Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 2017

Receivables [Abstract]

Loans and Allowance for Credit Losses

Note 5. Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, D.C. metropolitan area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

Loans, net of unamortized net deferred fees, at June 30, 2017, December 31, 2016, and June 30, 2016 are summarized by type as follows:

	June 30, 2017						December 31, 2016						June 30, 2016
(dollars in thousands)	Amount			%			Amount			%			Amount			%
Commercial	$	1,319,736			22	%	$	1,200,728			21	%	$	1,140,863			21	%
Income producing - commercial real estate		2,596,230			43	%		2,509,517			44	%		2,461,581			45	%
Owner occupied - commercial real estate		660,066			11	%		640,870			12	%		584,358			11	%
Real estate mortgage - residential		151,115			3	%		152,748			3	%		150,129			3	%
Construction - commercial and residential*		1,034,902			17	%		932,531			16	%		847,268			16	%
Construction - C&I (owner occupied)		116,577			2	%		126,038			2	%		100,063			2	%
Home equity		103,671			2	%		105,096			2	%		110,697			2	%
Other consumer		2,734			—			10,365			—			8,470			—
Total loans		5,985,031			100	%		5,677,893			100	%		5,403,429			100	%
Less: allowance for credit losses		(61,047	)					(59,074	)					(56,536	)
Net loans	$	5,923,984					$	5,618,819					$	5,346,893

*Includes land loans

Unamortized net deferred fees amounted to $22.4 million, $22.3 million, and $20.2 million at June 30, 2017, December 31, 2016, and June 30, 2016, respectively.

As of June 30, 2017 and December 31, 2016, the Bank serviced $123.1 million and $128.8 million, respectively, of SBA loans and other loan participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

The Company’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and income producing real estate. At June 30, 2017, owner occupied - commercial real estate and construction - C&I (owner occupied) represent approximately 13% of the loan portfolio. At June 30, 2017, 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 loans represent approximately 73% of the loan portfolio. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees may be required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Company is also an active traditional commercial lender providing loans for a variety of purposes, including working capital, equipment and account receivable financing. This loan category represents approximately 22% of the loan portfolio at June 30, 2017 and was generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent approximately 2% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the unguaranteed portion of the credit. The Company generally sells the guaranteed portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans are subject to a maximum loan size established by the SBA.

Approximately 2% of the loan portfolio at June 30, 2017 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a small portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

Approximately 3% of the loan portfolio consists of residential mortgage loans. The repricing duration of these loans was 20 months. These credits represent first liens on residential property loans originated by the Bank. While the Bank’s general practice is to originate and sell (servicing released) loans made by its Residential Lending department, from time to time certain loan characteristics do not meet the requirements of third party investors and these loans are instead maintained in the Bank’s portfolio until they are resold to another investor at a later date or mature.

Loans are secured primarily by duly recorded first deeds of trust or mortgages. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and; 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums.

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.

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

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

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

The Company’s loan portfolio includes ADC real estate loans including both investment and owner occupied projects. ADC loans amounted to $1.15 billion at June 30, 2017. A portion of the ADC portfolio, both speculative and non-speculative, includes loan funded interest reserves at origination. ADC loans are serviced by loan funded interest reserves and represent approximately 75% of the outstanding ADC loan portfolio at June 30, 2017. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including: (1) the feasibility of the project; (2) the experience of the sponsor; (3) the creditworthiness of the borrower and guarantors; (4) borrower equity contribution; and (5) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including: (1) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (2) a construction loan administration department independent of the lending function; (3) third party independent construction loan inspection reports; (4) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (5) quarterly commercial real estate construction meetings among senior Company management, which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. 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 may bear current interest at a rate with a significant premium to normal market rates. Other loan transactions may carry a standard rate of current interest, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

The following tables detail activity in the allowance for credit losses by portfolio segment for the three and six months ended June 30, 2017 and 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(dollars in thousands)	Commercial			Income Producing Commercial Real Estate			Owner Occupied Commercial Real Estate		Real Estate Mortgage Residential			Construction Commercial and Residential			Home Equity			Other Consumer			Total
Three months ended June 30, 2017
Allowance for credit losses:
Balance at beginning of period	$	14,583		$	21,384		$	4,026	$	1,106		$	17,356		$	1,088		$	305		$	59,848
Loans charged-off		—			(970	)		—		—			—			—			(3	)		(973	)
Recoveries of loans previously charged-off		255			—			1		1			342			2			5			606
Net loans (charged-off) recoveries		255			(970	)		1		1			342			2			2			(367	)
Provision for credit losses		(613	)		2,894			162		(26	)		(971	)		126			(6	)		1,566
Ending balance	$	14,225		$	23,308		$	4,189	$	1,081		$	16,727		$	1,216		$	301		$	61,047
Six months ended June 30, 2017
Allowance for credit losses:
Balance at beginning of period	$	14,700		$	21,105		$	4,010	$	1,284		$	16,487		$	1,328		$	160		$	59,074
Loans charged-off		(137	)		(1,470	)		—		—			—			—			(66	)		(1,673	)
Recoveries of loans previously charged-off		268			50			2		3			345			3			12			683
Net loans charged-off		131			(1,420	)		2		3			345			3			(54	)		(990	)
Provision for credit losses		(606	)		3,623			177		(206	)		(105	)		(115	)		195			2,963
Ending balance	$	14,225		$	23,308		$	4,189	$	1,081		$	16,727		$	1,216		$	301		$	61,047
As of June 30, 2017
Allowance for credit losses:
Individually evaluated for impairment	$	3,070		$	2,013		$	350	$	—		$	350		$	90		$	52		$	5,925
Collectively evaluated for impairment		11,155			21,295			3,839		1,081			16,377			1,126			249			55,122
Ending balance	$	14,225		$	23,308		$	4,189	$	1,081		$	16,727		$	1,216		$	301		$	61,047
Three months ended June 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	13,622		$	15,794		$	3,931	$	1,051		$	18,466		$	1,483		$	261		$	54,608
Loans charged-off		(1,888	)		(1	)		—		—			—			(92	)		(18	)		(1,999	)
Recoveries of loans previously charged-off		14			—			1		1			8			7			8			39
Net loans (charged-off) recoveries		(1,874	)		(1	)		1		1			8			(85	)		(10	)		(1,960	)
Provision for credit losses		1,638			3,279			270		9			(1,450	)		158			(16	)		3,888
Ending balance	$	13,386		$	19,072		$	4,202	$	1,061		$	17,024		$	1,556		$	235		$	56,536
Six months ended June 30, 2016
Allowance for credit losses:
Balance at beginning of period	$	11,563		$	14,122		$	3,279	$	1,268		$	21,088		$	1,292		$	75		$	52,687
Loans charged-off		(2,693	)		(591	)		—		—			—			(96	)		(25	)		(3,405	)
Recoveries of loans previously charged-off		86			4			2		3			204			8			16			323
Net loans charged-off		(2,607	)		(587	)		2		3			204			(88	)		(9	)		(3,082	)
Provision for credit losses		4,430			5,537			921		(210	)		(4,268	)		352			169			6,931
Ending balance	$	13,386		$	19,072		$	4,202	$	1,061		$	17,024		$	1,556		$	235		$	56,536
As of June 30, 2016
Allowance for credit losses:
Individually evaluated for impairment	$	2,634		$	1,697		$	450	$	—		$	350		$	88		$	—		$	5,219
Collectively evaluated for impairment		10,752			17,375			3,752		1,061			16,674			1,468			235			51,317
Ending balance	$	13,386		$	19,072		$	4,202	$	1,061		$	17,024		$	1,556		$	235		$	56,536

The Company’s recorded investments in loans as of June 30, 2017, December 31, 2016 and June 30, 2016 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

(dollars in thousands)	Commercial		Income Producing Commercial Real Estate		Owner occupied Commercial Real Estate		Real Estate Mortgage Residential		Construction Commercial and Residential		Home Equity		Other Consumer		Total
June 30, 2017
Recorded investment in loans:
Individually evaluated for impairment	$	8,929	$	12,339	$	5,370	$	—	$	9,028	$	594	$	93	$	36,353
Collectively evaluated for impairment		1,310,807		2,583,891		654,696		151,115		1,142,451		103,077		2,641		5,948,678
Ending balance	$	1,319,736	$	2,596,230	$	660,066	$	151,115	$	1,151,479	$	103,671	$	2,734	$	5,985,031
December 31, 2016
Recorded investment in loans:
Individually evaluated for impairment	$	10,437	$	15,057	$	2,093	$	241	$	6,517	$	—	$	126	$	34,471
Collectively evaluated for impairment		1,190,291		2,494,460		638,777		152,507		1,052,052		105,096		10,239		5,643,422
Ending balance	$	1,200,728	$	2,509,517	$	640,870	$	152,748	$	1,058,569	$	105,096	$	10,365	$	5,677,893
June 30, 2016
Recorded investment in loans:
Individually evaluated for impairment	$	12,402	$	19,778	$	1,699	$	254	$	5,413	$	121	$	—	$	39,667
Collectively evaluated for impairment		1,128,461		2,441,803		582,659		149,875		941,918		110,576		8,470		5,363,762
Ending balance	$	1,140,863	$	2,461,581	$	584,358	$	150,129	$	947,331	$	110,697	$	8,470	$	5,403,429

At June 30, 2017, nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) and Virginia Heritage Bank (“Virginia Heritage”) have a carrying value of $304 thousand and $533 thousand, and an unpaid principal balance of $354 thousand and $1.6 million, respectively, and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses.

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:

Pass: Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

Watch: Loan paying as agreed with generally acceptable asset quality; however the obligor’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the obligor could not sustain any further setbacks. Credit is expected to be strengthened through improved obligor performance and/or additional collateral within a reasonable period of time.

Special Mention: Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.

Classified: Classified (a) Substandard - Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

The Company’s credit quality indicators are updated generally on a quarterly basis, but no less frequently than annually. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of June 30, 2017, December 31, 2016 and June 30, 2016.

(dollars in thousands)	Pass		Watch and Special Mention		Substandard		Doubtful		Total Loans
June 30, 2017
Commercial	$	1,276,713	$	34,094	$	8,929	$	—	$	1,319,736
Income producing - commercial real estate		2,564,780		19,111		12,339		—		2,596,230
Owner occupied - commercial real estate		642,342		12,354		5,370		—		660,066
Real estate mortgage – residential		150,449		666		—		—		151,115
Construction - commercial and residential		1,139,629		2,822		9,028		—		1,151,479
Home equity		101,963		1,114		594		—		103,671
Other consumer		2,639		2		93		—		2,734
Total	$	5,878,515	$	70,163	$	36,353	$	—	$	5,985,031
December 31, 2016
Commercial	$	1,160,185	$	30,106	$	10,437	$	—	$	1,200,728
Income producing - commercial real estate		2,489,407		5,053		15,057		—		2,509,517
Owner occupied - commercial real estate		630,827		7,950		2,093		—		640,870
Real estate mortgage – residential		151,831		676		241		—		152,748
Construction - commercial and residential		1,051,445		607		6,517		—		1,058,569
Home equity		103,484		1,612		—		—		105,096
Other consumer		10,237		2		126		—		10,365
Total	$	5,597,416	$	46,006	$	34,471	$	—	$	5,677,893
June 30, 2016
Commercial	$	1,112,108	$	17,842	$	10,913	$	—	$	1,140,863
Income producing - commercial real estate		2,424,180		22,763		14,638		—		2,461,581
Owner occupied - commercial real estate		572,598		10,499		1,261		—		584,358
Real estate mortgage – residential		149,181		694		254		—		150,129
Construction - commercial and residential		938,148		3,770		5,413		—		947,331
Home equity		108,954		1,622		121		—		110,697
Other consumer		8,467		3		—		—		8,470
Total	$	5,313,636	$	57,193	$	32,600	$	—	$	5,403,429

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table presents, by class of loan, information related to nonaccrual loans as of June 30, 2017, December 31, 2016 and June 30, 2016.

(dollars in thousands)	June 30, 2017		December 31, 2016		June 30, 2016
Commercial	$	3,202	$	2,490	$	3,775
Income producing - commercial real estate		1,471		10,539		10,234
Owner occupied - commercial real estate		5,370		2,093		1,261
Real estate mortgage - residential		304		555		576
Construction - commercial and residential		6,115		2,072		5,413
Home equity		594		—		121
Other consumer		92		126		—
Total nonaccrual loans (1)(2)	$	17,148	$	17,875	$	21,380

(1) Excludes troubled debt restructurings (“TDRs”) that were performing under their restructured terms totaling $12.7 million at June 30, 2017, as compared to $7.9 million at December 31, 2016 and $7.3 million at June 30, 2016.

(2) Gross interest income of $322 thousand and $626 thousand would have been recorded for the three and six months ended June 30, 2017, if nonaccrual loans shown above had been current and in accordance with their original terms while interest actually recorded on such loans was $265 thousand and $355 thousand for the three and six months ended June 30, 2017. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

The following table presents, by class of loan, an aging analysis and the recorded investments in loans past due as of June 30, 2017 and December 31, 2016.

(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
June 30, 2017
Commercial	$	3,366	$	1,007	$	3,202	$	7,575	$	1,312,161	$	1,319,736
Income producing - commercial real estate		4,560		4,195		1,471		10,226		2,586,004		2,596,230
Owner occupied - commercial real estate		2,080		5,195		5,370		12,645		647,421		660,066
Real estate mortgage – residential		1,011		—		304		1,315		149,800		151,115
Construction - commercial and residential		—		—		6,115		6,115		1,145,364		1,151,479
Home equity		157		—		594		751		102,920		103,671
Other consumer		11		—		92		103		2,631		2,734
Total	$	11,185	$	10,397	$	17,148	$	38,730	$	5,946,301	$	5,985,031
December 31, 2016
Commercial	$	1,634	$	757	$	2,490	$	4,881	$	1,195,847	$	1,200,728
Income producing - commercial real estate		511		—		10,539		11,050		2,498,467		2,509,517
Owner occupied - commercial real estate		3,987		3,328		2,093		9,408		631,462		640,870
Real estate mortgage – residential		1,015		163		555		1,733		151,015		152,748
Construction - commercial and residential		360		1,342		2,072		3,774		1,054,795		1,058,569
Home equity		—		—		—		—		105,096		105,096
Other consumer		101		9		126		236		10,129		10,365
Total	$	7,608	$	5,599	$	17,875	$	31,082	$	5,646,811	$	5,677,893

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following table presents, by class of loan, information related to impaired loans for the periods ended June 30, 2017, December 31, 2016 and June 30, 2016.

	Unpaid Contractual		Recorded Investment		Recorded Investment		Total				Average Recorded Investment				Interest Income Recognized
(dollars in thousands)	Principal Balance		With No Allowance		With Allowance		Recorded  Investment		Related Allowance		Quarter To Date		Year To Date		Quarter To Date		Year To Date
June 30, 2017
Commercial	$	8,988	$	2,805	$	3,514	$	6,319	$	3,070	$	5,950	$	5,842	$	24	$	66
Income producing - commercial real estate		10,683		6,233		4,450		10,683		2,013		10,351		11,879		204		252
Owner occupied - commercial real estate		5,713		4,927		786		5,713		350		4,356		3,731		20		20
Real estate mortgage – residential		304		304		—		304		—		307		390		—		—
Construction - commercial and residential		6,115		5,582		533		6,115		350		4,685		3,814		14		14
Home equity		594		494		100		594		90		297		198		2		2
Other consumer		92		—		92		92		52		93		104		—		—
Total	$	32,489	$	20,345	$	9,475	$	29,820	$	5,925	$	26,039	$	25,958	$	264	$	354
December 31, 2016
Commercial	$	8,296	$	2,532	$	3,095	$	5,627	$	2,671	$	12,620	$	12,755	$	79	$	191
Income producing - commercial real estate		14,936		5,048		9,888		14,936		1,943		16,742		17,533		54		198
Owner occupied - commercial real estate		2,483		1,691		792		2,483		350		2,233		2,106		—		13
Real estate mortgage – residential		555		555		—		555		—		246		249		—		—
Construction - commercial and residential		2,072		1,535		537		2,072		522		5,091		5,174		—		—
Home equity		—		—		—		—		—		78		89		—		—
Other consumer		126		—		126		126		113		42		32		2		4
Total	$	28,468	$	11,361	$	14,438	$	25,799	$	5,599	$	37,052	$	37,938	$	135	$	406
June 30, 2016
Commercial	$	17,471	$	150	$	12,252	$	12,402	$	2,634	$	12,782	$	12,747	$	42	$	58
Income producing - commercial real estate		19,778		—		19,778		19,778		1,697		19,842		15,267		58		116
Owner occupied - commercial real estate		1,699		—		1,699		1,699		450		1,712		1,725				—
Real estate mortgage – residential		254		254		—		254		—		256		280				—
Construction - commercial and residential		5,413		4,871		542		5,413		350		5,418		7,096				—
Home equity		121		—		121		121		88		122		135				—
Other consumer		—		—		—		—		—		—		7				—
Total	$	44,736	$	5,275	$	34,392	$	39,667	$	5,219	$	40,132	$	37,257	$	100	$	174

Modifications

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. As of June 30, 2017, all performing TDRs were categorized as interest-only modifications.

Loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following table presents by class, information related to loans modified in a TDR during the three months ended June 30, 2017 and 2016.

	For the Three Months Ended June 30, 2017
(dollars in thousands)	Number of Contracts		Commercial		Income Producing - Commercial Real Estate		Owner Occupied - Commercial Real Estate		Construction - Commercial Real Estate		Total
Troubled debt restructings
Restructured accruing		1	$	—	$	4,815	$	—	$	—	$	4,815
Restructured non-accruing		—		—		—		—		—		—
Total		1	$	—	$	4,815	$	—	$	—	$	4,815
Increase in allowance (as of period end)			$	15	$	800	$	—	$	—	$	815
Restructured and subsequently defaulted			$	—	$	—	$	—	$	—	$	—

	For the Three Months Ended June 30, 2016
(dollars in thousands)	Number of Contracts		Commercial		Income Producing - Commercial Real Estate		Owner Occupied - Commercial Real Estate		Construction - Commercial Real Estate		Total
Troubled debt restructings
Restructured accruing		2	$	590	$	—	$	—	$	—	$	590
Restructured non-accruing		—		—		—		—		—		—
Total		2	$	590	$	—	$	—	$	—	$	590
Increase in allowance (as of period end)			$	—	$	—	$	—	$	—	$	—
Restructured and subsequently defaulted			$	—	$	—	$	—	$	—	$	—

The following table presents by class, the recorded investment of loans modified in TDRs held by the Company during the six months ended June 30, 2017 and June 30, 2016.

	For the Six Months Ended June 30, 2017
(dollars in thousands)	Number of Contracts		Commercial		Income Producing - Commercial Real Estate		Owner Occupied - Commercial Real Estate		Construction - Commercial Real Estate		Total
Troubled debt restructings
Restructured accruing		9	$	3,117	$	9,212	$	343	$	—	$	12,672
Restructured non-accruing		2		190		696		—		—		886
Total		11	$	3,307	$	9,908	$	343	$	—	$	13,558
Specific allowance			$	870	$	1,900	$	—	$	—	$	2,770
Restructured and subsequently defaulted			$	237	$	—	$	—	$	—	$	237

	For the Six Months Ended June 30, 2016
(dollars in thousands)	Number of Contracts		Commercial		Income Producing - Commercial Real Estate		Owner Occupied - Commercial Real Estate		Construction - Commercial Real Estate		Total
Troubled debt restructings
Restructured accruing		8	$	1,751	$	5,140	$	438	$	—	$	7,329
Restructured non-accruing		2		204		—		—		4,998		5,202
Total		10	$	1,955	$	5,140	$	438	$	4,998	$	12,531
Specific allowance			$	49	$	44	$	—	$	—	$	93
Restructured and subsequently defaulted			$	—	$	—	$	—	$	4,998	$	4,998

The Company had eleven TDR’s at June 30, 2017 totaling approximately $13.6 million. Nine of these loans, totaling approximately $12.7 million, are performing under their modified terms. During the six months of 2017, there was one default on a $237 thousand restructured loan which was charged off, as compared to the same period in 2016, which had one default on a $5.0 million restructured loan. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.  There were no nonperforming TDRs reclassified to nonperforming loans during the six months ended June 30, 2017. There was one nonperforming TDR totaling $5.0 million reclassified to nonperforming loans during the six months ended June 30, 2016. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There was one loan totaling $4.8 million modified in a TDR during the three months ended June 30, 2017, as compared to the three months ended June 30, 2016 which had two loans totaling $590 thousand modified in a TDR.