Loans

12 Months Ended

Dec. 31, 2018

Loans and Leases Receivable Disclosure [Abstract]

Loans

Note 3 – Loans

The composition of the loan portfolio by loan classification appears below.

	December 31,			December 31,
	2018			2017
Commercial
Commercial and industrial - organic	$	41,526		$	45,254
Commercial and industrial - government guaranteed		31,367			22,946
Commercial and industrial - syndicated		12,134			13,165
Total commercial and industrial		85,027			81,365
Real estate construction and land
Residential construction		1,552			3,812
Commercial construction		5,078			13,365
Land and land development		10,894			9,681
Total construction and land		17,524			26,858
Real estate mortgages
1-4 family residential, first lien, investment		40,311			40,313
1-4 family residential, first lien, owner occupied		16,775			16,448
1-4 family residential, junior lien		3,169			2,965
1-4 family residential - purchased		18,647			-
Home equity lines of credit, first lien		8,325			9,238
Home equity lines of credit, junior lien		10,912			13,226
Farm		10,397			10,445
Multifamily		27,328			33,356
Commercial owner occupied		93,800			80,261
Commercial non-owner occupied		123,214			116,599
Total real estate mortgage		352,878			322,851
Consumer
Consumer revolving credit		21,540			24,030
Consumer all other credit		5,530			9,036
Student loans purchased		54,691			64,644
Total consumer		81,761			97,710
Total loans		537,190			528,784
Less: Allowance for loan losses		(4,891	)		(4,043	)
Net loans	$	532,299		$	524,741

The balances in the table above include unamortized premiums and net deferred loan costs and fees. Unamortized premiums on loans purchased were $2.5 million and $2.0 million as of December 31, 2018 and 2017, respectively. Net deferred loan costs (fees) totaled $129,000 and $199,000 as of December 31, 2018 and 2017, respectively.

Loan origination/risk management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approves lending policies on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are reported in three classes. Organic loans are originated by the Bank’s commercial lenders. Syndicated loans, also referred to as Shared National Credits, are purchased from national lending correspondents. Government guaranteed loan balances represent the guaranteed portion of loans which the Company purchased that are 100% guaranteed by either the United States Department of Agriculture (“USDA”) or the Small Business Administration (“SBA”); the originating institution holds the unguaranteed portion of each loan and services it. These loans are typically purchased at a premium. In the event of early prepayment, the Bank may need to write off any unamortized premium.

Both organic and syndicated loans are underwritten according to the Bank’s loan policies. The Company has developed policies to limit overall credit exposure to the syndicated market as a whole and to each borrower.

Organic commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Management examines current and projected cash flows to determine the ability of borrowers to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable, inventory or marketable securities and may incorporate personal guarantees; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

The Bank’s loan policies for underwriting syndicated loans are based on the “Interagency Guidance on Leveraged Lending” applicable to national banks supervised by the OCC.

Real estate construction and land loans consist primarily of loans for the purchase or refinance of unimproved lots or raw land. Additionally, the Company finances the construction of real estate projects typically where the permanent mortgage will remain with the Company. Specific underwriting guidelines are delineated in the Bank’s loan policies.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those specific to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on cash flows, collateral, geography and risk grade criteria. As a general rule, the Company avoids financing projects where the source of repayment is dependent upon the sale or operation of the collateral, unless other underwriting factors are present to help mitigate risk.

Residential mortgages include consumer purpose 1-to-4 family residential properties and home equity loans, as well as investor-owned residential real estate. In addition, the Company purchased a package of 1-to-4 family residential mortgages in December of 2018. Each of the 42 adjustable rate loans purchased, totaling approximately $18.6 million, were individually underwritten by the Company prior to the closing of the sale. Consumer purpose loans have underwriting standards that are heavily influenced by statutory requirements, which include, but are not limited to, documentation requirements, limits on maximum loan-to-value percentages, and collection remedies. Loans to finance 1-4 family investment properties are primarily dependent upon rental income generated from the property and secondarily supported by the borrower’s personal income. The Company typically originates residential mortgages with the intention of retaining in its portfolio adjustable-rate mortgages and shorter-term, fixed-rate loans. The Company also originates longer-term, fixed rate loans, which are sold to secondary mortgage market correspondents.

Consumer loans are generally small loans spread across many borrowers and are underwritten after determining the ability of the consumer borrower to repay their obligations as agreed. The underwriting standards are heavily influenced by statutory requirements, which include, but are not limited to, documentation requirements and collection remedies. Consumer loans may be secured or unsecured and are comprised of revolving lines, installment loans and other consumer loans. Included in consumer loans are student loan packages that were purchased beginning in 2015. Along with the purchase of these student loans, the Company purchased surety bonds to fully insure this portion of the Company’s consumer portfolio. ReliaMax Surety Company (“ReliaMax Surety”), the South Dakota insurance company which issued surety bonds for the student loan pool, was placed into liquidation due to insolvency on June 27, 2018, and the surety bonds terminated on July 27, 2018. Deposit account overdrafts are included in the consumer loan balances and totaled $26,000 and $434,000 at December 31, 2018 and 2017, respectively.

Independent loan review is performed by an independent loan review firm that reviews and validates the credit risk program on a periodic basis. Results of these reviews are presented to management and the Audit and Compliance Committee of the Board. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Concentrations of credit. Most of the Company’s lending activity occurs within the Commonwealth of Virginia, primarily in the Company’s primary markets and surrounding areas. The majority of the Company’s loan portfolio consists of commercial real estate loans. The Company manages this risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations to any one business or industry.

Related party loans. In the ordinary course of business, the Company has granted loans to certain directors, principal officers and their affiliates (collectively referred to as “related party loans”). Activity in related party loans during 2018 and 2017 is presented in the following table.

	2018			2017
Balance outstanding at beginning of year	$	21,443		$	12,578
Principal additions		2,199			13,818
Principal reductions		(2,238	)		(4,953	)
Balance outstanding at end of year	$	21,404		$	21,443

Past due, non-accrual and charged-off 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 non-accrual 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. Smaller, unsecured consumer loans are typically charged-off when management judges such loans to be uncollectible or the borrowers file for bankruptcy; these loans are generally not placed in non-accrual status prior to charge-off. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, the Company considers the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regards to the Company’s collateral position.

Regulatory provisions would typically require a loan to be charged-off or placed on non-accrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on non-accrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Student loans purchased which were 120 or more days past due as of July 27, 2018, were placed in non-accrual based on the loss of insurance on these loans. The Company has filed claims with the liquidator of ReliaMax Surety, which issued surety bonds on the student loan portfolio, for these non-accrual loans. Based on information released by the liquidator, the Company expects to collect the principal balances outstanding on such non-accrual loans, together with interest outstanding as of that date. Student loans that have or will become 120 days or more past due after July 27, 2018 are classified as charge-offs. The Company has contracted with a third party to proactively manage the collections of past due student loans; this third party has extensive experience and specializes in this type of asset management.

Non-accrual loans are shown below by class:

	December 31, 2018		December 31, 2017
Land and land development	$	32	$	41
1-4 family residential mortgages, first lien, owner occupied		82		99
1-4 family residential mortgages, junior lien		-		37
Student loans purchased		445		-
Commercial and industrial - organic		56
Total nonaccrual loans	$	615	$	177

The following tables show the aging of past due loans as of December 31, 2018 and December 31, 2017.

Past Due Aging as of													90 Days
December 31, 2018	30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	50	$	172	$	-	$	222	$	41,304	$	41,526	$	-
Commercial and industrial - government guaranteed		-		-		548		548		30,819		31,367		548
Commercial and industrial - syndicated		-		-		-		-		12,134		12,134		-
Real estate construction and land
Residential construction		-		-		-		-		1,552		1,552		-
Commercial construction		-		-		-		-		5,078		5,078		-
Land and land development		1		-		15		16		10,878		10,894		15
Real estate mortgages
1-4 family residential, first lien, investment		-		-		-		-		40,311		40,311		-
1-4 family residential, first lien, owner occupied		-		-		-		-		16,775		16,775		-
1-4 family residential, junior lien		-		-		-		-		3,169		3,169		-
1-4 family residential - purchased		954		-		-		954		17,693		18,647		-
Home equity lines of credit, first lien		-		-		-		-		8,325		8,325		-
Home equity lines of credit, junior lien		-		-		-		-		10,912		10,912		-
Farm		-		-		-		-		10,397		10,397		-
Multifamily		-		-		-		-		27,328		27,328		-
Commercial owner occupied		-		-		-		-		93,800		93,800		-
Commercial non-owner occupied		75		-		-		75		123,139		123,214		-
Consumer loans
Consumer revolving credit		-		-		-		-		21,540		21,540		-
Consumer all other credit		4		599		-		603		4,927		5,530		-
Student loans purchased		850		463		754		2,067		52,624		54,691		332
Total Loans	$	1,934	$	1,234	$	1,317	$	4,485	$	532,705	$	537,190	$	895
Past Due Aging as of													90 Days
December 31, 2017	30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	-	$	-	$	-	$	-	$	45,254	$	45,254	$	-
Commercial and industrial - government guaranteed		-		-		-		-		22,946		22,946		-
Commercial and industrial - syndicated		-		-		-		-		13,165		13,165		-
Real estate construction and land
Residential construction		-		-		-		-		3,812		3,812		-
Commercial construction		-		-		-		-		13,365		13,365		-
Land and land development		20		-		-		20		9,661		9,681		-
Real estate mortgages
1-4 family residential, first lien, investment		118		-		-		118		40,195		40,313		-
1-4 family residential, first lien, owner occupied		128		-		18		146		16,302		16,448		18
1-4 family residential, junior lien		-		-		-		-		2,965		2,965		-
Home equity lines of credit, first lien		100		-		-		100		9,138		9,238		-
Home equity lines of credit, junior lien		-		-		-		-		13,226		13,226		-
Farm		-		-		-		-		10,445		10,445		-
Multifamily		-		-		-		-		33,356		33,356		-
Commercial owner occupied		11		-		-		11		80,250		80,261		-
Commercial non-owner occupied		79		91		-		170		116,429		116,599		-
Consumer loans
Consumer revolving credit		1		-		-		1		24,029		24,030		-
Consumer all other credit		71		-		-		71		8,965		9,036		-
Student loans purchased		997		160		271		1,428		63,216		64,644		271
Total Loans	$	1,525	$	251	$	289	$	2,065	$	526,719	$	528,784	$	289

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 when 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 of the impairment, using either the present value of estimated future cash flows at 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.

Regulatory guidelines require the Company to re-evaluate the fair value of collateral supporting impaired collateral dependent loans on at least an annual basis.

The following tables provide a breakdown by class of the loans classified as impaired loans as of December 31, 2018 and December 31, 2017. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for the twelve months ended December 31, 2018 and December 31, 2017. Interest income recognized is for the years ended December 31, 2018 and December 31, 2017.

December 31, 2018			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	32	$	90	$	-	$	37	$	-
1-4 family residential mortgages, first lien, owner occupied		82		127		-		90		-
1-4 family residential mortgages, junior lien		127		127				248		15
Commercial non-owner occupied real estate		923		923		-		947		51
Total impaired loans without a valuation allowance		1,164		1,267		-		1,322		66
Impaired loans with a valuation allowance
Student loans purchased		1,602		1,602		90		1,387		86
Total impaired loans with a valuation allowance		1,602		1,602		90		1,387		86
Total impaired loans	$	2,766	$	2,869	$	90	$	2,709	$	152
December 31, 2017			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	41	$	94	$	-	$	46	$	-
1-4 family residential mortgages, first lien, owner occupied		99		137		-		107		-
1-4 family residential mortgages, junior lien		379		382				367		17
Commercial non-owner occupied real estate		972		972		-		992		48
Student loans purchased		1,083		1,083		-		959		64
Impaired loans with a valuation allowance		-		-		-		-		-
Total impaired loans	$	2,574	$	2,668	$	-	$	2,471	$	129

Troubled debt restructurings (“TDRs”) are also considered impaired loans. TDRs occur when the Bank agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

Based on regulatory guidance on Student Lending, the Company classified 66 of its student loans purchased as TDRs for a total of $1.2 million as of December 31, 2018. The Company classified 64 of its student loans purchased as TDRs for a total of $1.1 million as of December 31, 2017. These borrowers, who should have been in repayment, requested and were granted payment extensions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed inschool deferments, plus an automatic six month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. Initially, all student loans were fully insured by a surety bond, and the Company did not expect to experience a loss on these loans. Based on the termination of the surety bond on July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in non-accrual status, which are considered to be nonperforming.

Troubled debt restructurings (TDRs)	December 31, 2018			December 31, 2017
	No. of	Recorded		No. of	Recorded
	Loans	Investment		Loans	Investment
Performing TDRs
1-4 family residential mortgages, junior lien	1	$	127	2	$	342
Commercial non-owner occupied real estate	1		923	1		972
Student loans purchased	65		1,157	64		1,083
Total performing TDRs	67	$	2,207	67	$	2,397
Nonperforming TDRs
Student loans purchased	1		4	-		-
Land and land development	1	$	19	1	$	24
Total nonperforming TDRs	2	$	23	1	$	24
Total TDRs	69	$	2,230	68	$	2,421

A summary of loans shown above that were modified as TDRs during the years ended December 31, 2018 and 2017 is shown below by class. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported. The Post-Modification Recorded Balance reflects any interest or fees from the original loan which may have been added to the principal balance on the new note as a condition of the TDR. Additionally, the Post-Modification Recorded Balance is reported below at the period end balances, inclusive of all partial principal pay downs and principal charge-offs since the modification date.

	During year ended					During year ended
	December 31, 2018					December 31, 2017
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Balance		Balance		of Loans	Balance		Balance
Student loans purchased	12	$	244	$	244	21	$	316	$	316
Total loans modified during the period	12	$	244	$	244	21	$	316	$	316

There was one loan modified as a TDR that subsequently defaulted during the year ended December 31, 2018 and was modified as TDRs during the twelve months prior to default. This student loan had balance of $33.0 thousand prior to being charged off. There were no loans modified as TDRs that subsequently defaulted during the year ended December 31, 2017 and were modified as TDRs during the twelve months prior to default.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either December 31, 2018 or December 31, 2017.