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Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2021

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, 2021 and December 31, 2020 are summarized by type as follows:


	June 30, 2021				December 31, 2020
(dollars in thousands)	Amount		%		Amount		%
Commercial	$	1,359,157	19	%	$	1,437,433	19	%
PPP loans	238,041		3	%	454,771		6	%
Income producing - commercial real estate	3,534,057		48	%	3,687,000		47	%
Owner occupied - commercial real estate	991,936		14	%	997,694		13	%
Real estate mortgage - residential	77,131		1	%	76,592		1	%
Construction - commercial and residential	835,733		12	%	873,261		11	%
Construction - C&I (owner occupied)	161,187		2	%	158,905		2	%
Home equity	60,559		1	%	73,167		1	%
Other consumer	1,757		—		1,389		—
Total loans	7,259,558		100	%	7,760,212		100	%
Less: allowance for credit losses	(92,560)				(109,579)
Net loans (1)	$	7,166,998			$	7,650,633

________________________________________

(1)Excludes accrued interest receivable of $43.5 million and $46.0 million at June 30, 2021 and December 31, 2020, respectively, which is recorded in other assets.

Unamortized net deferred fees amounted to $25.0 million and $30.8 million at June 30, 2021 and December 31, 2020, respectively.

As of June 30, 2021 and December 31, 2020, the Bank serviced $125 million and $124 million, respectively, of multifamily FHA loans, SBA loans and other loan participations that are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

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 real estate. At June 30, 2021, owner occupied - commercial real estate and construction – C&I (owner occupied) represent approximately 16% of the loan portfolio. At June 30, 2021, non-owner occupied commercial real estate and real estate construction represented approximately 60% of the loan portfolio. The combined owner occupied and commercial real estate and construction loans represent approximately 76% of the loan portfolio. Real estate also serves as collateral for loans made for other purposes, resulting in 83% 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 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 June 30, 2021 and was generally variable or adjustable rate. Personal guarantees are generally required, but may be limited. Non-PPP 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 as well as potential recourse 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 3% of the loan portfolio at June 30, 2021 consists of PPP loans to eligible customers. PPP loans are expected to primarily be repaid via forgiveness provisions (under the CARES Act and subsequent legislation) 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 June 30, 2021 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 21 months at June 30, 2021. 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 approval authority. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

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

Commercial permanent loans are generally secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15 to 1.0. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

The Company’s loan portfolio includes acquisition, development and construction (“ADC”) real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.4 billion at June 30, 2021. 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 57.9% of the outstanding ADC loan portfolio at June 30, 2021. 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) the 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 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 these inherent risks, 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, 2021 and 2020. 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 restrict the use of the allowance to absorb losses in other categories.


					Income Producing -				Owner Occupied -				Real Estate				Construction -
					Commercial				Commercial				Mortgage -				Commercial and				Home				Other
(dollars in thousands)	Commercial				Real Estate				Real Estate				Residential				Residential				Equity				Consumer		Total

Three Months Ended June 30, 2021
Allowance for credit losses:
Balance at beginning of period	$	23,701			$	51,510			$	14,315			$	919			$	10,683			$	907			$	35	$	102,070
Loans charged-off	(1,541)				(4,216)				—				—				—				—				—		(5,757)
Recoveries of loans previously charged-off	150				—				—				—				6				—				2		158
Net loans charged-off	(1,391)		—		(4,216)		—		—		—		—		—		6		—		—		—		2		(5,599)
Provision for credit losses	(962)				(1,324)				(1,320)				(37)				(262)				(10)				4		(3,911)
Ending balance	$	21,348	$	—	$	45,970	$	—	$	12,995	$	—	$	882	$	—	$	10,427	$	—	$	897	$	—	$	41	$	92,560

Six Months Ended June 30, 2021
Allowance for credit losses:
Balance at beginning of period	$	26,569			$	55,385			$	14,000			$	1,020			$	11,529			$	1,039			$	37	$	109,579
Loans charged-off	(5,691)				(5,216)				—				—				(206)				—				(1)		(11,114)
Recoveries of loans previously charged-off	246				—				—				—				6				—				15		267
Net loans (charged-off) recoveries	(5,445)				(5,216)				—				—				(200)				—				14		(10,847)
Provision for credit losses- loans	224				(4,199)				(1,005)				(138)				(902)				(142)				(10)		(6,172)
Ending balance	$	21,348			$	45,970			$	12,995			$	882			$	10,427			$	897			$	41	$	92,560

As of June 30, 2021
Allowance for credit losses:
Individually evaluated for impairment	$	4,941			$	4,923			$	436			$	330			$	—			$	172			$	—	$	10,802
Collectively evaluated for impairment	16,407				41,047				12,559				552				10,427				725				41		81,758
Ending balance	$	21,348			$	45,970			$	12,995			$	882			$	10,427			$	897			$	41	$	92,560

Three Months Ended June 30, 2020
Allowance for credit losses:
Balance at beginning of period, prior to adoption of ASC 326	27,346				43,551				9,867				1,369				13,341				818				44		96,336
Loans charged-off	(7,145)				—				—				—								—				—		(7,145)
Recoveries of loans previously charged-off	5				—				—				—								—				1		6
Net loans (charged-off) recoveries	(7,140)				—		—		—		—		—		—		—		—		—		—		1		(7,139)
Provision for credit losses- loans	7,872				8,312				2,474				181				467				294				(1)		19,599
Ending balance	28,078				51,863				12,341		—		1,550		—		13,808		—		1,112		—		44		108,796

Six Months Ended June 30, 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 326	892				11,230				4,674				(301)				(6,143)				245				17		$	10,614
Loans charged-off	(7,145)				(550)				—				—				(1,768)				—				—		(9,463)
Recoveries of loans previously charged-off	74				—				—				—				—				—				4		78
Net loans (charged-off) recoveries	(7,071)				(550)				—				—				(1,768)				—				4		(9,385)
Provision for credit losses- loans	15,425				11,918				1,829				294				4,234				211				(2)		33,909
Ending balance	$	28,078			$	51,863			$	12,341			$	1,550			$	13,808			$	1,112			$	44	$	108,796

As of June 30, 2020
Allowance for credit losses:


Individually evaluated for impairment	$	8,797	$	5,260	$	405	$	746	$	1,383	$	107	$	3	$	16,701
Collectively evaluated for impairment	19,281		46,603		11,936		804		12,425		1,005		41		92,095
Ending balance	$	28,078	$	51,863	$	12,341	$	1,550	$	13,808	$	1,112	$	44	$	108,796

We recorded a reversal of $3.9 million and a positive $19.7 million provision for credit losses (inclusive of the PCL on loans and AFS debt securities) for the three months ended June 30, 2021 and 2020, respectively, under CECL. We recorded a reversal of $6.2 million and a positive $34.0 million provision for credit losses for the six months ended June 30, 2021 and 2020, respectively, under CECL. We recorded $5.6 million and $7.1 million in net charge-offs during the three months ended June 30, 2021 and 2020, respectively. We also recorded $10.8 million and $9.4 million in net charge-offs during the six months ended June 30, 2021 and 2020, respectively.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2021 and December 31, 2020:

June 30, 2021


(dollars in thousands)	Business/Other Assets		Real Estate
Commercial	$	7,450	$	8,520
Income producing - commercial real estate	3,193		27,342
Owner occupied - commercial real estate	—		7,058
Real estate mortgage - residential	—		1,938
Construction - commercial and residential	—		3,659
Home equity	—		564
Other consumer	—		—
Total	$	10,643	$	49,081

December 31, 2020


(dollars in thousands)	Business/Other Assets		Real Estate
Commercial	$	11,326	$	4,026
Income producing - commercial real estate	3,193		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 inform 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.

Based on the most recent analysis performed, amortized cost basis of loans by risk category, class and year of origination is as follows:


June 30, 2021 (dollars in thousands)	Prior				2017				2018				2019				2020				2021		Total
Commercial
Pass	445,359				206,252				194,852				136,249				163,994				96,633		1,243,339
Watch	32,128				11,393				16,407				6,720				10,750				1,944		79,342
Special Mention	1,384				10,386				3,346				3,977				900				—		19,993
Substandard	12,721				678				2,419				540				125				—		16,483
Total	491,592		—		228,709		—		217,024		—		147,486		—		175,769		—		98,577		1,359,157
PPP loans
Pass	—		—		—		—		—		—		—		—		198,313				39,728		238,041
Total	—		—		—		—		—		—		—		—		198,313				39,728		238,041
Income producing - commercial real estate
Pass	713,318				267,101				654,340				574,668				503,679				244,300		2,957,406
Watch	156,867				106,813				—				44,223				34,620				—		342,523
Special Mention	57,361				—				42,544				51,972				—				—		151,877
Substandard	67,753				—				8,518				5,542				438				—		82,251
Total	995,299		—		373,914		—		705,402		—		676,405		—		538,737		—		244,300		3,534,057
Owner occupied - commercial real estate
Pass	403,599				133,224				132,309				65,422				46,712				19,429		800,695
Watch	26,454				3,254				11,982				8,783				2,043				—		52,516
Special Mention	355				—				81,634				19,084				—				—		101,073
Substandard	25,776				1,786				1,693				8,397				—				—		37,652
Total	456,184		—		138,264		—		227,618		—		101,686		—		48,755		—		19,429		991,936
Real estate mortgage - residential
Pass	18,663				10,160				13,430				16,922				4,789				10,673		74,637
Watch	598				—				—				—				—				—		598
Substandard	1,896				—				—				—				—				—		1,896
Total	21,157		—		10,160		—		13,430		—		16,922		—		4,789		—		10,673		77,131
Construction - commercial and residential
Pass	64,042				204,514				198,089				118,410				148,352				40,809		774,216
Watch	203				56,360				1,295				—				—				—		57,858
Substandard	—		—				3,468		3,468		191		191		—				—		—		3,659
Total	64,245		—		260,874		—		202,852		—		118,601		—		148,352		—		40,809		835,733
Construction - C&I (owner occupied)																							—
Pass	17,572				1,979				20,373				24,552				54,309				688		119,473
Watch	4,607				401				5,699				—				—				—		10,707
Special Mention	110				—				—				15,182				15,715				—		31,007
Total	22,289		—		2,380		—		26,072		—		39,734		—		70,024		—		688		161,187
Home Equity																							—
Pass	28,213				6,241				1,773				3,642				11,819				6,945		58,633
Watch	1,314				—				—				—				—				—		1,314
Substandard	564				—				—				48				—				—		612
Total	30,091		—		6,241		—		1,773		—		3,690		—		11,819		—		6,945		60,559
Other Consumer																							—
Pass	1,502				55				58				77				26				33		1,751
Substandard	6				—				—				—				—				—		6
Total	1,508		—		55		—		58		—		77		—		26		—		33		1,757
Total Recorded Investment	$	2,082,365	$	—	$	1,020,597	$	—	$	1,394,229	$	—	$	1,104,601	$	—	$	1,196,584	$	—	$	461,182	7,259,558


December 31, 2020 (dollars in thousands)	Prior		2016		2017		2018		2019		2020		Total
Commercial
Pass	323,660		111,886		249,541		211,551		164,166		227,095		1,287,899
Watch	31,903		5,315		19,145		21,013		7,740		7,979		93,095
Special Mention	4,969		1,692		8,969		3,385		5,599		2,169		26,783
Substandard	17,679		5,803		1,820		3,525		829		—		29,656
Total	378,211		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													—
Pass	560,915		347,946		397,953		622,276		643,388		512,387		3,084,865
Watch	152,367		62,912		91,636		89,852		44,555		34,195		475,517
Special Mention	213		—		—		—		51,969		—		52,182
Substandard	58,555		800		4,656		4,883		5,542		—		74,436
Total	772,050		411,658		494,245		717,011		745,454		546,582		3,687,000
Owner occupied - commercial real estate
Pass	343,371		100,272		111,996		136,644		59,681		49,584		801,548
Watch	16,014		5,011		2,640		10,338		15,501		—		49,504
Special Mention	418		—		—		83,110		19,091		—		102,619
Substandard	28,228		784		1,908		2,048		10,151		904		44,023
Total	388,031		106,067		116,544		232,140		104,424		50,488		997,694
Real estate mortgage - residential
Pass	16,310		2,693		10,199		12,746		18,209		10,116		70,273
Watch	1,996		699		—		728		—		—		3,423
Substandard	1,198		1,698		—		—		—		—		2,896
Total	19,504		5,090		10,199		13,474		18,209		10,116		76,592
Construction - commercial and residential
Pass	21,290		60,486		266,788		297,480		105,679		71,297		823,020
Watch	929		—		42,751		3,448		—		—		47,128
Special Mention	12		—		—		2,895		—		—		2,907
Substandard	—		—		206		—		—		—		206
Total	22,231		60,486		309,745		303,823		105,679		71,297		873,261
Construction - C&I (owner occupied)
Pass	8,278		10,476		6,637		30,340		22,209		40,101		118,041
Watch	3,573		—		2,118		4,935		—		—		10,626
Special Mention	124		—		—		—		14,436		15,678		30,238
Total	11,975		10,476		8,755		35,275		36,645		55,779		158,905
Home Equity
Pass	33,226		4,493		8,227		7,827		4,224		12,924		70,921
Watch	1,596		—		—		—		—		—		1,596
Substandard	603		—		—		—		47		—		650
Total	35,425		4,493		8,227		7,827		4,271		12,924		73,167
Other Consumer
Pass	929		190		64		74		94		31		1,382
Substandard	7		—		—		—		—		—		7
Total	936		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

The Company’s credit quality indicators are generally updated annually; however, credits rated watch or below are reviewed more frequently.

Nonaccrual and Past Due Loans

As part of the Company's comprehensive loan review process, management committees carefully evaluate loans that are past-due 30 days or more. The committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are 90 days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.

The table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of June 30, 2021 and December 31, 2020:


			Loans		Loans		Loans						Total Recorded
	Current		30-59 Days		60-89 Days		90 Days or		Total Past				Investment in
(dollars in thousands)	Loans		Past Due		Past Due		More Past Due		Due Loans		Nonaccrual		Loans
June 30, 2021
Commercial	$	1,341,971	$	1,477	$	835	$	—	$	2,312	$	14,874	$	1,359,157
PPP loans	238,041		—		—		—		—		—		238,041
Income producing - commercial real estate	3,512,671		—		—		—		—		21,386		3,534,057
Owner occupied - commercial real estate	984,448		—		430		—		430		7,058		991,936
Real estate mortgage - residential	75,193		—		—		—		—		1,938		77,131
Construction - commercial and residential	832,074		—		—		—		—		3,659		835,733
Construction - C&I (owner occupied)	160,335		852		—		—		852		—		161,187
Home equity	59,715		214		66		—		280		564		60,559
Other consumer	1,693		64		—		—		64		—		1,757
Total	$	7,206,141	$	2,607	$	1,331	$	—	$	3,938	$	49,479	$	7,259,558

December 31, 2020
Commercial	$	1,394,244	$	6,411	$	21,426	$	—	$	27,837	$	15,352	$	1,437,433
PPP loans	454,771		—		—		—		—		—		454,771
Income producing - commercial real estate	3,616,207		—		51,913		—		51,913		18,880		3,687,000
Owner occupied - commercial real estate	960,364		10,630		3,542		—		14,172		23,158		997,694
Real estate mortgage – residential	72,231		1,430		—		—		1,430		2,931		76,592
Construction - commercial and residential	869,723		2,992		340		—		3,332		206		873,261
Construction- C&I (owner occupied)	158,905		—		—		—		—		—		158,905
Home equity	67,732		467		4,552		—		5,019		416		73,167
Other consumer	1,367		21		1		—		22		—		1,389
Total	$	7,595,544	$	21,951	$	81,774	$	—	$	103,725	$	60,943	$	7,760,212

The following presents the nonaccrual loans as of June 30, 2021 and December 31, 2020:


	June 30, 2021
	Nonaccrual with		Nonaccrual with		Total
	No Allowance		an Allowance		Nonaccrual
(dollars in thousands)	for Credit Loss		for Credit Loss		Loans

Commercial	$	7,454	$	7,420	$	14,874
Income producing - commercial real estate	5,271		16,115		21,386
Owner occupied - commercial real estate	5,272		1,786		7,058
Real estate mortgage - residential	240		1,698		1,938
Construction - commercial and residential	3,659		—		3,659
Home equity	367		197		564
Total (1)(2)	$	22,263	$	27,216	$	49,479


	December 31, 2020
	Nonaccrual with		Nonaccrual with		Total
	No Allowance		an Allowance		Nonaccrual
(dollars in thousands)	for Credit Loss		for Credit Loss		Loans

Commercial	$	3,263	$	12,089	$	15,352
Income producing - commercial real estate	6,500		12,380		18,880
Owner occupied - commercial real estate	18,941		4,217		23,158
Real estate mortgage - residential	1,234		1,697		2,931
Construction - commercial and residential	—		206		206
Home equity	416		—		416
Total (1)(2)	$	30,354	$	30,589	$	60,943

(1)Excludes TDRs that were performing under their restructured terms totaling $10.2 million at June 30, 2021 and $10.5 million at December 31, 2020.

(2)Gross interest income of $1.5 million and $3.7 million would have been recorded for the six months ended June 30, 2021 and December 31, 2020, respectively, if nonaccrual loans shown above had been current and in accordance with their original terms, while $44 thousand interest was actually recorded on such loans for the six months ended June 30, 2021 or 2020. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

Modifications

A modification of a loan constitutes a TDR when the 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. The most common change in terms provided by the Company is an extension of an interest-only term. As of June 30, 2021, 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 allows for a deferral of payments for 90 days, which we extended for an additional 90 days, 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. As of June 30, 2021, we had ongoing temporary modifications on approximately 31 loans representing approximately $77 million (approximately 1.1% of total loans) in outstanding balances, as compared to 36 loans representing approximately $72 million (approximately 0.9% of total loans) at December 31, 2020. 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 for the periods ended June 30, 2021 and 2020.


	For the Six Months Ended June 30, 2021
				Income		Owner
	Number			Producing -		Occupied -		Construction -
	of			Commercial		Commercial		Commercial
(dollars in thousands)	Contracts	Commercial		Real Estate		Real Estate		Real Estate		Total
Troubled debt restructurings
Restructured accruing	5	$	1,096	$	9,149	$	—	$	—	$	10,245
Restructured nonaccruing	2	—		6,342		—		—		6,342
Total	7	$	1,096	$	15,491	$	—	$	—	$	16,587

Specific allowance		$	364	$	2,708	$	—	$	—	$	3,072

Restructured and subsequently defaulted		$	—	$	6,342	$	—	$	—	$	6,342


	For the Six Months Ended June 30, 2020
				Income		Owner
	Number			Producing -		Occupied -		Construction -
	of			Commercial		Commercial		Commercial
(dollars in thousands)	Contracts	Commercial		Real Estate		Real Estate		Real Estate		Total
Troubled debt restructurings
Restructured accruing	10	$	1,420	$	10,016	$	836	$	—	$	12,272
Restructured nonaccruing	3	138		5,542		2,370		—		8,050
Total	13	$	1,558	$	15,558	$	3,206	$	—	$	20,322

Specific allowance		$	257	$	1,295	$	—	$	—	$	1,552

Restructured and subsequently defaulted		$	138	$	5,542	$	2,370	$	—	$	8,050

The Company had seven TDRs at June 30, 2021 totaling approximately $16.6 million. Five of these loans totaling approximately $10.2 million are performing under their modified terms as of June 30, 2021.

For the first six months of 2021 there were no performing TDR loans that defaulted on their modified terms; in the first six months of 2020, one performing TDR loan, with a balance of $5.5 million, defaulted on its modified terms and was placed on nonaccrual status.

A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual status. For the six months ended June 30, 2021, one previously nonperforming restructured loan had its collateral sold and all principal collected along with partial collection of delinquent interest; in addition, one restructured loan purchased as part of the 2014 acquisition of Virginia Heritage Bank has now had its full carrying value collected, while additional payments will recover previously written off principal and interest, and one nonperforming restructured loan was charged off. No similar transactions occurred during the three months ended June 30, 2021. During the six months ended June 30, 2021 and 2020, no loans were re-underwritten and removed from TDR status. 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 the six months ended June 30, 2021 and 2020, there were no loans modified in a TDR.