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Loans and Allowance for Credit Losses
 6 Months Ended
Jun. 30, 2019
Receivables [Abstract]  
Loans and Allowance for Credit Losses
Note 5. 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 June 30, 2019 and December 31, 2018 are summarized by type as follows:
 
   
 
 
June 30, 2019
 
 
December 31, 2018
 
(dollars in thousands)
 
Amount
 
 
%
 
 
Amount
 
 
%
 
Commercial
 
$
1,475,201
 
 
 
20
%
 
$
1,553,112
 
 
 
22
%
Income producing - commercial real estate
 
 
3,666,815
 
 
 
50
%
 
 
3,256,900
 
 
 
46
%
Owner occupied - commercial real estate
 
 
970,850
 
 
 
13
%
 
 
887,814
 
 
 
13
%
Real estate mortgage - residential
 
 
105,191
 
 
 
1
%
 
 
106,418
 
 
 
2
%
Construction - commercial and residential
 
 
1,012,789
 
 
 
14
%
 
 
1,039,815
 
 
 
15
%
Construction - C&I (owner occupied)
 
 
76,324
 
 
 
1
%
 
 
57,797
 
 
 
1
%
Home equity
 
 
83,447
 
 
 
1
%
 
 
86,603
 
 
 
1
%
Other consumer
 
 
1,998
 
 
 
—
 
 
 
2,988
 
 
 
—
 
Total loans
 
 
7,392,615
 
 
 
100
%
 
 
6,991,447
 
 
 
100
%
Less: allowance for credit losses
 
 
(72,086
)
 
 
 
 
 
 
(69,944
)
 
 
 
 
Net loans
 
$
7,320,529
 
 
 
 
 
 
$
6,921,503
 
 
 
 
 
 
Unamortized net deferred fees amounted to $25.2 million and $26.5 million at June 30, 2019 and December 31, 2018, respectively.
 
As of June 30, 2019 and December 31, 2018, the Bank serviced $101.8 million and $111.1 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 June 30, 2019, owner occupied - commercial real estate and construction - C&I (owner occupied) represent approximately 14 % of the loan portfolio. At June 30, 2019, non-owner occupied commercial real estate and real estate construction represented approximately 64 % of the loan portfolio. The combined owner occupied and commercial real estate loans represent approximately 78 % of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 84 % of all loans being secured by real estate. 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 thanfiveyears.
 
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 2 0% of the loan portfolio at June 30, 2019 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 approximately2 % of the commercial loan category. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit as well as potential repairs to the SBA guarantees. 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 June 30, 2019 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 1 % of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 20 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 than10 years or the remaining useful life of the property, whichever is lower. The preferred term is between5 to 7 years, with amortization to a maximum of25 years.
 
The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.62 billion at June 30, 2019. 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 71 % of the outstanding ADC loan portfolio at June 30, 2019. 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 recognizes thatoneof 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 three and six months ended June 30, 2019 and 2018. 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 -
Commercial
 
 
Owner
Occupied - Commercial
 
 
Real Estate
Mortgage -
 
 
Construction -
Commercial and
 
 
Home
 
 
Other
 
 
 
 
(dollars in thousands)
 
Commercial
 
 
Real Estate
 
 
Real Estate
 
 
Residential
 
 
Residential
 
 
Equity
 
 
Consumer
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ThreeMonths Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
17,195
 
 
$
26,765
 
 
$
5,980
 
 
$
681
 
 
$
18,469
 
 
$
605
 
 
$
248
 
 
$
69,943
 
Loans charged-off
 
 
(1
)
 
 
(1,847
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(2
)
 
 
(1,850
)
Recoveries of loans previously charged-off
 
 
37
 
 
 
302
 
 
 
2
 
 
 
2
 
 
 
37
 
 
 
—
 
 
 
13
 
 
 
393
 
Net loans charged-off
 
 
36
 
 
 
(1,545
)
 
 
2
 
 
 
2
 
 
 
37
 
 
 
—
 
 
 
11
 
 
 
(1,457
)
Provision for credit losses
 
 
905
 
 
 
1,790
 
 
 
(226
)
 
 
672
 
 
 
500
 
 
 
(24
)
 
 
(17
)
 
 
3,600
 
Ending balance
 
$
18,136
 
 
$
27,010
 
 
$
5,756
 
 
$
1,355
 
 
$
19,006
 
 
$
581
 
 
$
242
 
 
$
72,086
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SixMonths Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
15,857
 
 
$
28,034
 
 
$
6,242
 
 
$
965
 
 
$
18,175
 
 
$
599
 
 
$
72
 
 
$
69,944
 
Loans charged-off
 
 
(5
)
 
 
(5,343
)
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(2
)
 
 
(5,350
)
Recoveries of loans previously charged-off
 
 
167
 
 
 
302
 
 
 
2
 
 
 
3
 
 
 
37
 
 
 
—
 
 
 
21
 
 
 
532
 
Net loans (charged-off) recoveries
 
 
162
 
 
 
(5,041
)
 
 
2
 
 
 
3
 
 
 
37
 
 
 
—
 
 
 
19
 
 
 
(4,818
)
Provision for credit losses
 
 
2,117
 
 
 
4,017
 
 
 
(488
)
 
 
387
 
 
 
794
 
 
 
(18
)
 
 
151
 
 
 
6,960
 
Ending balance
 
$
18,136
 
 
$
27,010
 
 
$
5,756
 
 
$
1,355
 
 
$
19,006
 
 
$
581
 
 
$
242
 
 
$
72,086
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
7,905
 
 
$
1,000
 
 
$
475
 
 
$
650
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
10,030
 
Collectively evaluated for impairment
 
 
10,231
 
 
 
26,010
 
 
 
5,281
 
 
 
705
 
 
 
19,006
 
 
 
581
 
 
 
242
 
 
 
62,056
 
Ending balance
 
$
18,136
 
 
$
27,010
 
 
$
5,756
 
 
$
1,355
 
 
$
19,006
 
 
$
581
 
 
$
242
 
 
$
72,086
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ThreeMonths Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
13,358
 
 
$
26,468
 
 
$
5,471
 
 
$
734
 
 
$
18,742
 
 
$
699
 
 
$
335
 
 
$
65,807
 
Loans charged-off
 
 
(408
)
 
 
 —
 
 
 
 —
 
 
 
—
 
 
 
(517
)
 
 
—
 
 
 
—
 
 
 
(925
)
Recoveries of loans previously charged-off
 
 
23
 
 
 
2
 
 
 
1
 
 
 
1
 
 
 
35
 
 
 
10
 
 
 
5
 
 
 
77
 
Net loans (charged-off) recoveries
 
 
(385
)
 
 
2
 
 
 
1
 
 
 
1
 
 
 
(482
)
 
 
10
 
 
 
5
 
 
 
(848
)
Provision for credit losses
 
 
(767
)
 
 
1,518
 
 
 
531
 
 
 
22
 
 
 
391
 
 
 
(36
)
 
 
(9
)
 
 
1,650
 
Ending balance
 
$
12,206
 
 
$
27,988
 
 
$
6,003
 
 
$
757
 
 
$
18,651
 
 
$
673
 
 
$
331
 
 
$
66,609
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SixMonths Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
13,102
 
 
$
25,376
 
 
$
5,934
 
 
$
944
 
 
$
18,492
 
 
$
770
 
 
$
140
 
 
$
64,758
 
Loans charged-off
 
 
(1,261
)
 
 
(121
)
 
 
(132
)
 
 
—
 
 
 
(517
)
 
 
—
 
 
 
—
 
 
 
(2,031
)
Recoveries of loans previously charged-off
 
 
26
 
 
 
2
 
 
 
2
 
 
 
3
 
 
 
95
 
 
 
127
 
 
 
8
 
 
 
263
 
Net loans (charged-off) recoveries
 
 
(1,235
)
 
 
(119
)
 
 
(130
)
 
 
3
 
 
 
(422
)
 
 
127
 
 
 
8
 
 
 
(1,768
)
Provision for credit losses
 
 
339
 
 
 
2,731
 
 
 
199
 
 
 
(190
)
 
 
581
 
 
 
(224
)
 
 
183
 
 
 
3,619
 
Ending balance
 
$
12,206
 
 
$
27,988
 
 
$
6,003
 
 
$
757
 
 
$
18,651
 
 
$
673
 
 
$
331
 
 
$
66,609
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
4,506
 
 
$
3,543
 
 
$
500
 
 
$
—
 
 
$
 —
 
 
$
—
 
 
$
80
 
 
$
8,629
 
Collectively evaluated for impairment
 
 
7,700
 
 
 
24,445
 
 
 
5,503
 
 
 
757
 
 
 
18,651
 
 
 
673
 
 
 
251
 
 
 
57,980
 
Ending balance
 
$
12,206
 
 
$
27,988
 
 
$
6,003
 
 
$
757
 
 
$
18,651
 
 
$
673
 
 
$
331
 
 
$
66,609
 
 
 
 
 
The Company’s recorded investments in loans as of June 30, 2019 and December 31, 2018 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
26,980
 
 
$
37,900
 
 
$
3,879
 
 
$
5,367
 
 
$
9,155
 
 
$
487
 
 
$
—
 
 
$
83,768
 
Collectively evaluated for impairment
 
 
1,448,221
 
 
 
3,628,915
 
 
 
966,971
 
 
 
99,824
 
 
 
1,079,958
 
 
 
82,960
 
 
 
1,998
 
 
 
7,308,847
 
Ending balance
 
$
1,475,201
 
 
$
3,666,815
 
 
$
970,850
 
 
$
105,191
 
 
$
1,089,113
 
 
$
83,447
 
 
$
1,998
 
 
$
7,392,615
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded investment in loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
8,738
 
 
$
61,747
 
 
$
5,307
 
 
$
1,228
 
 
$
7,012
 
 
$
487
 
 
$
—
 
 
$
84,519
 
Collectively evaluated for impairment
 
 
1,544,374
 
 
 
3,195,153
 
 
 
882,507
 
 
 
105,190
 
 
 
1,090,600
 
 
 
86,116
 
 
 
2,988
 
 
 
6,906,928
 
Ending balance
 
$
1,553,112
 
 
$
3,256,900
 
 
$
887,814
 
 
$
106,418
 
 
$
1,097,612
 
 
$
86,603
 
 
$
2,988
 
 
$
6,991,447
 
 
 
At June 30, 2019, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $273thousandand $155thousand, respectively, and an unpaid principal balance of $323thousandand $968thousand, respectively, and were evaluated separately in accordance with ASC Topic 310 -30,
“Loans and Debt Securities Acquired with Deteriorated Credit Quality
 .” At December 31, 2018, nonperforming loans acquired from Fidelity and Virginia Heritage had a carrying value of $282thousandand $202thousand, respectively, and an unpaid principal balance of $332thousandand $995thousand, respectively, and were evaluated separately in accordance with ASC Topic 310-30. 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 June 30, 2019 and December 31, 2018.
 
 
 
 
 
 
Watch and
 
 
 
 
 
 
 
 
Total
 
(dollars in thousands)
 
Pass
 
 
Special Mention
 
 
Substandard
 
 
Doubtful
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
1,398,098
 
 
$
50,123
 
 
$
26,980
 
 
$
—
 
 
$
1,475,201
 
Income producing - commercial real estate
 
 
3,611,968
 
 
 
16,947
 
 
 
37,900
 
 
 
—
 
 
 
3,666,815
 
Owner occupied - commercial real estate
 
 
924,643
 
 
 
42,328
 
 
 
3,879
 
 
 
—
 
 
 
970,850
 
Real estate mortgage – residential
 
 
99,188
 
 
 
636
 
 
 
5,367
 
 
 
—
 
 
 
105,191
 
Construction - commercial and residential
 
 
1,079,958
 
 
 
—
 
 
 
9,155
 
 
 
—
 
 
 
1,089,113
 
Home equity
 
 
82,274
 
 
 
686
 
 
 
487
 
 
 
—
 
 
 
83,447
 
Other consumer
 
 
1,998
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
1,998
 
Total
 
$
7,198,127
 
 
$
110,720
 
 
$
83,768
 
 
$
—
 
 
$
7,392,615
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
1,505,477
 
 
$
25,584
 
 
$
22,051
 
 
$
—
 
 
$
1,553,112
 
Income producing - commercial real estate
 
 
3,172,479
 
 
 
1,536
 
 
 
82,885
 
 
 
—
 
 
 
3,256,900
 
Owner occupied - commercial real estate
 
 
844,286
 
 
 
38,221
 
 
 
5,307
 
 
 
—
 
 
 
887,814
 
Real estate mortgage – residential
 
 
104,543
 
 
 
647
 
 
 
1,228
 
 
 
—
 
 
 
106,418
 
Construction - commercial and residential
 
 
1,090,600
 
 
 
—
 
 
 
7,012
 
 
 
—
 
 
 
1,097,612
 
Home equity
 
 
85,434
 
 
 
682
 
 
 
487
 
 
 
—
 
 
 
86,603
 
Other consumer
 
 
2,988
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
2,988
 
Total
 
$
6,805,807
 
 
$
66,670
 
 
$
118,970
 
 
$
—
 
 
$
6,991,447
 
 
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 June 30, 2019 and December 31, 2018.
 
(dollars in thousands)
 
June 30,
2019
 
 
December 31,
2018
 
 
 
 
 
 
 
 
Commercial
 
$
16,053
 
 
$
7,115
 
Income producing - commercial real estate
 
 
4,563
 
 
 
1,766
 
Owner occupied - commercial real estate
 
 
1,510
 
 
 
2,368
 
Real estate mortgage - residential
 
 
5,640
 
 
 
1,510
 
Construction - commercial and residential
 
 
9,155
 
 
 
3,031
 
Home equity
 
 
487
 
 
 
487
 
Total nonaccrual loans ( 1)( 2)
 
$
37,408
 
 
$
16,277
 
 
 
( 1)
Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $8.6 million at June 30, 2019 and $24.0 million at December 31, 2018.
 
( 2)
Gross interest income of $1.2 million and $321 thousand would have been recorded for thesixmonths ended June 30, 2019 and 2018, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while the interest actually recorded on such loans was $86 thousand and $6 thousand for thesixmonths ended June 30, 2019 and 2018, 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 June 30, 2019 and December 31, 2018.
 
 
 
Loans
 
 
Loans
 
 
Loans
 
 
 
 
 
 
 
 
Total Recorded
 
 
 
30-59Days
 
 
60-89Days
 
 
90Days or
 
 
Total Past
 
 
Current
 
 
Investment in
 
(dollars in thousands)
 
Past Due
 
 
Past Due
 
 
More Past Due
 
 
Due Loans
 
 
Loans
 
 
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
4,784
 
 
$
1,112
 
 
$
16,053
 
 
$
21,949
 
 
$
1,453,252
 
 
$
1,475,201
 
Income producing - commercial real estate
 
 
2,253
 
 
 
4,656
 
 
 
4,563
 
 
 
11,472
 
 
 
3,655,343
 
 
 
3,666,815
 
Owner occupied - commercial real estate
 
 
445
 
 
 
3,654
 
 
 
1,510
 
 
 
5,609
 
 
 
965,241
 
 
 
970,850
 
Real estate mortgage – residential
 
 
 —
 
 
 
—
 
 
 
5,640
 
 
 
5,640
 
 
 
99,551
 
 
 
105,191
 
Construction - commercial and residential
 
 
2,011
 
 
 
1,866
 
 
 
9,155
 
 
 
13,032
 
 
 
1,076,081
 
 
 
1,089,113
 
Home equity
 
 
1,413
 
 
 
47
 
 
 
487
 
 
 
1,947
 
 
 
81,500
 
 
 
83,447
 
Other consumer
 
 
21
 
 
 
10
 
 
 
—
 
 
 
31
 
 
 
1,967
 
 
 
1,998
 
Total
 
$
10,927
 
 
$
11,345
 
 
$
37,408
 
 
$
59,680
 
 
$
7,332,935
 
 
$
7,392,615
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
4,535
 
 
$
2,870
 
 
$
7,115
 
 
$
14,520
 
 
$
1,538,592
 
 
$
1,553,112
 
Income producing - commercial real estate
 
 
5,855
 
 
 
27,479
 
 
 
1,766
 
 
 
35,100
 
 
 
3,221,800
 
 
 
3,256,900
 
Owner occupied - commercial real estate
 
 
5,051
 
 
 
2,370
 
 
 
2,368
 
 
 
9,789
 
 
 
878,025
 
 
 
887,814
 
Real estate mortgage – residential
 
 
2,456
 
 
 
1,698
 
 
 
1,510
 
 
 
5,664
 
 
 
100,754
 
 
 
106,418
 
Construction - commercial and residential
 
 
4,392
 
 
 
—
 
 
 
3,031
 
 
 
7,423
 
 
 
1,090,189
 
 
 
1,097,612
 
Home equity
 
 
630
 
 
 
47
 
 
 
487
 
 
 
1,164
 
 
 
85,439
 
 
 
86,603
 
Other consumer
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
2,988
 
 
 
2,988
 
Total
 
$
22,919
 
 
$
34,464
 
 
$
16,277
 
 
$
73,660
 
 
$
6,917,787
 
 
$
6,991,447
 
 
 
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 June 30, 2019 and December 31, 2018.
 
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
17,434
 
 
$
5,003
 
 
$
11,959
 
 
$
16,962
 
 
$
7,905
 
 
$
14,972
 
 
$
12,695
 
 
$
84
 
 
$
103
 
Income producing - commercial real estate
 
 
8,953
 
 
 
4,563
 
 
 
4,390
 
 
 
8,953
 
 
 
1,000
 
 
 
24,198
 
 
 
23,266
 
 
 
(165
)
 
 
98
 
Owner occupied - commercial real estate
 
 
4,819
 
 
 
3,449
 
 
 
1,370
 
 
 
4,819
 
 
 
475
 
 
 
4,836
 
 
 
5,134
 
 
 
47
 
 
 
93
 
Real estate mortgage – residential
 
 
5,640
 
 
 
3,184
 
 
 
2,456
 
 
 
5,640
 
 
 
650
 
 
 
5,642
 
 
 
4,265
 
 
 
—
 
 
 
—
 
Construction - commercial and residential
 
 
10,315
 
 
 
9,155
 
 
 
—
 
 
 
9,155
 
 
 
—
 
 
 
6,093
 
 
 
5,072
 
 
 
15
 
 
 
15
 
Home equity
 
 
487
 
 
 
487
 
 
 
—
 
 
 
487
 
 
 
—
 
 
 
487
 
 
 
487
 
 
 
—
 
 
 
—
 
Other consumer
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total
 
$
47,648
 
 
$
25,841
 
 
$
20,175
 
 
$
46,016
 
 
$
10,030
 
 
$
56,228
 
 
$
50,919
 
 
$
(19
)
 
$
309
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
$
8,613
 
 
$
2,057
 
 
$
6,084
 
 
$
8,141
 
 
$
4,803
 
 
$
10,306
 
 
$
8,359
 
 
$
(126
)
 
$
190
 
Income producing - commercial real estate
 
 
21,402
 
 
 
1,720
 
 
 
19,682
 
 
 
21,402
 
 
 
2,465
 
 
 
15,331
 
 
 
12,309
 
 
 
189
 
 
 
550
 
Owner occupied - commercial real estate
 
 
5,731
 
 
 
4,361
 
 
 
1,370
 
 
 
5,731
 
 
 
600
 
 
 
5,746
 
 
 
6,011
 
 
 
47
 
 
 
196
 
Real estate mortgage – residential
 
 
1,510
 
 
 
1,510
 
 
 
—
 
 
 
1,510
 
 
 
—
 
 
 
1,516
 
 
 
1,688
 
 
 
—
 
 
 
2
 
Construction - commercial and residential
 
 
3,031
 
 
 
3,031
 
 
 
—
 
 
 
3,031
 
 
 
1,050
 
 
 
3,031
 
 
 
2,028
 
 
 
—
 
 
 
68
 
Home equity
 
 
487
 
 
 
487
 
 
 
—
 
 
 
487
 
 
 
—
 
 
 
487
 
 
 
491
 
 
 
—
 
 
 
—
 
Other consumer
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
46
 
 
 
69
 
 
 
—
 
 
 
—
 
Total
 
$
40,774
 
 
$
13,166
 
 
$
27,136
 
 
$
40,302
 
 
$
8,918
 
 
$
36,463
 
 
$
30,955
 
 
$
110
 
 
$
1,006
 
 
 
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 June 30, 2019, 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 for the periods ended June 30, 2019 and 2018.
 
 
 
For theSixMonths Ended June 30, 2019
 
 
 
Number of
 
 
 
 
 
Income Producing -
 
 
Owner Occupied -
 
 
Construction -
 
 
 
 
(dollars in thousands)
 
Contracts
 
 
Commercial
 
 
Commercial Real Estate
 
 
Commercial Real Estate
 
 
Commercial Real Estate
 
 
Total
 
Troubled debt restructurings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructured accruing
 
 
7
 
 
$
909
 
 
$
4,390
 
 
$
3,309
 
 
$
—
 
 
$
8,608
 
Restructured nonaccruing
 
 
4
 
 
 
2,831
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
2,831
 
Total
 
 
11
 
 
$
3,740
 
 
$
4,390
 
 
$
3,309
 
 
$
—
 
 
$
11,439
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specific allowance
 
 
 
 
 
$
 —
 
 
$
1,000
 
 
$
—
 
 
$
—
 
 
$
1,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructured and subsequently defaulted
 
 
 
 
 
$
 
 
 
$
2,300
 
 
$
—
 
 
$
—
 
 
$
1,847
 
 
 
 
For theSixMonths Ended June 30, 2018
 
 
 
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
 
 
$
4,938
 
 
$
9,138
 
 
$
1,047
 
 
$
—
 
 
$
15,123
 
Restructured nonaccruing
 
 
4
 
 
 
1,211
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
1,211
 
Total
 
 
13
 
 
$
6,149
 
 
$
9,138
 
 
$
1,047
 
 
$
—
 
 
$
16,334
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Specific allowance
 
 
 
 
 
$
2,000
 
 
$
3,500
 
 
$
—
 
 
$
—
 
 
$
5,500
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructured and subsequently defaulted
 
 
 
 
 
$
—
 
 
$
937
 
 
$
—
 
 
$
—
 
 
$
937
 
 
 
The Company had eleven TDR’s at June 30, 2019 totaling approximately $11.4 million.Sevenof these loans totaling approximately $8.6 million are performing under their modified terms. There wasoneperforming TDR totaling $2.3 million that defaulted on its modified terms which was reclassified to nonperforming loans during thesixmonths ended June 30, 2019. During thesixmonths ended June 30, 2018, there weretwoperforming TDRs totaling $937 thousand that defaulted on their modified terms which were reclassified to nonperforming 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. For thethreemonths ended June 30, 2019, there wasonerestructured loan totaling approximately $4.8 million that had its collateral property sold for approximately $3 million and the remaining $1.8 million was charged-off during the quarter, as compared to the same period in 2018, there wasonedefaulted loan totaling approximately $315 thousand that was charged-off. During thethreemonths ended June 30, 2019, there wasoneloan totaling $10.4 million that was re-underwritten intotwonew loans which provided better collateral for the Bank, as compared to thethreemonths ended June 30, 2018, there wasoneloan totaling $274 thousand that was partially paid off from the sale proceeds of the business which totaled approximately $236 thousand. The remaining balance on the loan of $38 thousand was charged-off. 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. For thethreemonths ended June 30, 2019, there were no loans modified in a TDR, as compared to thethreemonths ended June 30, 2018 which hadtwoloans totaling $4.0 million modified in a TDR.