LOANS

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

LOANS AND LEASES

Note 5 – Loans

The lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type.

Outstanding loan balances at December 31, 2019 and 2018 are net of unearned income including net deferred loan fees of $1.8 million and $0.9 million, respectively.

The loan portfolio segment balances at December 31 are presented in the following table:

(In thousands)		2019		2018
Residential real estate:
	Residential mortgage	$	1,149,327	$	1,228,247
	Residential construction		146,279		186,785
Commercial real estate:
	Commercial owner occupied real estate		1,288,677		1,202,903
	Commercial investor real estate		2,169,156		1,958,395
	Commercial AD&C		684,010		681,201
Commercial Business			801,019		796,264
Consumer			466,764		517,839
	Total loans	$	6,705,232	$	6,571,634

Portfolio Segments

The Company currently manages its credit products and the respective exposure to credit losses (credit risk) by the following specific portfolio segments (classes) which are levels at which the Company develops and documents its systematic methodology to determine the allowance for loan losses attributable to each respective portfolio segment. These segments are:

 Commercial business loans – Commercial loans are made to provide funds for equipment and general corporate needs. Repayment of a loan primarily uses the funds obtained from the operation of the borrower’s business. Commercial loans also include lines of credit that are utilized to finance a borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory.

 Commercial acquisition, development and construction loans –Commercial acquisition, development and construction loans are intended to finance the construction of commercial properties and include loans for the acquisition and development of land. Construction loans represent a higher degree of risk than permanent real estate loans and may be affected by a variety of factors such as the borrower’s ability to control costs and adhere to time schedules and the risk that constructed units may not be absorbed by the market within the anticipated time frame or at the anticipated price. The loan commitment on these loans often includes an interest reserve that allows the lender to periodically advance loan funds to pay interest charges on the outstanding balance of the loan.

 Commercial owner occupied real estate loans - Commercial owned-occupied real estate loans consist of commercial mortgage loans secured by owner occupied properties where an established banking relationship exists and involves a variety of property types to conduct the borrower’s operations. The primary source of repayment for this type of loan is the cash flow from the business and is based upon the borrower’s financial health and the ability of the borrower and the business to repay.

 Commercial investor real estate loans - Commercial investor real estate loans consist of loans secured by non-owner occupied properties where an established banking relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. This commercial real estate category contains mortgage loans to the developers and owners of commercial real estate where the borrower intends to operate or sell the property at a profit and use the income stream or proceeds from the sale(s) to repay the loan.

 Consumer loans - This category of loans includes primarily home equity loans and lines, installment loans, personal lines of credit and marine loans. The home equity category consists mainly of revolving lines of credit to consumers which are secured by residential real estate. These loans are typically secured with second mortgages on the homes. Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles.

 Residential mortgage loans – The residential real estate category contains permanent mortgage loans principally to consumers secured by residential real estate. Residential real estate loans are evaluated for the adequacy of repayment sources at the time of approval, based upon measures including credit scores, debt-to-income ratios, and collateral values. Loans may be either conforming or non-conforming.

 Residential construction loans - The Company makes residential real estate construction loans generally to provide interim financing on residential property during the construction period. Borrowers are typically individuals who will ultimately occupy the single-family dwelling. Loan funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections.

The fair value of the financial assets acquired in the Company’s acquisition of WashingtonFirst Bancshares, Inc. (“WashingtonFirst”) on January 1, 2018 (the “acquisition date”) included loans receivable with a gross amortized cost basis of $1.7 billion. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. Interest and credit fair value adjustments related to loans acquired without evidence of credit quality deterioration are accreted or amortized into interest income over the remaining expected lives of the loans. The specific credit adjustment on acquired credit impaired loans includes accretable and non-accretable components. Of the $14.5 million specific credit mark on acquired credit impaired loans, approximately $4.0 million was estimated to be an accretable adjustment recognized over the remaining expected lives of the loans and $10.5 million was estimated to be non-accretable adjustment.

In conjunction with the WashingtonFirst acquisition, the acquired loan portfolio was accounted for at fair value as follows:

(Dollars in thousands)	January 1, 2018
Gross amortized cost basis at January 1, 2018	$	1,697,760
Interest rate fair value adjustment		15,370
Credit fair value adjustment on pools of homogeneous loans		(22,421)
Credit fair value adjustment on purchased credit impaired loans		(14,518)
Fair value of acquired loan portfolio at January 1, 2018	$	1,676,191

The following table presents the acquired credit impaired loans receivable as of the acquisition date:

(Dollars in thousands)	January 1, 2018
Contractual principal and interest at acquisition	$	49,412
Contractual cash flows not expected to be collected (Nonaccretable yield)		(17,915)
Expected cash flows at acquisition		31,497
Interest component of expected cash flows (Accretable yield)		(3,988)
Fair value of purchased credit impaired loans	$	27,509

The outstanding balance of purchased credit impaired loans receivable totaled $41.9 million, $26.0 million and $12.7 million at January 1, 2018, December 31, 2018 and December 31, 2019, respectively. The fair value of purchased credit impaired loans was $9.9 million and $15.3 million at December 31, 2019 and December 31, 2018, respectively. The decrease in the outstanding amounts of purchased credit impaired loans receivable from the acquisition date through the current period was driven by efforts to resolve the most material credit deteriorated borrowers. During 2018, liquidation of collateral resulted in full pay-off of the outstanding principal balances of $12.4 million and the related release of accretable and non-accretable adjustments into interest income in the total amounts of $0.8 million and $1.3 million, respectively. During the current year, the Company settled additional purchased credit impaired loans with total outstanding balances of $5.8 million resulting in the related release of accretable and non-accretable adjustments into interest income in the total amounts of $0.2 million and $1.6 million, respectively.

Activity for the accretable yield since the acquisition date was as follows:

	For the Year Ended,
(Dollars in thousands)	December 31, 2019		December 31, 2018
Accretable yield at the beginning of the period	$	1,279	$	-
Addition of accretable yield due to acquisition		-		3,988
Accretion into interest income		(1,073)		(1,860)
Disposals (including maturities, foreclosures, and charge-offs)		(199)		(849)
Accretable yield at the end of the period.	$	7	$	1,279

Loans to Related Parties

Certain directors and executive officers have loan transactions with the Company. The following schedule summarizes changes in amounts of loans outstanding, both direct and indirect, to these persons during the periods indicated:

(In thousands)		2019		2018		2017
Balance at January 1		$	54,208	$	36,712	$	41,988
	Additions		4,737		21,871		6,140
	Repayments		(7,578)		(4,375)		(11,416)
Balance at December 31		$	51,367	$	54,208	$	36,712