	December 31, 2017					December 31, 2016
(dollars in thousands)	Amount			%		Amount			%
Commercial	$	1,375,939		21	%	$	1,200,728		21	%
Income producing - commercial real estate	3,047,094			48	%	2,509,517			44	%
Owner occupied - commercial real estate	755,444			12	%	640,870			12	%
Real estate mortgage - residential	104,357			2	%	152,748			3	%
Construction - commercial and residential	973,141			15	%	932,531			16	%
Construction - C&I (owner occupied)	58,691			1	%	126,038			2	%
Home equity	93,264			1	%	105,096			2	%
Other consumer	3,598			—		10,365			—
Total loans	6,411,528			100	%	5,677,893			100	%
Less: allowance for credit losses	(64,758		)			(59,074		)
Net loans	$	6,346,770				$	5,618,819

Unamortized net deferred fees amounted to $23.9 million and $22.3 million at December 31, 2017 and 2016, of which $93 thousand and $120 thousand at December 31, 2017 and 2016, respectively, represented net deferred costs on home equity loans.

Loans acquired from Virginia Heritage Bank (“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 310-30 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“ASC 310-30”). Loans acquired in the acquisition of Virginia Heritage 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.

As of December 31, 2017 and 2016, the Bank serviced $195.3 million and $128.8 million, respectively, of multifamily FHA loans, 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, 2017, owner occupied commercial real estate and construction - C&I (owner occupied) represents approximately 13% of the loan portfolio while non-owner occupied commercial real estate and real estate construction represents approximately 63% of the loan portfolio. The combined owner occupied and commercial real estate loans represents 76% 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 may be 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, 2017 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 approximately 2% 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 as well as internal loan size guidelines.

Approximately 1% of the loan portfolio at December 31, 2017 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 2% 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 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: 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 generally 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 1.0. 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 $1.40 billion at December 31, 2017. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans that provide for the use of interest reserves represent approximately 80% of the outstanding ADC loan portfolio at December 31, 2017. 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.

The following tables detail activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2017 and 2016. 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, 2017
Allowance for credit losses:
Balance at beginning of period	$	14,700		$	21,105		$	4,010	$	1,284		$	16,487		$	1,328		$	160		$	59,074
Loans charged-off	(747		)	(1,470		)	—		—			(2,158		)	(100		)	(100		)	(4,575		)
Recoveries of loans previously charged-off	681			80			3		6			492			5			21			1,288
Net loans charged-off	(66		)	(1,390		)	3		6			(1,666		)	(95		)	(79		)	(3,287		)
Provision for credit losses	(1,532		)	5,661			1,921		(346		)	3,671			(463		)	59			8,971
Ending balance	$	13,102		$	25,376		$	5,934	$	944		$	18,492		$	770		$	140		$	64,758
For the Year Ended December 31, 2017
Allowance for credit losses:
Individually evaluated for impairment	$	3,259		$	2,380		$	1,382	$	—		$	500		$	—		$	80		$	7,601
Collectively evaluated for impairment	9,843			22,996			4,552		944			17,992			770			60			57,157
Ending balance	$	13,102		$	25,376		$	5,934	$	944		$	18,492		$	770		$	140		$	64,758

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

The Company’s recorded investments in loans as of December 31, 2017 and December 31, 2016 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, 2017
Recorded investment in loans:
Individually evaluated for impairment	$	8,726	$	10,192	$	5,501	$	478	$	4,709	$	494	$	91	$	30,191
Collectively evaluated for impairment	1,367,213		3,036,902		749,943		103,879		1,027,123		92,770		3,507		6,381,337
Ending balance	$	1,375,939	$	3,047,094	$	755,444	$	104,357	$	1,031,832	$	93,264	$	3,598	$	6,411,528

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

At December 31, 2017, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage have a carrying value of $297 thousand and $479 thousand, respectively, and an unpaid principal balance of $347 thousand and $1.5 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.

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, 2017 and 2016.

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

December 31, 2017
Commercial	$	1,333,050	$	34,163	$	8,726	$	—	$	1,375,939
Income producing - commercial real estate	3,033,046		3,856		10,192		—		3,047,094
Owner occupied - commercial real estate	696,754		53,189		5,501		—		755,444
Real estate mortgage — residential	103,220		659		478		—		104,357
Construction - commercial and residential	1,027,123		—		4,709		—		1,031,832
Home equity	92,084		686		494		—		93,264
Other consumer	3,505		2		91		—		3,598
Total	$	6,288,782	$	92,555	$	30,191	$	—	$	6,411,528

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

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. 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, 2017 and 2016.


(dollars in thousands)	December 31, 2017		December 31, 2016

Commercial	$	3,493	$	2,490
Income producing - commercial real estate	832		10,539
Owner occupied - commercial real estate	5,501		2,093
Real estate mortgage - residential	775		555
Construction - commercial and residential	2,052		2,072
Home equity	494		—
Other consumer	91		126
Total nonaccrual loans (1)(2)	$	13,238	$	17,875

(1) Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $12.3 million at December 31, 2017, and $7.9 million at December 31, 2016.

(2) Gross interest income of $939 thousand and $1.2 million would have been recorded in 2017 and 2016, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $101 thousand and $48 thousand at December 31, 2017 and 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 December 31, 2017 and 2016.

	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, 2017
Commercial	$	2,705	$	748	$	3,493	$	6,946	$	1,368,993	$	1,375,939
Income producing - commercial real estate	4,398		6,930		832		12,160		3,034,934		3,047,094
Owner occupied - commercial real estate	522		3,906		5,501		9,929		745,515		755,444
Real estate mortgage — residential	6,993		1,244		775		9,012		95,345		104,357
Construction - commercial and residential	—		5,268		2,052		7,320		1,024,512		1,031,832
Home equity	307		—		494		801		92,463		93,264
Other consumer	45		6		91		142		3,456		3,598
Total	$	14,970	$	18,102	$	13,238	$	46,310	$	6,365,218	$	6,411,528

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

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, 2017 and 2016.

	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, 2017
Commercial	$	5,644	$	1,777	$	3,748	$	5,525	$	3,259	$	5,764	$	5,765	$	48		$	145
Income producing - commercial real estate	10,044		781		9,263		10,044		2,380		10,068		10,127		120			493
Owner occupied - commercial real estate	6,596		1,095		5,501		6,596		1,382		6,743		5,210		27			73
Real estate mortgage — residential	775		775		—		775		—		538		423		17			17
Construction - commercial and residential	2,052		1,534		518		2,052		500		3,491		3,731		(14		)	—
Home equity	494		494		—		494		—		544		346		—			2
Other consumer	91		—		91		91		80		92		93		—			—
Total	$	25,696	$	6,456	$	19,121	$	25,577	$	7,601	$	27,240	$	25,695	$	198		$	730

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

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, 2017, 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, 2017 and 2016.

	For the Year Ended December 31, 2017
	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	9	$	2,032	$	9,212	$	1,095	$	—	$	12,339
Restructured nonaccruing	5	867		121		—		—		988
Total	14	$	2,899	$	9,333	$	1,095	$	—	$	13,327

Specific allowance		$	595	$	2,350	$	—	$	—	$	2,945

Restructured and subsequently defaulted		$	237	$	—	$	—	$	—	$	237

	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 nonaccruing	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		$	—	$	—	$	—	$	—	$	—

The Company had fourteen TDRs at December 31, 2017, totaling approximately $13.3 million, as compared to ten TDRs totaling approximately $13.3 million at December 31, 2016. At December 31, 2017, nine of these TDR loans, totaling approximately $12.3 million, are performing under their modified terms. During the 2017, there was one default on a $237 thousand restructured loan which was charged off, as compared to the same period in 2016, which had no defaults on restructured loan. During 2017, there were four loans modified in a TDR totaling approximately $5.3 million. There were four loans totaling approximately $2.2 million modified in a TDR during the year ended December 31, 2016. At December 31, 2017, there were five performing TDR loans totaling approximately $988 thousand that experienced defaults on their modified terms, as compared to the year ended December 31, 2016, which had three performing TDR loans totaling approximately $5.4 million that experienced defaults on their modified terms. During 2017, these five previously performing TDRs were reclassified to nonperforming loans. There were three nonperforming TDRs reclassified to nonperforming loans during the year ended December 31, 2016. A default is considered to have occurred once the TDR is past due 90 days or more, or it has been placed on nonaccrual. During 2017, there was a pay down of approximately $4.8 million resulting from the sale of the underlying collateral on one nonperforming loan totaling approximately $4.9 million at December 31, 2016. 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 differences between the initial fair value 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)	2017			2016
Balance at January 1,	$	(4,444	)	$	(6,008	)
Net reclassifications from nonaccretable yield	—			—
Accretion	1,985			1,564
Balance at December 31,	$	(2,459	)	$	(4,444	)

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 2017 and 2016.

(dollars in thousands)	2017			2016
Balance at January 1,	$	52,570		$	29,949
Additions	44,221			31,158
Repayments	(35,886		)	(8,537		)
Balance at December 31,	$	60,905		$	52,570

The Bank has made an aggregate of $4.0 million of loans to a trust with an independent third party trustee, established by an executive officer and director, of which the children of such executive officer and director are discretionary beneficiaries, and over which such individuals have no investment or operational authority, and an aggregate of $65.6 million of loans to entities in which the trust has an ownership interest in excess of 10%, which the Company does not consider to be related party transactions. All of such loans were made in the ordinary course of the Company's lending business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with third parties; and did not involve more than the normal risk of collectability or present other unfavorable features. All of such loans are performing and none of such loans are disclosed as nonaccrual, past due, restructured or potential problem loans.

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

+ References + Details