Loans and Allowance for Loan Losses

Portfolio Segmentation:

At March 31, 2019 and December 31, 2018, loans are summarized as follows (in thousands):



	March 31, 2019									December 31, 2018
	PCI Loans¹			All Other Loans			Total			PCI Loans¹		All Other Loans			Total
Commercial real estate	$	17,299		$	871,643		$	888,942		$	17,682	$	842,345		$	860,027
Consumer real estate	8,146			402,835			410,981			8,712		398,542			407,254
Construction and land development	4,670			182,339			187,009			4,602		183,293			187,895
Commercial and industrial	2,300			339,171			341,471			2,557		305,697			308,254
Consumer and other	453			11,713			12,166			605		13,204			13,809
Total loans	32,868			1,807,701			1,840,569			34,158		1,743,081			1,777,239
Less: Allowance for loan losses	(54		)	(8,650		)	(8,704		)	—		(8,275		)	(8,275		)
Loans, net	$	32,814		$	1,799,051		$	1,831,865		$	34,158	$	1,734,806		$	1,768,964

¹ Purchased Credit Impaired loans (“PCI loans”) are loans with evidence of credit deterioration at purchase.

For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are five loan portfolio segments that include commercial real estate, consumer real estate, construction and land development, commercial and industrial, and consumer and other.

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management:

The composition of loans by loan classification for impaired and performing loan status at March 31, 2019 and December 31, 2018, is summarized in the tables below (in thousands):



	March 31, 2019
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	871,007	$	401,937	$	181,684	$	338,806	$	11,660	$	1,805,094
Impaired loans	636		898		655		365		53		2,607
	871,643		402,835		182,339		339,171		11,713		1,807,701
PCI loans	17,299		8,146		4,670		2,300		453		32,868
Total	$	888,942	$	410,981	$	187,009	$	341,471	$	12,166	$	1,840,569



	December 31, 2018
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	841,709	$	397,306	$	182,746	$	304,673	$	13,088	$	1,739,522
Impaired loans	636		1,236		547		1,024		116		3,559
	842,345		398,542		183,293		305,697		13,204		1,743,081
PCI loans	17,682		8,712		4,602		2,557		605		34,158
Total loans	$	860,027	$	407,254	$	187,895	$	308,254	$	13,809	$	1,777,239

The following tables show the allowance for loan losses allocation by loan classification for impaired, PCI, and performing loans as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	4,023	$	1,902	$	846	$	1,545	$	114	$	8,430
PCI loans	40		14		—		—		—		54
Impaired loans	11		33		8		164		4		220
Total	$	4,074	$	1,949	$	854	$	1,709	$	118	$	8,704



	December 31, 2018
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	3,639	$	1,763	$	795	$	1,304	$	240	$	7,741
PCI loans	—		—		—		—		—		—
Impaired loans	—		26		—		442		66		534
Total	$	3,639	$	1,789	$	795	$	1,746	$	306	$	8,275

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

The following tables detail the changes in the allowance for loan losses for the three month periods ending March 31, 2019 and March 31, 2018, by loan classification (in thousands):



	March 31, 2019
	Commercial Real Estate		Consumer Real Estate			Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Beginning balance	$	3,639	$	1,789		$	795	$	1,746		$	306		$	8,275
Loans charged off	—		(2		)	—		(318		)	(130		)	(450		)
Recoveries of loans charged off	2		4			2		12			62			82
Provision (reallocation) charged to expense	433		158			57		269			(120		)	797
Ending balance	$	4,074	$	1,949		$	854	$	1,709		$	118		$	8,704



	March 31, 2018
	Commercial Real Estate			Consumer Real Estate			Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Beginning balance	$	2,465		$	1,596		$	521	$	1,062		$	216		$	5,860
Loans charged off	(38		)	—			—		(78		)	(42		)	(158		)
Recoveries of charge-offs	—			23			2		40			21			86
Provision (reallocation) charged to expense	498			(100		)	104		186			1			689
Ending balance	$	2,925		$	1,519		$	627	$	1,210		$	196		$	6,477

The following table details the changes in the allowance for loan losses for the year ending December 31, 2018, by loan classification (in thousands):



	December 31, 2018
	Commercial Real Estate			Consumer Real Estate			Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Beginning balance	$	2,465		$	1,596		$	521	$	1,062		$	216		$	5,860
Loans charged off	(38		)	(275		)	—		(177		)	(370		)	(860		)
Recoveries of charge-offs	2			100			9		72			156			339
Provision (reallocation) charged to expense	1,210			368			265		789			304			2,936
Ending balance	$	3,639		$	1,789		$	795	$	1,746		$	306		$	8,275

Note 4. Loans and Allowance for Loan Losses, Continued

Credit Risk Management (continued):

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
Non PCI Loans	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	863,455	$	400,139	$	180,904	$	333,423	$	11,527	$	1,789,448
Watch	7,547		1,775		623		4,228		131		14,304
Special mention	—		15		157		1,155		—		1,327
Substandard	641		906		655		357		55		2,614
Doubtful	—		—		—		8		—		8
Total	$	871,643	$	402,835	$	182,339	$	339,171	$	11,713	$	1,807,701



PCI Loans
Pass	$	12,825	$	5,555	$	3,554	$	2,196	$	397	$	24,527
Watch	2,736		581		1,116		—		16		4,449
Special mention	1,010		440		—		—		9		1,459
Substandard	728		1,570		—		104		31		2,433
Doubtful	—		—		—		—		—		—
Total	$	17,299	$	8,146	$	4,670	$	2,300	$	453	$	32,868
Total loans	$	888,942	$	410,981	$	187,009	$	341,471	$	12,166	$	1,840,569



	December 31, 2018
Non PCI Loans	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	834,912	$	394,728	$	182,524	$	303,805	$	12,927	$	1,728,896
Watch	6,791		2,678		64		1,090		135		10,758
Special mention	—		14		158		137		—		309
Substandard	642		1,122		547		462		142		2,915
Doubtful	—		—		—		203		—		203
Total	$	842,345	$	398,542	$	183,293	$	305,697	$	13,204	$	1,743,081



PCI Loans
Pass	$	14,050	$	5,617	$	4,033	$	2,382	$	541	$	26,623
Watch	1,805		756		569		—		17		3,147
Special mention	1,030		446		—		50		10		1,536
Substandard	797		1,893		—		125		37		2,852
Doubtful	—		—		—		—		—		—
Total	$	17,682	$	8,712	$	4,602	$	2,557	$	605	$	34,158
Total loans	$	860,027	$	407,254	$	187,895	$	308,254	$	13,809	$	1,777,239

Note 4. Loans and Allowance for Loan Losses, Continued

Past Due Loans:

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places a loan on nonaccrual when there is a clear indicator that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due.

The following tables present the aging of the recorded investment in loans as of March 31, 2019 and December 31, 2018 (in thousands):



	March 31, 2019
	30-60 Days Past Due and Accruing		61-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due and NonAccrual		PCI Loans		Current Loans		Total Loans
Commercial real estate	$	1,625	$	764	$	—	$	272	$	2,661	$	17,299	$	868,982	$	888,942
Consumer real estate	1,492		123		73		807		2,495		8,146		400,340		410,981
Construction and land development	—		79		—		655		734		4,670		181,605		187,009
Commercial and industrial	92		165		114		296		667		2,300		338,504		341,471
Consumer and other	132		131		23		42		328		453		11,385		12,166
Total	$	3,341	$	1,262	$	210	$	2,072	$	6,885	$	32,868	$	1,800,816	$	1,840,569



	December 31, 2018
	30-60 Days Past Due and Accruing		61-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due and NonAccrual		PCI Loans		Current Loans		Total Loans
Commercial real estate	$	377	$	19	$	—	$	272	$	668	$	17,682	$	841,677	$	860,027
Consumer real estate	1,168		462		454		844		2,928		8,712		395,614		407,254
Construction and land development	343		—		—		547		890		4,602		182,403		187,895
Commercial and industrial	155		—		101		909		1,165		2,557		304,532		308,254
Consumer and other	117		—		29		124		270		605		12,934		13,809
Total	$	2,160	$	481	$	584	$	2,696	$	5,921	$	34,158	$	1,737,160	$	1,777,239

Note 4. Loans and Allowance for Loan Losses, Continued

Impaired Loans:

The following is an analysis of the impaired loan portfolio, including PCI loans, detailing the related allowance recorded as of March 31, 2019 and December 31, 2018 (in thousands):



							For the three months ended
	At March 31, 2019						March 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	589	$	601	$	—	$	613	$	20
Consumer real estate	863		879		—		967		4
Construction and land development	599		599		—		573		—
Commercial and industrial	31		32		—		50		1
Consumer and other	27		31		—		28		1
	2,109		2,142		—		2,231		26
Impaired loans with a valuation allowance:
Commercial real estate	47		47		11		24		1
Consumer real estate	35		40		33		99		—
Construction and land development	56		56		8		28		—
Commercial and industrial	334		349		164		644		9
Consumer and other	26		26		4		57		—
	498		518		220		852		10
PCI loans:
Commercial real estate	2,535		2,837		40		845		(10		)
Consumer real estate	1,101		1,271		14		367		3
Total impaired loans	$	6,243	$	6,768	$	274	$	4,295	$	29

Note 4. Loans and Allowance for Loan Losses, Continued

Impaired Loans (continued):



							For the year ended
	At December 31, 2018						December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	636	$	648	$	—	$	855	$	33
Consumer real estate	1,073		1,089		—		934		29
Construction and land development	547		547		—		547		—
Commercial and industrial	69		70		—		69		6
Consumer and other	29		33		—		15		3
	2,354		2,387		—		2,420		71
Impaired loans with a valuation allowance:
Commercial real estate	—		—		—		—		—
Consumer real estate	163		205		26		365		—
Construction and land development	—		—		—		—		—
Commercial and industrial	955		973		442		476		37
Consumer and other	87		87		66		86		3
	1,205		1,265		534		927		40
PCI loans:
Commercial real estate	0		0		0		11		0
Total impaired loans	$	3,559	$	3,652	$	534	$	3,358	$	111

Troubled Debt Restructurings:

At March 31, 2019 and December 31, 2018, impaired loans included loans that were classified as Troubled Debt Restructurings ("TDRs"). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

In assessing whether or not a borrower is experiencing financial difficulties, the Company considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the debtor is currently in payment default on any of its debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the debtor has declared or is in the process of declaring bankruptcy; and (iv) the debtor's projected cash flow is sufficient to satisfy contractual payments due under the original terms of the loan without a modification.

The Company considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by the Company include the debtor's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan.

Note 4. Loans and Allowance for Loan Losses, Continued

Troubled Debt Restructurings (continued):

The most common concessions granted by the Company generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt; (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk; (iii) a temporary period of interest-only payments; and (iv) a reduction in the contractual payment amount for either a short period or remaining term of the loan. As of March 31, 2019 and December 31, 2018, management had approximately $62 thousand and $116 thousand, respectively, in loans that met the criteria for restructured, none of which were on nonaccrual. A loan is placed back on accrual status when both principal and interest are current and it is probable that management will be able to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

There were no loans that were modified as troubled debt restructurings during the three month period ended March 31, 2019 and 2018. There were no loans that were modified as troubled debt restructurings during the past three months and for which there was a subsequent payment default.

Foreclosure Proceedings and Balances:

As of March 31, 2019, there was no residential real estate included in foreclosed assets and there were no consumer mortgage loans collateralized by residential real estate property that were in the process of foreclosure.

Purchased Credit Impaired Loans:

The Company has acquired loans where there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of as of March 31, 2019 and December 31, 2018 is as follows (in thousands):



	March 31, 2019			December 31, 2018
Commercial real estate	$	24,226		$	24,849
Consumer real estate	10,464			11,108
Construction and land development	5,724			5,731
Commercial and industrial	5,369			5,824
Consumer and other	721			892
Total loans	46,504			48,404
Less remaining purchase discount	(13,636		)	(14,246		)
Total loans, net of purchase discount	32,868			34,158
Less: Allowance for loan losses	(54		)	—
Carrying amount, net of allowance	$	32,814		$	34,158

Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows for the three month periods ended March 31, 2019 and 2018 (in thousands):



	Three Months Ended March 31,
	2019			2018
Accretable yield, beginning of period	$	7,052		$	9,287
Additions	—			—
Accretion income	(1,254		)	(1,101		)
Reclassification to accretable	1,035			262
Other changes, net	1,811			(668		)
Accretable yield	$	8,644		$	7,780