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Loans and Allowance for Credit Losses
 12 Months Ended
Dec. 31, 2020
Receivables [Abstract]  
Loans and Allowance for Credit Losses 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, 2020 and 2019 are summarized by type as follows:
December 31, 2020December 31, 2019
(dollars in thousands)Amount%  Amount%
Commercial$1,437,433 19 %$1,545,906 20 %
PPP loans454,771 6 %— — %
Income producing - commercial real estate3,687,000 47 %3,702,747 50 %
Owner occupied - commercial real estate997,694 13 %985,409 13 %
Real estate mortgage - residential76,592 1 %104,221 1 %
Construction - commercial and residential873,261 11 %1,035,754 14 %
Construction - C&I (owner occupied)158,905 2 %89,490 1 %
Home equity73,167 1 %80,061 1 %
Other consumer1,389 — 2,160 — 
Total loans7,760,212 100 %7,545,748 100 %
Less: allowance for credit losses(109,579)(73,658)
Net loans$7,650,633 $7,472,090 
Unamortized net deferred fees amounted to $30.8 million and $25.2 million at December 31, 2020 and 2019, of which $30 thousand and $32 thousand at December 31, 2020 and 2019, respectively, represented net deferred costs on home equity loans.
As of December 31, 2020 and 2019, the Bank serviced $124 million and $99 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. The remainder of the portfolio, representing all loans not assigned an individual reserve, is segregated by call report codes and a loan-level PD/LGD cash flow method using an EAD model is applied. The loss rates are then modified to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing. At December 31, 2020, owner occupied commercial real estate and construction – C&I (owner occupied) represent approximately 15% of the loan portfolio while non-owner occupied commercial real estate and real estate construction represented approximately 58% of the loan portfolio. The combined owner and non-owner occupied and commercial real estate loans represented approximately 73% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 85% of all loans being secured or partially 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 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 19% of the loan portfolio at December 31, 2020 and generally with 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 1% of the commercial loan category. 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 6% of the loan portfolio at December 31, 2020 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act) from the SBA. These loans are fully guaranteed as to principal and interest by the SBA and ultimately by the full faith and credit of the U.S. Government; as a result, they were approved utilizing different underwriting standards than the Bank's other commercial loans. PPP loans are included in the CECL model but do not carry an allowance for credit loss due to the aforementioned government guarantees.
Approximately 1% of the loan portfolio at December 31, 2020 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 22 months as December 31, 2020. 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 five to seven 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 $1.4 billion at December 31, 2020. 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 61.4% of the outstanding ADC loan portfolio at December 31, 2020. 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 ACL by portfolio segment for the years ended December 31, 2020 and 2019. PPP loans are excluded from these tables since they do not carry an allowance for credit loss, as these loans are fully guaranteed as to principal and interest by the SBA, whose guarantee is backed by the full faith and credit of the U.S. Government. 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)CommercialIncome Producing -
Commercial
Real Estate		Owner Occupied -
Commercial
Real Estate		Real Estate
Mortgage -
Residential		Construction -
Commercial and
Residential		Home
Equity		Other
Consumer		Total
Year Ended December 31, 2020
Allowance for credit losses:                
Balance at beginning of period, prior to adoption of ASC 326$18,832 $29,265 $5,838 $1,557 $17,485 $656 $25 $73,658 
Impact of adopting ASC 326892 11,230 4,674 (301)(6,143)245 17 10,614 
Loans charged-off(12,082)(4,300)(20)(815)(2,947)(92)(3)(20,259)
Recoveries of loans previously charged-off130 — — — 4 — 28 162 
Net loans charged-off(11,952)(4,300)(20)(815)(2,943)(92)25 (20,097)
Provision for credit losses18,797 19,190 3,508 579 3,130 230 (30)45,404 
Ending balance$26,569 $55,385 $14,000 $1,020 $11,529 $1,039 $37 $109,579 
At December 31, 2020
Allowance for credit losses:
Individually evaluated for impairment$7,343 $6,425 $1,241 $330 $103 $— $— $15,442 
Collectively evaluated for impairment19,226 48,960 12,759 690 11,426 1,039 37 94,137 
Ending balance$26,569 $55,385 $14,000 $1,020 $11,529 $1,039 $37 $109,579 
Year Ended December 31, 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(4,868)(1,847)— — (3,496)— (8)(10,219)
Recoveries of loans previously charged-off405 26 3 3 354 — 51 842 
Net loans (charged-off) recoveries(4,463)(1,821)3 3 (3,142)— 43 (9,377)
Provision for credit losses7,438 3,052 (407)589 2,452 57 (90)13,091 
Ending balance$18,832 $29,265 $5,838 $1,557 $17,485 $656 $25 $73,658 
At December 31, 2019
Allowance for credit losses:
Individually evaluated for impairment$5,714 $2,145 $415 $650 $100 $100 $— $9,124 
Collectively evaluated for impairment13,118 27,120 5,423 907 17,385 556 25 64,534 
Ending balance$18,832 $29,265 $5,838 $1,557 $17,485 $656 $25 $73,658 
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020:
(dollars in thousands)Business/Other AssetsReal Estate
Commercial$11,326 $4,026 
PPP loans— — 
Income-producing-commercial real estate3,193 15,686 
Owner occupied - commercial real estate— 23,159 
Real estate mortgage- residential— 2,932 
Construction - commercial and residential— 206 
Home Equity— 415 
Other consumer— — 
Total$14,519 $46,424 
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 is 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 is 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 on an ongoing basis along with our credits rated watch or below reviews. 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, 2020 and 2019. The December 31, 2020 data is further defined by year of loan origination.

December 31, 2020 (dollars in thousands)Prior20162017201820192020Total
Commercial
Pass323,660 111,886 249,541 211,551 164,166 227,095 1,287,899 
Watch31,903 5,315 19,145 21,013 7,740 7,979 93,095 
Special Mention4,969 1,692 8,969 3,385 5,599 2,169 26,783 
Substandard17,679 5,803 1,820 3,525 829 — 29,656 
Total378,211 124,696 279,475 239,474 178,334 237,243 1,437,433 
PPP loans— 
Pass— — — — — 454,771 454,771 
Total— — — — — 454,771 454,771 
Income producing - commercial real estate— 
Pass560,915 347,946 397,953 622,276 643,388 512,387 3,084,865 
Watch152,367 62,912 91,636 89,852 44,555 34,195 475,517 
Special Mention213 — — — 51,969 — 52,182 
Substandard58,555 800 4,656 4,883 5,542 — 74,436 
Total772,050 411,658 494,245 717,011 745,454 546,582 3,687,000 
Owner occupied - commercial real estate— 
Pass343,371 100,272 111,996 136,644 59,681 49,584 801,548 
Watch16,014 5,011 2,640 10,338 15,501 — 49,504 
Special Mention418 — — 83,110 19,091 — 102,619 
Substandard28,228 784 1,908 2,048 10,151 904 44,023 
Total388,031 106,067 116,544 232,140 104,424 50,488 997,694 
Real estate mortgage - residential— 
Pass16,310 2,693 10,199 12,746 18,209 10,116 70,273 
Watch1,996 699 — 728 — — 3,423 
Substandard1,198 1,698 — — — — 2,896 
Total19,504 5,090 10,199 13,474 18,209 10,116 76,592 
Construction - commercial and residential— 
Pass21,290 60,486 266,788 297,480 105,679 71,297 823,020 
Watch929 — 42,751 3,448 — — 47,128 
Special Mention12 — — 2,895 — — 2,907 
Substandard— — 206 — — — 206 
Total22,231 60,486 309,745 303,823 105,679 71,297 873,261 
Construction - C&I (owner occupied)— 
Pass8,278 10,476 6,637 30,340 22,209 40,101 118,041 
Watch3,573 — 2,118 4,935 — — 10,626 
Special Mention124 — — — 14,436 15,678 30,238 
Total11,975 10,476 8,755 35,275 36,645 55,779 158,905 
Home Equity— 
Pass33,226 4,493 8,227 7,827 4,224 12,924 70,921 
Watch1,596 — — — — — 1,596 
Substandard603 — — — 47 — 650 
Total35,425 4,493 8,227 7,827 4,271 12,924 73,167 
Other Consumer— 
Pass929 190 64 74 94 31 1,382 
Substandard7 — — — — — 7 
Total936 190 64 74 94 31 1,389 
Total Recorded Investment$1,628,363 $723,156 $1,227,254 $1,549,098 $1,193,110 $1,439,231 $7,760,212 
(dollars in thousands)PassWatchSpecial MentionSubstandardDoubtfulTotal
Loans
December 31, 2019
Commercial$1,470,636 $38,522 $11,460 $25,288 $— $1,545,906 
Income producing - commercial real estate3,667,585 16,069 — 19,093 — 3,702,747 
Owner occupied - commercial real estate925,800 53,146 — 6,463 — 985,409 
Real estate mortgage - residential98,228 628 — 5,365 — 104,221 
Construction - commercial and residential1,113,734 — — 11,510 — 1,125,244 
Home equity78,626 948 — 487 — 80,061 
Other consumer2,160 — — — — 2,160 
Total$7,356,769 $109,313 $11,460 $68,206 $— $7,545,748 
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, 2020 and 2019.
December 31, 2020December 31, 2019
(dollars in thousands)Nonaccrual with No Allowance for Credit LossNonaccrual with an Allowance for Credit LossesTotal Nonaccrual LoansTotal Nonaccrual Loans
Commercial$3,263 $12,089 $15,352 $14,928 
Income producing - commercial real estate6,500 12,380 18,880 9,711 
Owner occupied - commercial real estate18,941 4,217 23,158 6,463 
Real estate mortgage - residential1,234 1,697 2,931 5,631 
Construction - commercial and residential— 206 206 11,509 
Home equity416 — 416 487 
Total nonaccrual loans (1)(2)
$30,354 $30,589 $60,943 $48,729 
(1)Excludes TDRs that were performing under their restructured terms totaling $10.5 million at December 31, 2020, and $16.6 million at December 31, 2019.
(2)Gross interest income of $3.7 million and $3.0 million would have been recorded for 2020 and 2019, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while interest actually recorded on such loans were $679 thousand and $630 thousand at December 31, 2020 and 2019, 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, 2020 and 2019.
(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		Nonaccrual LoansTotal Recorded
Investment in
Loans
December 31, 2020
Commercial$6,411 $21,426 $— $27,837 $1,394,244 $15,352 $1,437,433 
PPP loans— — — 454,771 — $454,771 
Income producing - commercial real estate— 51,913 — 51,913 3,616,207 18,880 3,687,000 
Owner occupied - commercial real estate10,630 3,542 — 14,172 960,364 23,158 997,694 
Real estate mortgage – residential1,430 — — 1,430 72,231 2,931 76,592 
Construction - commercial and residential2,992 340 — 3,332 869,723 206 873,261 
Construction - C&I (owner occupied)— — — 158,905 — $158,905 
Home equity467 4,552 — 5,019 67,732 416 73,167 
Other consumer21 1 — 22 1,367 — 1,389 
Total$21,951 $81,774 $— $103,725 $7,595,544 $60,943 $7,760,212 
December 31, 2019
Commercial$3,063 $781 $— $3,844 $1,527,134 $14,928 $1,545,906 
Income producing - commercial real estate— 5,542 — 5,542 3,687,494 9,711 3,702,747 
Owner occupied - commercial real estate13,008 — — 13,008 965,938 6,463 985,409 
Real estate mortgage – residential3,533 — — 3,533 95,057 5,631 104,221 
Construction - commercial and residential— — — — 1,113,735 11,509 1,125,244 
Home equity136 192 — 328 79,246 487 80,061 
Other consumer— 9 — 9 2,151 — 2,160 
Total$19,740 $6,524 $— $26,264 $7,470,755 $48,729 $7,545,748 
Pre Adoption of CECL
Loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral. The Bank’s loan policy required that loans be placed on nonaccrual if they were ninety days past-due, unless they were well secured and in the process of collection. Impaired loans, or portions thereof, were charged-off when deemed uncollectible.
The following table presents, by class of loan, information related to impaired loans for the year ended December 31, 2019.
Average Recorded 
Investment		Interest Income 
Recognized
(dollars in thousands)Unpaid 
Contractual
Principal
Balance		Recorded
Investment
With No
Allowance		Recorded
Investment
With
Allowance		Total
Recorded
Investment		Related
Allowance		Year
To Date		Year
To Date
December 31, 2019
Commercial$15,814 $11,858 $3,956 $15,814 $5,714 $15,682 $270 
Income producing - commercial real estate14,093 2,713 11,380 14,093 2,145 18,133 382 
Owner occupied - commercial real estate7,349 6,388 961 7,349 415 6,107 197 
Real estate mortgage - residential5,631 3,175 2,456 5,631 650 5,638 — 
Construction - commercial and residential11,509 11,101 408 11,509 100 8,211 92 
Home equity487 — 487 487 100 487 — 
Other consumer— — — — — — — 
Total$54,883 $35,235 $19,648 $54,883 $9,124 $54,258 $941 
The Company’s recorded investments in loans as of December 31, 2019 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:
(dollars in thousands)CommercialIncome Producing -
Commercial
Real Estate		Owner Occupied -
Commercial
Real Estate		Real Estate
Mortgage -
Residential		Construction -
Commercial and
Residential		Home
Equity		Other
Consumer		Total
December 31, 2019
Recorded investment in loans:
Individually evaluated for impairment$25,288 $19,093 $6,463 $5,365 $11,510 $487 $— $68,206 
Collectively evaluated for impairment1,520,618 3,683,654 978,946 98,856 1,113,734 79,574 2,160 7,477,542 
Ending balance$1,545,906 $3,702,747 $985,409 $104,221 $1,125,244 $80,061 $2,160 $7,545,748 
Loan Modifications
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. 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, 2020, 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.
In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the CARES Act and ASC 310-40 to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allowed for a deferral of payments for 90 days, which we extended for an additional 90 days for certain loans, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Through December 31, 2020, we granted temporary modifications on approximately 750 loans representing $1.6 billion. These deferrals amounted to 36 loans representing approximately $72.4 million (0.9% of total loans) in outstanding exposure at December 31, 2020 as many deferrals have migrated back to current payments, were placed on watch list or placed on nonaccrual. Additionally, none of the deferrals are reflected in the Company's asset quality measures (i.e. non-performing loans) due to the provision of the CARES Act that permits U.S. financial institutions to temporarily suspend the GAAP requirements to treat such short-term loan modifications as TDR. Similar provisions have also been confirmed by interagency guidance issued by the federal banking agencies and confirmed with staff members of the Financial Accounting Standards Board.

The following table presents, by class, the recorded investment of loans modified in TDRs held by the Company during the years ended December 31, 2020 and 2019.
For the Year Ended December 31, 2020
(dollars in thousands)Number
of
Contracts		CommercialIncome
Producing -
Commercial
Real Estate		Owner
Occupied -
Commercial
Real Estate		Construction -
Commercial
Real Estate		Total
Troubled debt restructurings            
Restructured accruing7 $1,276 $9,183 $13 $— $10,472 
Restructured nonaccruing3 — 6,342 2,370 — 8,712 
Total10 $1,276 $15,525 $2,383 $— $19,184 
Specific allowance$733 $2,989 $— $— $3,722 
Restructured and subsequently defaulted$— $6,342 $2,370 $— $8,712 
For the Year Ended December 31, 2019
(dollars in thousands)Number
of
Contracts		CommercialIncome
Producing -
Commercial
Real Estate		Owner
Occupied -
Commercial
Real Estate		Construction -
Commercial
Real Estate		Total
Troubled debt restructings            
Restructured accruing7 $885 $14,806 $887 $— $16,578 
Restructured nonaccruing2 142 — 2,370 — 2,512 
Total9 $1,027 $14,806 $3,257 $— $19,090 
Specific allowance$— $1,000 $— $— $1,000 
Restructured and subsequently defaulted$— $7,115 $2,370 $— $9,485 
The Company had ten TDRs at December 31, 2020, totaling approximately $19.2 million, as compared to nine TDRs totaling approximately $19.1 million at December 31, 2019. At December 31, 2020, six of these TDR loans, totaling approximately $10.5 million, were performing under their modified terms, as compared to December 31, 2019, when there were seven performing TDR loans totaling approximately $16.6 million. During 2020, there were two performing TDRs totaling $6.3 million that defaulted on their modified terms that were reclassified to nonperforming loans, as compared to 2019, during which there were three performing TDR loans totaling approximately $9.5 million that defaulted on their modified terms and either charged-off or 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. During 2020, there were two restructured loans totaling approximately $870 thousand which had their collateral property sold and were paid in full and one restructured loan totaling $138 thousand that had previously defaulted that 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. During 2020, there were two loans modified in a TDR totaling approximately $572 thousand, as compared to 2019, during which there was one loan totaling approximately $2.3 million modified in a TDR.
Loan Charge Off Criteria
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 326. 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 nonaccrual status, or charge off, are managed by the Chief Credit Officer or as dictated by the Directors Loan Committee and/or Management 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 is 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, are 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.
Purchased Loans
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 ACL 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 accretable yield, which includes income recognized from contractual interest cash flows, for the dates indicated.
(dollars in thousands)20202019
Balance at January 1,$(975)$(1,495)
Net reclassifications from nonaccretable yield— — 
Accretion370 520 
Balance at December 31,$(605)$(975)
Related Party Loans
Certain directors and executive officers of the Company and the Bank have had loan transactions with the Company. 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, in the opinion of management, 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.
The following table summarizes changes in amounts of loans outstanding, both direct and indirect, to those persons during 2020 and 2019.
(dollars in thousands)20202019
Balance at January 1,$52,368$167,884
Additions30,92030,153
Repayments(10,332)(38,204)
Additions due to Changes in Related Parties—9,034
Deletions due to Changes in Related Parties—(116,499)
Balance at December 31, $72,956$52,368