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, 2011 and 2010 are summarized by type as follows:

(dollars in thousands)	2011			2010

Commercial	$	478,886		$	411,744
Investment—commercial real estate		756,645			619,714
Owner occupied—commercial real estate		250,174			223,986
Real estate mortgage—residential		39,552			15,977
Construction—commercial and residential(1)		429,669			308,081
Home equity		97,103			89,885
Other consumer		4,227			6,113

Total loans		2,056,256			1,675,500
Less: Allowance for Credit Losses		(29,653	)		(24,754	)

Net loans	$	2,026,603		$	1,650,746

Unamortized net deferred fees amounted to $5.2 million and $4.1 million at December 31, 2011 and 2010, of which $399 thousand and $484 thousand at December 31, 2011 and 2010, respectively, represented net deferred costs on home equity loans.

As of December 31, 2011 and 2010, the Bank serviced $27.3 million and $28.1 million, respectively, of SBA loans participations which are not reflected as loan balances on the Consolidated Balance Sheets.

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 investment real estate. At December 31, 2011, commercial real estate, and real estate construction loans combined represented approximately 70% of the loan portfolio. Owner occupied commercial real estate and owner occupied commercial real estate construction represent 13.5% of the loan portfolio. When owner occupied commercial real estate is excluded, the percentage of total loans decreases to 56.5%. 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% or less and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees are generally required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including cash flow, equipment and account receivable financing. This loan category represents approximately 23% of the loan portfolio at December 31, 2011 and is generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent 2% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the uninsured portion of the credit. The Company generally sells the insured 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 5% of the loan portfolio at December 31, 2011 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

The remaining 2% of the loan portfolio consists of longer-term residential mortgage loans. These are typically loans underwritten to the same underwriting standards as residential loans held for sale but for shorter terms, generally less than 10 years.

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded second 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.

All construction draw requests must be presented in writing on American Institute of Architects documents and certified by the contractor, the borrower and the borrower's architect. Each draw request shall also include the borrower's soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1. 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.

Personal guarantees are generally received from the principals, and only in instances where the loan-to-value is sufficiently low and the debt service is sufficiently high is consideration given to either limiting or not requiring personal recourse.

The Company's loan portfolio includes loans made for real estate Acquisition, Development and Construction ("ADC") purposes, including both investment and owner occupied projects. ADC loans amounted to $429.7 million at December 31, 2011. The majority of the ADC portfolio, both speculative and non speculative, includes loan funded interest reserves. ADC loans containing loan funded interest reserves represent approximately 39% of the outstanding ADC loan portfolio at December 31, 2011. 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: (i) the feasibility of the project; (ii) the experience of the sponsor; (iii) the creditworthiness of the borrower and guarantors; (iv) borrower equity contribution; and (v) 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: (i) 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; (ii) a construction loan administration department independent of lending function; (iii) third party independent construction loan inspection reports; (iv) 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 (v) 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, which under its operating documents conducts lending only to real estate projects. 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 bear current interest at a rate with a significant premium to normal market rates. Other loan transactions carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project.

The following table details activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2011 and 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(dollars in thousands)	Commercial			Investment Commercial Real Estate			Owner occupied Commercial Real Estate			Real Estate Mortgage Residential			Construction Commercial and Residential			Home Equity			Other Consumer			Total

For the Year Ended December 31, 2011
Allowance for credit losses:
Balance at beginning of period	$	8,630		$	6,668		$	2,064		$	115		$	5,745		$	1,441		$	91		$	24,754
Loans charged-off		(4,310	)		(277	)		—			(95	)		(1,366	)		(295	)		(87	)		(6,430	)
Recoveries of loans previously charged-off		28			126			—			3			183			3			3			346

Net loan charged-off		(4,282	)		(151	)		—			(92	)		(1,183	)		(292	)		(84	)		(6,084	)
Provision for credit losses		5,261			787			(166	)		376			3,984			379			362			10,983

Balance at end of period	$	9,609		$	7,304		$	1,898		$	399		$	8,546		$	1,528		$	369		$	29,653

For the Year Ended December 31, 2010
Allowance for credit losses:
Balance at beginning of period	$	9,871		$	3,328		$	3,167		$	28		$	3,680		$	382		$	163		$	20,619
Loans charged-off		(2,495	)		(719	)		(246	)		—			(1,698	)		(43	)		(21	)		(5,222	)
Recoveries of loans previously charged-off		37			3			—			—			7			2			—			49

Net loan charged-off		(2,458	)		(716	)		(246	)		—			(1,691	)		(41	)		(21	)		(5,173	)
Provision for credit losses		1,217			4,056			(857	)		87			3,756			1,100			(51	)		9,308

Balance at end of period	$	8,630		$	6,668		$	2,064		$	115		$	5,745		$	1,441		$	91		$	24,754

(dollars in thousands)	Commercial		Investment Commercial Real Estate		Owner occupied Commercial Real Estate		Real Estate Mortgage Residential		Construction Commercial and Residential		Home Equity		Other Consumer		Total

For the Year Ended December 31, 2011
Allowance for credit losses:
Individually evaluated for impairment	$	2,249	$	724	$	90	$	—	$	1,530	$	182	$	304	$	5,079
Collectively evaluated for impairment		7,360		6,580		1,808		399		7,016		1,346		65		24,574

Total	$	9,609	$	7,304	$	1,898	$	399	$	8,546	$	1,528	$	369	$	29,653

Recorded investment in loans:
Individually evaluated for impairment	$	11,741	$	9,304	$	5,280	$	751	$	26,855	$	363	$	1,345	$	55,639
Collectively evaluated for impairment		467,145		747,341		244,894		38,801		402,814		96,740		2,882		2,000,617

Total	$	478,886	$	756,645	$	250,174	$	39,552	$	429,669	$	97,103	$	4,227	$	2,056,256

For the Year Ended December 31, 2010
Allowance for credit losses:
Individually evaluated for impairment	$	2,080	$	545	$	150	$	—	$	1,075	$	85	$	—	$	3,935
Collectively evaluated for impairment		6,550		6,123		1,914		115		4,670		1,356		91		20,819

Total	$	8,630	$	6,668	$	2,064	$	115	$	5,745	$	1,441	$	91	$	24,754

Recorded investment in loans:
Individually evaluated for impairment	$	18,720	$	9,805	$	3,859	$	—	$	27,778	$	284	$	—	$	60,446
Collectively evaluated for impairment		393,024		609,909		220,127		15,977		280,303		89,601		6,113		1,615,054

Total	$	411,744	$	619,714	$	223,986	$	15,977	$	308,081	$	89,885	$	6,113	$	1,675,500

At December 31, 2011, the nonperforming loans acquired from Fidelity & Trust Financial Corporation ("Fidelity") have a carrying value of $3.8 million and an unpaid principal balance of $14.5 million and were evaluated separately in accordance with ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.

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.


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, 2011.

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

As of December 31, 2011
Commercial	$	438,943	$	28,202	$	11,704	$	37	$	478,886
Investment—commercial real estate		739,668		7,673		9,304		—		756,645
Owner occupied—commercial real estate		235,988		8,906		5,280		—		250,174
Real estate mortgage—residential		38,801		—		751		—		39,552
Construction—commercial and residential		394,135		8,679		26,855		—		429,669
Home equity		96,740		—		363		—		97,103
Other consumer		2,882		—		1,345		—		4,227

Total	$	1,947,157	$	53,460	$	55,602	$	37	$	2,056,256

(dollars in thousands)	Pass Rates		Watch		Substandard		Doubtful		Total Loans

As of December 31, 2010
Commercial	$	375,493	$	17,531	$	17,710	$	1,010	$	411,744
Investment—commercial real estate		605,340		4,569		9,805		—		619,714
Owner occupied—commercial real estate		216,204		3,923		3,859		—		223,986
Real estate mortgage—residential		15,977		—		—		—		15,977
Construction—commercial and residential		274,837		5,466		27,098		680		308,081
Home equity		89,601		—		284		—		89,885
Other consumer		6,113		—		—		—		6,113

Total	$	1,583,565	$	31,489	$	58,756	$	1,690	$	1,675,500

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 non-accrual 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 non-accrual 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 presents by class of loan, information related to non-accrual loans as of the year ended December 31:

(dollars in thousands)	December 31, 2011		December 31, 2010

Commercial	$	5,718	$	5,137
Investment—commercial real estate		7,662		3,913
Owner occupied—commercial real estate		282		—
Real estate mortgage—residential		1,041		760
Construction—commercial and residential		17,459		14,645
Home equity		624		297
Other consumer		8		535

Total nonperforming loans(1)(2)	$	32,794	$	25,287

The following table presents by class, an aging analysis and the recorded investments in loans past due as of December 31, 2011 and 2010:

(dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past Due Loans		Current Loans		Total Recorded Investment in Loans

December 31, 2011
Commercial	$	2,520	$	2,082	$	5,718	$	10,320	$	468,566	$	478,886
Investment—commercial real estate		1,016		6,140		7,662		14,818		741,827		756,645
Owner occupied—commercial real estate		248		—		282		530		249,644		250,174
Real estate mortgage—residential		—		346		1,041		1,387		38,165		39,552
Construction—commercial and residential		6,201		9,395		17,459		33,055		396,614		429,669
Home equity		147		—		624		771		96,332		97,103
Other consumer		34		2		8		44		4,183		4,227

Total	$	10,166	$	17,965	$	32,794	$	60,925	$	1,995,331	$	2,056,256

(dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past Due Loans		Current Loans		Total Recorded Investment in Loans

December 31, 2010
Commercial	$	1,175	$	1,497	$	5,136	$	7,808	$	403,936	$	411,744
Investment—commercial real estate		3,758		2,096		5,039		10,893		608,821		619,714
Owner occupied—commercial real estate		368		3,177		—		3,545		220,441		223,986
Real estate mortgage—residential		107		—		760		867		15,110		15,977
Construction—commercial and residential		12,028		8,122		14,056		34,206		273,875		308,081
Home equity		1,199		—		297		1,496		88,389		89,885
Other consumer		64		—		—		64		6,049		6,113

Total	$	18,699	$	14,892	$	25,288	$	58,879	$	1,616,621	$	1,675,500

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, information related to impaired loans for the years ended December 31, 2011 and 2010.

(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized

Commercial	$	10,695	$	2,723	$	5,923	$	8,646	$	2,049	$	7,955	$	161
Investment—commercial real estate		11,205		8,222		2,373		10,595		692		8,298		159
Owner occupied—commercial		282		—		192		192		90		488		6
Real estate mortgage—residential		1,041		8		733		741		300		1,112		24
Construction—commercial and residential		22,812		17,407		5,086		22,493		237		22,254		14
Home equity		624		353		89		442		182		557		19
Other consumer		8		—		4		4		4		6		—

Total impaired loans at December 31, 2011	$	46,667	$	28,713	$	14,400	$	43,113	$	3,554	$	40,670	$	383

(dollars in thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized

Commercial	$	5,136	$	1,527	$	1,995	$	3,522	$	1,615	$	4,480	$	131
Investment—commercial real estate		7,182		2,156		2,188		4,344		695		3,736		87
Owner occupied—commercial		—		—		—		—		—		263		—
Real estate mortgage—residential		760		760		—		760		—		510		23
Construction—commercial and residential		15,055		7,775		5,206		12,981		1,075		19,147		136
Home equity		297		112		100		212		85		170		13
Other consumer		—		—		—		—		—		4,253		—

Total impaired loans at December 31, 2010	$	28,430	$	12,330	$	9,489	$	21,819	$	3,470	$	32,559	$	390

A modification of a loan constitutes a troubled debt restructuring ("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, however, forgiveness of principal is rarely granted. 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.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, 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, information related to loans modified in a TDR during the years ended December 31, 2011 and 2010.

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 2011 and 2010.