Loans

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Loans

Loans

The following table presents the composition of loans segregated by legacy and purchased loans and by class of loans, as of March 31, 2020 and December 31, 2019. Purchased loans are defined as loans that were acquired in bank acquisitions.

	March 31, 2020
(dollars in thousands)	Legacy Loans		Purchased Loans		Total
Construction, land and land development	$	86,268	$	47,769	$	134,037
Other commercial real estate	466,761		57,723		524,484
Total commercial real estate	553,029		105,492		658,521
Residential real estate	169,199		21,770		190,969
Commercial, financial, & agricultural	99,121		17,665		116,786
Consumer and other	19,303		3,447		22,750
Total Loans	$	840,652	$	148,374	$	989,026

	December 31, 2019
(dollars in thousands)	Legacy Loans		Purchased Loans		Total
Construction, land and land development	$	83,036	$	13,061	$	96,097
Other commercial real estate	481,943		58,296		540,239
Total commercial real estate	564,979		71,357		636,336
Residential real estate	171,341		23,455		194,796
Commercial, financial, & agricultural	91,535		22,825		114,360
Consumer and other	19,245		4,077		23,322
Total Loans	$	847,100	$	121,714	$	968,814

Commercial and industrial loans are extended to a diverse group of businesses within the Company’s market area. These loans are often underwritten based on the borrower’s ability to service the debt from income from the business. Real estate construction loans often require loan funds to be advanced prior to completion of the project. Due to uncertainties inherent in estimating construction costs, changes in interest rates and other economic conditions, these loans often pose a higher risk than other types of loans. Consumer loans are originated at the Bank level. These loans are generally smaller loan amounts spread across many individual borrowers to help minimize risk.

Credit Quality Indicators. As part of the ongoing monitoring of the credit quality of the loan portfolio, management tracks certain credit quality indicators including trends related to (1) the risk grade assigned to commercial and consumer loans, (2) the level of classified commercial loans, (3) net charge-offs, (4) nonperforming loans, and (5) the general economic conditions in the Company’s geographic markets.

The Company uses a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. A description of the general characteristics of the grades is as follows:

•Grades 1 and 2 – Borrowers with these assigned grades range in risk from virtual absence of risk to minimal risk. Such loans may be secured by Company-issued and controlled certificates of deposit or properly margined equity securities or bonds. Other loans comprising these grades are made to companies that have been in existence for a long period of time with many years of consecutive profits and strong equity, good liquidity, excellent debt service ability and unblemished past performance, or to exceptionally strong individuals with collateral of unquestioned value that fully secures the loans. Loans in this category fall into the “pass” classification.

•Grades 3 and 4 – Loans assigned these “pass” risk grades are made to borrowers with acceptable credit quality and risk. The risk ranges from loans with no significant weaknesses in repayment capacity and collateral protection to acceptable loans with one or more risk factors considered to be more than average.

•Grade 5 – This grade includes “special mention” loans on management’s watch list and is intended to be used on a temporary basis for pass grade loans where risk-modifying action is intended in the short-term.

•Grade 6 – This grade includes “substandard” loans in accordance with regulatory guidelines. This category includes borrowers with well-defined weaknesses that jeopardize the payment of the debt in accordance with the agreed terms. Loans considered to be impaired are assigned this grade, and these loans often have assigned loss allocations as part of the allowance for loan and lease losses. Generally, loans on which interest accrual has been stopped would be included in this grade.

•Grades 7 and 8 – These grades correspond to regulatory classification definitions of “doubtful” and “loss,” respectively. In practice, any loan with these grades would be for a very short period of time, and generally the Company has no loans with these assigned grades. Management manages the Company’s problem loans in such a way that uncollectible loans or uncollectible portions of loans are charged off immediately with any residual, collectible amounts assigned a risk grade of 6.

The following table presents the loan portfolio, excluding purchased loans, by credit quality indicator (risk grade) as of March 31, 2020 and December 31, 2019. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column

for presentation purposes. For the period ending March 31, 2020 and December 31, 2019, the Company did not have any loans classified as “doubtful” or a “loss”.

(dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
March 31, 2020
Construction, land and land development	$	85,515	$	431	$	322	$	86,268
Other commercial real estate	445,603		11,123		10,035		466,761
Total commercial real estate	531,118		11,554		10,357		553,029
Residential real estate	157,935		4,496		6,768		169,199
Commercial, financial, & agricultural	94,465		1,713		2,943		99,121
Consumer and other	18,927		178		198		19,303
Total Loans	$	802,445	$	17,941	$	20,266	$	840,652
(dollars in thousands)
December 31, 2019
Construction, land and land development	$	82,322	$	445	$	269	$	83,036
Other commercial real estate	459,064		13,438		9,441		481,943
Total commercial real estate	541,386		13,883		9,710		564,979
Residential real estate	159,194		4,632		7,515		171,341
Commercial, financial, & agricultural	86,558		1,973		3,004		91,535
Consumer and other	18,883		148		214		19,245
Total Loans	$	806,021	$	34,519	$	20,443	$	847,100

The following table presents the purchased loan portfolio by credit quality indicator (risk grade) as of March 31, 2020 and December 31, 2019. Those loans with a risk grade of 1, 2, 3 or 4 have been combined in the pass column for presentation purposes. For the period ending March 31, 2020, the Company did not have any loans classified as “doubtful” or a “loss”.

(dollars in thousands)	Pass		Special Mention		Substandard		Total Loans
March 31, 2020
Construction, land and land development	$	45,953	$	1,698	$	118	$	47,769
Other commercial real estate	54,900		579		2,244		57,723
Total commercial real estate	100,853		2,277		2,362		105,492
Residential real estate	21,348		307		115		21,770
Commercial, financial, & agricultural	14,525		2,981		159		17,665
Consumer and other	3,256		—		191		3,447
Total Loans	$	139,982	$	5,565	$	2,827	$	148,374
December 31, 2019
Construction, land and land development	$	12,996	$	—	$	65	$	13,061
Other commercial real estate	57,881		381		34		58,296
Total commercial real estate	70,877		381		99		71,357
Residential real estate	23,097		249		109		23,455
Commercial, financial, & agricultural	19,443		2,949		433		22,825
Consumer and other	4,077		—		—		4,077
Total Loans	$	117,494	$	3,579	$	641	$	121,714

A loan’s risk grade is assigned at the inception of the loan and is based on the financial strength of the borrower and the type of collateral. Loan risk grades are subject to reassessment at various times throughout the year as part of the Company’s ongoing loan review process. Loans with an assigned risk grade of 6 or below and an outstanding balance of $250,000 or more are reassessed on a quarterly basis. During this reassessment process individual reserves may be identified and placed against certain loans which are not considered impaired.

In assessing the overall economic condition of the markets in which it operates, the Company monitors the unemployment rates for its major service areas. The unemployment rates are reviewed on a quarterly basis as part of the allowance for loan loss determination.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due or 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 provision. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due.

The following table represents an age analysis of past due loans and nonaccrual loans for legacy loans, segregated by class of loans, excluding purchased loans as of March 31, 2020 and December 31, 2019:

	Accruing Loans
(dollars in thousands)	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
March 31, 2020
Construction, land and land development	$	293	$	—	$	293	$	81	$	85,894	$	86,268
Other commercial real estate	1,390		—		1,390		3,805		461,566		466,761
Total commercial real estate	1,683		—		1,683		3,886		547,460		553,029
Residential real estate	1,635		—		1,635		3,336		164,228		169,199
Commercial, financial, & agricultural	531		—		531		2,779		95,811		99,121
Consumer and other	113		—		113		129		19,061		19,303
Total Loans	$	3,962	$	—	$	3,962	$	10,130	$	826,560	$	840,652
December 31, 2019
Construction, land and land development	$	50	$	—	$	50	$	32	$	82,954	$	83,036
Other commercial real estate	335		—		335		3,738		477,870		481,943
Total commercial real estate	385		—		385		3,770		560,824		564,979
Residential real estate	1,296		—		1,296		3,643		166,402		171,341
Commercial, financial, & agricultural	212		—		212		1,628		89,695		91,535
Consumer and other	21		—		21		138		19,086		19,245
Total Loans	$	1,914	$	—	$	1,914	$	9,179	$	836,007	$	847,100

The following table represents an age analysis of past due loans and nonaccrual loans, segregated by class of loans, for purchased loans as of March 31, 2020 and December 31, 2019:

	Accruing Loans
(dollars in thousands)	30-89 Days Past Due		90 Days or More Past Due		Total Accruing Loans Past Due		Nonaccrual Loans		Current Loans		Total Loans
March 31, 2020
Construction, land and land development	$	679	$	—	$	679	$	—	$	47,090	$	47,769
Other commercial real estate	—		—		—		—		57,723		57,723
Total commercial real estate	679		—		679		—		104,813		105,492
Residential real estate	—		—		—		—		21,770		21,770
Commercial, financial, & agricultural	—		—		—		—		17,665		17,665
Consumer and other	4		—		4		—		3,443		3,447
Total Loans	$	683	$	—	$	683	$	—	$	147,691	$	148,374
December 31, 2019
Construction, land and land development	$	—	$	—	$	—	$	—	$	13,061	$	13,061
Other commercial real estate	83		—		83		—		58,213		58,296
Total commercial real estate	83		—		83		—		71,274		71,357
Residential real estate	57		—		57		—		23,398		23,455
Commercial, financial, & agricultural	553		—		553		—		22,272		22,825
Consumer and other	8		—		8		—		4,069		4,077
Total Loans	$	701	$	—	$	701	$	—	$	121,013	$	121,714

The following table details impaired loan data, including purchased credit impaired loans, as of March 31, 2020.

(dollars in thousands)
March 31, 2020	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment
With No Related Allowance Recorded
Construction, land and land development	$	66	$	66	$	—	$	67
Commercial real estate	13,124		12,259		—		12,357
Residential real estate	2,477		2,465		—		2,586
Commercial, financial & agriculture	381		381		—		319
Consumer & other	—		—		—		—
	16,048		15,171		—		15,329
With An Allowance Recorded
Construction, land and land development	—		—		—		—
Commercial real estate	6,336		6,336		2,077		6,358
Residential real estate	525		525		99		641
Commercial, financial & agriculture	1,974		1,974		981		2,082
Consumer & other	—		—		—		—
	8,835		8,835		3,157		9,081
Purchased Credit Impaired Loans
Construction, land and land development	119		119		—		92
Commercial real estate	125		125		—		79
Residential real estate	18		18		12		15
Commercial, financial & agriculture	62		62		—		49
Consumer & other	191		191		88		95
	515		515		100		330
Total
Construction, land and land development	185		185		—		159
Commercial real estate	19,585		18,720		2,077		18,794
Residential real estate	3,020		3,008		111		3,242
Commercial, financial & agriculture	2,417		2,417		981		2,450
Consumer & other	191		191		88		95
	$	25,398	$	24,521	$	3,257	$	24,740

The following table details impaired loan data as of December 31, 2019.

(dollars in thousands)
December 31, 2019	Unpaid Contractual Principal Balance		Impaired Balance		Related Allowance		Average Recorded Investment
With No Related Allowance Recorded
Construction, land and land development	$	67	$	67	$	—	$	168
Commercial real estate	12,455		11,639		—		13,924
Residential real estate	2,706		2,711		—		3,693
Commercial, financial & agriculture	257		257				910
Consumer & other	—		—		—		123
	15,485		14,674		—		18,818
With An Allowance Recorded
Construction, land and land development	—		—		—		80
Commercial real estate	6,379		6,385		1,939		3,898
Residential real estate	757		760		137		367
Commercial, financial & agriculture	2,189		1,989		1,073		722
Consumer & other	—		—		—		—
	9,325		9,134		3,149		5,067
Purchased Credit Impaired Loans
Construction, land and land development	65		65		—		80
Commercial real estate	34		34		—		35
Residential real estate	11		11		6		24
Commercial, financial & agriculture	37		37		—		47
Consumer & other	—		—		—		—
	147		147		6		186
Total
Construction, land and land development	132		132		—		328
Commercial real estate	18,868		18,058		1,939		17,857
Residential real estate	3,474		3,482		143		4,084
Commercial, financial & agriculture	2,483		2,283		1,073		1,679
Consumer & other	—		—		—		123
	24,957		23,955		3,155		24,071

Interest income recorded on impaired loans during the three months ended March 31, 2020 and 2019 was $50,000, and $43,000 reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on TDRs.

TDRs are troubled loans on which the original terms of the loan have been modified in favor of the borrower due to deterioration in the borrower’s financial condition. Each potential loan modification is reviewed individually and the terms of the loan are modified to meet the borrower’s specific circumstances at a point in time. Not all loan modifications are TDRs. Loan modifications are reviewed and approved by the Company’s senior lending staff, who then determine whether the loan

meets the criteria for a TDR. Generally, the types of concessions granted to borrowers that are evaluated in determining whether a loan is classified as a TDR include:

•Interest rate reductions – Occur when the stated interest rate is reduced to a nonmarket rate or a rate the borrower would not be able to obtain elsewhere under similar circumstances.

•Amortization or maturity date changes – Result when the amortization period of the loan is extended beyond what is considered a normal amortization period for loans of similar type with similar collateral.

•Principal reductions – These are often the result of commercial real estate loan workouts where two new notes are created. The primary note is underwritten based upon our normal underwriting standards and is structured so that the projected cash flows are sufficient to repay the contractual principal and interest of the newly restructured note. The terms of the secondary note vary by situation and often involve that note being charged-off, or the principal and interest payments being deferred until after the primary note has been repaid. In situations where a portion of the note is charged-off during modification there is often no specific reserve allocated to those loans. This is due to the fact that the amount of the charge-off usually represents the excess of the original loan balance over the collateral value and the Company has determined there is no additional exposure on those loans.

As discussed in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2019, which are included in the Company’s 2019 Form 10-K, once a loan is identified as a TDR, it is accounted for as an impaired loan. The Company had no unfunded commitments to lend to a customer that has a troubled debt restructured loan as of March 31, 2020. The Company had no loan contracts restructured during the three month period ended March 31, 2020 and 2019. Loans modified in a troubled debt restructuring are considered to be in default once the loan becomes 90 days past due. A TDR may cease being classified as impaired if the loan is subsequently modified at market terms and, has performed according to the modified terms for at least six months, and there has not been any prior principal forgiveness on a cumulative basis.

The Company had no loans that subsequently defaulted during the three months ended March 31, 2020 and 2019.

Modifications in Response to COVID-19

Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, loan customers may apply for a deferral of payments, or portions thereof, for up to three months. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on nonaccrual status (provided the loans were not past due or on nonaccrual status prior to the deferral). See Note 1 - Summary of Significant Accounting Policies for more information.