LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted”.

Consumer-related loans are generally charged to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans are summarized as follows:



Dollars in thousands	2019		2018
Commercial	$	207,138	$	194,315
Commercial real estate
Owner-occupied	276,218		266,362
Non-owner occupied	629,206		564,826
Construction and development
Land and land development	84,112		68,833
Construction	37,523		24,731
Residential real estate
Non-jumbo	354,963		336,977
Jumbo	70,947		73,599
Home equity	76,568		80,910
Mortgage warehouse lines	126,237		39,140
Consumer	36,470		32,460
Other	14,117		12,899
Total loans, net of unearned fees	1,913,499		1,695,052
Less allowance for loan losses	13,074		13,047
Loans, net	$	1,900,425	$	1,682,005

The outstanding balance and the recorded investment of acquired loans included in the consolidated balance sheet at December 31, 2019 and 2018 are as follows:



	Acquired Loans
	2019						2018
Dollars in thousands	Purchased Credit Impaired		Purchased Performing		Total		Purchased Credit Impaired		Purchased Performing		Total
Outstanding balance	$	3,488	$	131,745	$	135,233	$	4,275	$	138,167	$	142,442

Recorded investment
Commercial	$	—	$	3,333	$	3,333	$	—	$	3,934	$	3,934
Commercial real estate
Owner-occupied	—		17,416		17,416		—		16,133		16,133
Non-owner occupied	653		12,957		13,610		1,162		23,431		24,593
Construction and development
Land and land development	—		3,031		3,031		—		5,161		5,161
Construction	—		—		—		—		—		—
Residential real estate
Non-jumbo	1,247		83,856		85,103		1,374		77,894		79,268
Jumbo	944		3,055		3,999		975		2,577		3,552
Home equity	—		2,144		2,144		—		2,805		2,805
Consumer	—		4,159		4,159		—		4,630		4,630
Other	—		13		13		—		122		122
Total recorded investment	$	2,844	$	129,964	$	132,808	$	3,511	$	136,687	$	140,198

The following table presents a summary of the change in the accretable yield of the purchased credit impaired ("PCI") loan portfolio during 2019 and 2018:



Dollars in thousands	2019			2018
Accretable yield, January 1	$	632		$	745
Accretion	(63		)	(115		)
Reclassification of nonaccretable difference due to improvement in expected cash flows	—			—
Other changes, net	(46		)	2
Accretable yield, December 31	$	523		$	632

The following presents loan maturities at December 31, 2019:



	Within		After 1 but		After
Dollars in thousands	1 Year		within 5 Years		5 Years
Commercial	$	101,625	$	63,132	$	42,381
Commercial real estate	88,846		119,993		696,585
Construction and development	43,713		28,611		49,311
Residential real estate	25,830		39,072		437,576
Mortgage warehouse lines	126,237		—		—
Consumer	5,247		25,849		5,374
Other	1,026		6,232		6,859
	$	392,524	$	282,889	$	1,238,086
Loans due after one year with:
Variable rates			$	564,490
Fixed rates			956,485
			$	1,520,975

The following table presents the contractual aging of the recorded investment in past due loans by class as of December 31, 2019 and 2018.



	At December 31, 2019
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	216	$	—	$	383	$	599	$	206,539	$	—
Commercial real estate
Owner-occupied	119		137		4,035		4,291		271,927		—
Non-owner occupied	879		179		1,363		2,421		626,785		—
Construction and development
Land and land development	208		28		188		424		83,688		—
Construction	—		—		138		138		37,385		—
Residential mortgage
Non-jumbo	4,172		826		1,877		6,875		348,088		—
Jumbo	—		—		—		—		70,947		—
Home equity	760		—		223		983		75,585		—
Mortgage warehouse lines	—		—		—		—		126,237		—
Consumer	208		86		112		406		36,064		42
Other	—		—		100		100		14,017		—
Total	$	6,562	$	1,256	$	8,419	$	16,237	$	1,897,262	$	42



	At December 31, 2018
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	254	$	51	$	483	$	788	$	193,527	$	—
Commercial real estate
Owner-occupied	—		—		612		612		265,750		—
Non-owner occupied	156		255		1,756		2,167		562,659		—
Construction and development
Land and land development	190		4		3,174		3,368		65,465		—
Construction	—		—		—		—		24,731		—
Residential mortgage
Non-jumbo	4,120		2,235		3,753		10,108		326,869		—
Jumbo	—		—		675		675		72,924		—
Home equity	754		261		181		1,196		79,714		—
Mortgage warehouse lines	—		—		—		—		39,140		—
Consumer	502		121		125		748		31,712		36
Other	31		—		—		31		12,868		—
Total	$	6,007	$	2,927	$	10,759	$	19,693	$	1,675,359	$	36

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at December 31, 2019 and 2018.



Dollars in thousands	2019		2018
Commercial	$	764	$	935
Commercial real estate
Owner-occupied	4,198		1,028
Non-owner occupied	1,602		2,210
Construction and development
Land & land development	188		3,198
Construction	138		—
Residential mortgage
Non-jumbo	4,120		6,532
Jumbo	—		675
Home equity	284		299
Mortgage warehouse lines	—		—
Consumer	74		112
Other	100		—
Total	$	11,468	$	14,989

Impaired loans: Impaired loans include the following:

▪

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.5 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.


▪	Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The following tables present loans individually evaluated for impairment at December 31, 2019 and 2018.



	December 31, 2019
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	403	$	403	$	—	$	467	$	21
Commercial real estate
Owner-occupied	7,223		7,224		—		7,534		224
Non-owner occupied	8,514		8,515		—		9,389		495
Construction and development
Land & land development	945		945		—		1,143		65
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,387		3,393		—		3,787		217
Jumbo	3,980		3,979		—		4,017		210
Home equity	523		523		—		523		27
Mortgage warehouse lines	—		—		—		—		—
Consumer	13		13		—		14		2
Total without a related allowance	$	24,988	$	24,995	$	—	$	26,874	$	1,261

With a related allowance
Commercial	$	4,882	$	4,882	$	51	$	4,786	$	274
Commercial real estate
Owner-occupied	3,862		3,866		409		3,893		113
Non-owner occupied	540		544		113		535		5
Construction and development
Land & land development	1,015		1,015		589		1,030		51
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	1,876		1,874		173		2,112		59
Jumbo	—		—		—		—		—
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	12,175	$	12,181	$	1,335	$	12,356	$	502

Total
Commercial	$	27,384	$	27,394	$	1,162	$	28,777	$	1,248
Residential real estate	9,766		9,769		173		10,439		513
Consumer	13		13		—		14		2
Total	$	37,163	$	37,176	$	1,335	$	39,230	$	1,763

The above table does not include PCI loans.



	December 31, 2018
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	1,019	$	1,253	$	—	$	321	$	16
Commercial real estate
Owner-occupied	8,600		8,605		—		7,730		318
Non-owner occupied	9,666		9,673		—		9,753		493
Construction and development
Land & land development	4,767		4,767		—		4,947		102
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,279		3,284		—		3,401		180
Jumbo	4,132		4,130		—		3,517		166
Home equity	523		523		—		523		30
Mortgage warehouse lines	—		—		—		—		—
Consumer	9		10		—		13		1
Total without a related allowance	$	31,995	$	32,245	$	—	$	30,205	$	1,306

With a related allowance
Commercial	$	3,343	$	3,342	$	682	$	705	$	39
Commercial real estate
Owner-occupied	2,969		2,969		462		2,397		117
Non-owner occupied	189		191		9		226		16
Construction and development
Land & land development	1,057		1,057		298		1,073		56
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,982		2,981		585		2,539		98
Jumbo	821		822		106		827		48
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	11,361	$	11,362	$	2,142	$	7,767	$	374

Total
Commercial	$	31,610	$	31,857	$	1,451	$	27,152	$	1,157
Residential real estate	11,737		11,740		691		10,807		522
Consumer	9		10		—		13		1
Total	$	43,356	$	43,607	$	2,142	$	37,972	$	1,680

The above table does not include PCI loans.

The average recorded investment of impaired loans during 2017 was $35.6 million and $2.2 million interest income was recognized on those loans while impaired.

A modification of a loan is considered a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to be classified as a TDR for the life of the loan. Included in impaired loans are TDRs of $25.7 million, of which $22.9 million were current with respect to restructured contractual payments at December 31, 2019 and $27 million, of which $26.6 million were current with respect to restructured contractual payments at December 31, 2018. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during 2019 and 2018. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.



	2019					2018
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial	—	$	—	$	—	2	$	157	$	157
Commercial real estate
Owner-occupied	1	325		325		—	—		—
Non-owner occupied	4	324		324		2	183		183
Residential real estate
Non-jumbo	7	410		410		8	899		899
Consumer	1	15		15		—	—		—
Total	13	$	1,074	$	1,074	12	$	1,239	$	1,239

The following table presents defaults during the stated period of TDRs that were restructured during the past twelve months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.



	2019			2018
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	—	$	—	2	$	157
Commercial real estate
Non-owner occupied	2	178		—	—
Residential real estate
Non-jumbo	3	174		7	847
Total	5	$	352	9	$	1,004

The following table details the activity regarding TDRs by loan type during 2019 and the related allowance on TDRs.



2019
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance January 1, 2019	$	2,654		$	—	$	273		$	9,365		$	5,404		$	4,490		$	4,278		$	523	$	—	$	10		$	—	$	26,997
Additions	—			—		—			325			324			410			—			—		—		15			—		1,074
Charge-offs	—			—		—			—			—			—			—			—		—		—			—		—
Net (paydowns) advances	(694		)	—		(71		)	(204		)	(203		)	(287		)	(924		)	—		—		(12		)	—		(2,395		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, December 31, 2019	$	1,960		$	—	$	202		$	9,486		$	5,525		$	4,613		$	3,354		$	523	$	—	$	13		$	—	$	25,676

Allowance related to troubled debt restructurings	$	589		$	—	$	4		$	245		$	—		$	163		$	—		$	—	$	—	$	—		$	—	$	1,001

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $2.5 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future.

The following table presents the recorded investment in construction and development, commercial and commercial real estate loans which are generally evaluated based upon our internal risk ratings defined above.



Loan Risk Profile by Internal Risk Rating
	Construction and Development												Commercial Real Estate
	Land and Land Development				Construction				Commercial				Owner Occupied				Non-Owner Occupied				Mortgage Warehouse Lines
Dollars in thousands	2019		2018		2019		2018		2019		2018		2019		2018		2019		2018		2019		2018
Pass	$	82,317	$	63,743	$	37,385	$	24,589	$	200,313	$	182,651	$	269,357	$	259,360	$	622,857	$	556,609	$	126,237	$	39,140
OLEM (Special Mention)	454		472		138		142		1,052		6,748		2,184		1,864		1,876		1,554		—		—
Substandard	1,341		4,618		—		—		5,773		4,916		4,677		5,138		4,473		6,663		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	84,112	$	68,833	$	37,523	$	24,731	$	207,138	$	194,315	$	276,218	$	266,362	$	629,206	$	564,826	$	126,237	$	39,140

The following table presents the recorded investment in consumer, residential real estate and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.



	Performing				Nonperforming
Dollars in thousands	2019		2018		2019		2018
Residential real estate
Non-jumbo	$	350,843	$	330,445	$	4,120	$	6,532
Jumbo	70,947		72,924		—		675
Home Equity	76,284		80,611		284		299
Consumer	36,354		32,312		116		148
Other	14,017		12,899		100		—
Total	$	548,445	$	529,191	$	4,620	$	7,654

Industry concentrations: At December 31, 2019 and 2018, we had no concentrations of loans to any single industry in excess of 10% of total loans.

Loans to related parties: We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties). These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):



Dollars in thousands	2019			2018
Balance, beginning	$	43,899		$	45,698
Additions	37,947			6,750
Amounts collected	(30,203		)	(6,992		)
Other changes, net	(351		)	(1,557		)
Balance, ending	$	51,292		$	43,899