Portfolio Segmentation:

At December 31, 2018 and 2017, loans consisted of the following (in thousands):



	December 31, 2018								December 31, 2017
	PCI Loans		All Other Loans			Total			PCI Loans			All Other Loans			Total
Commercial real estate	$	17,682	$	842,345		$	860,027		$	17,903		$	625,085		$	642,988
Consumer real estate	8,712		398,542			407,254			7,450			286,007			293,457
Construction and land development	4,602		183,293			187,895			5,120			130,289			135,409
Commercial and industrial	2,557		305,697			308,254			858			237,229			238,087
Consumer and other	605		13,204			13,809			1,463			11,854			13,317
Total loans	34,158		1,743,081			1,777,239			32,794			1,290,464			1,323,258
Less: Allowance for loan losses	—		(8,275		)	(8,275		)	(16		)	(5,844		)	(5,860		)

Loans, net	$	34,158	$	1,734,806		$	1,768,964		$	32,778		$	1,284,620		$	1,317,398

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.

The following describe risk characteristics relevant to each of the portfolio segments:

Commercial Real Estate: Commercial real estate loans include owner-occupied commercial real estate loans and loans secured by income-producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. These loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Consumer Real Estate: Consumer real estate loans include real estate loans secured by first liens, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. One to four family first mortgage loans are repaid by various means such as a borrower's income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Construction and Land Development: Loans for real estate construction and development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial and Industrial: The commercial and industrial loan portfolio segment includes commercial, financial, and agricultural loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers' business operations.

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

Credit Risk Management:

The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approvals of credits. Within the Credit Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lies in each portfolio segment. For the consumer real estate and consumer and other portfolio segments, the risk management process focuses on managing customers who become delinquent in their payments. For the other portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently as needed. To ensure problem credits are identified on a timely basis, several specific portfolio reviews occur periodically to assess the larger adversely rated credits for proper risk rating and accrual status.

Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Senior Credit Officer and the Directors Loan Committee.

The allowance for loan losses is a valuation reserve allowance established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment and general allocations for pools of homogeneous loans with similar risk characteristics and trends.

The allowance for loan losses related to specific loans is based on management's estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan's observable market price. The Company's homogeneous loan pools include commercial real estate loans, consumer real estate loans, construction and land development loans, commercial and industrial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors.

The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk and (7) effectiveness of the Company's loan policies, procedures and internal controls. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio adjusted for qualitative factors and the total dollar amount of the loans in the pool.

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral.

The Company's loans are generally secured by specific items of collateral including real property, consumer assets, and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent on local economic conditions.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Company to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term.

Credit Risk Management (continued):

The composition of loans by loan classification for impaired and performing loan status at December 31, 2018 and 2017, is summarized in the tables below (amounts in thousands):



	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	$	860,027	$	407,254	$	187,895	$	308,254	$	13,809	$	1,777,239



	December 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Performing loans	$	624,638	$	284,585	$	129,742	$	237,016	$	11,842	$	1,287,823
Impaired loans	447		1,422		547		213		12		2,641
	625,085		286,007		130,289		237,229		11,854		1,290,464
PCI loans	17,903		7,450		5,120		858		1,463		32,794
Total loans	$	642,988	$	293,457	$	135,409	$	238,087	$	13,317	$	1,323,258

The following tables show the allowance for loan losses allocation by loan classification for impaired and performing loans as of December 31, 2018 and 2017 (amounts in thousands):



	December 31, 2018
					Construction		Commercial		Consumer
	Commercial		Consumer		and Land		and		and
	Real Estate		Real Estate		Development		Industrial		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

Credit Risk Management (continued):



	December 31, 2017
					Construction		Commercial		Consumer
	Commercial		Consumer		and Land		and		and
	Real Estate		Real Estate		Development		Industrial		Other		Total
Performing loans	$	2,444	$	1,340	$	521	$	890	$	204	$	5,399
PCI Loans	16		—		—		—		—		16
Impaired loans	5		256		—		172		12		445
Total	$	2,465	$	1,596	$	521	$	1,062	$	216	$	5,860

The following tables detail the changes in the allowance for loan losses for the year ending December 31, 2018 and December 31, 2017, by loan classification (amounts 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 loans charged off	2			100			9		72			156			339
Provision (reallocation) charged to operating expense	1,210			368			265		789			304			2,936
Ending balance	$	3,639		$	1,789		$	795	$	1,746		$	306		$	8,275



	December 31, 2017
	Commercial Real Estate		Consumer Real Estate			Construction and Land Development			Commercial and Industrial			Consumer and Other			Total
Beginning balance	$	2,369	$	1,382		$	717		$	520		$	117		$	5,105
Loans charged off	—		(111		)	—			(24		)	(141		)	(276		)
Recoveries of loans charged off	8		99			13			67			61			248
Provision (reallocation) charged to operating expense	88		226			(209		)	499			179			783
Ending balance	$	2,465	$	1,596		$	521		$	1,062		$	216		$	5,860

Credit Risk Management (continued):

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Watch: Loans in this risk category involve borrowers that exhibit characteristics, or are operating under conditions that, if not successfully mitigated as planned, have a reasonable risk of resulting in a downgrade within the next six to twelve months. Loans may remain in this risk category for six months and then are either upgraded or downgraded upon subsequent evaluation.

Special Mention: Loans in this risk grade are the equivalent of the regulatory definition of "Other Assets Especially Mentioned" classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and /or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company's credit position.

Substandard: Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Uncollectible: Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean 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. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans within this category.

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of December 31, 2018 and 2017 (amounts in thousands):

Non PCI Loans



	December 31, 2018
	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

Credit Risk Management (continued):

PCI Loans



	December 31, 2018
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
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

Non PCI Loans



	December 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	616,028	$	279,464	$	129,359	$	233,942	$	11,624	$	1,270,417
Watch	7,673		2,543		383		3,007		62		13,668
Special mention	1,006		2,627		—		64		155		3,852
Substandard	378		1,159		547		157		—		2,241
Doubtful	—		214		—		59		13		286
Total	$	625,085	$	286,007	$	130,289	$	237,229	$	11,854	$	1,290,464

PCI Loans



	December 31, 2017
	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	14,386	$	4,151	$	4,134	$	68	$	819	$	23,558
Watch	261		1,345		649		120		262		2,637
Special mention	—		456		—		58		24		538
Substandard	3,084		1,192		337		588		107		5,308
Doubtful	172		306		—		24		251		753
Total	$	17,903	$	7,450	$	5,120	$	858	$	1,463	$	32,794
Total loans	$	642,988	$	293,457	$	135,409	$	238,087	$	13,317	$	1,323,258

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 indication 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 and leases as of December 31, 2018 and 2017 (amounts in thousands):



	December 31, 2018
	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due		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



	December 31, 2017
	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due		PCI Loans		Current Loans		Total Loans
Commercial real estate	$	517	$	—	$	728	$	128	$	1,373	$	17,903	$	623,712	$	642,988
Consumer real estate	769		194		33		991		1,987		7,450		284,020		293,457
Construction and land development	65		—		326		547		938		5,120		129,351		135,409
Commercial and industrial	86		200		131		85		502		858		236,727		238,087
Consumer and other	109		56		291		13		469		1,463		11,385		13,317
Total	$	1,546	$	450	$	1,509	$	1,764	$	5,269	$	32,794	$	1,285,195	$	1,323,258

Impaired Loans:

A loan held for investment is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement.

The following is an analysis of the impaired loan portfolio detailing the related allowance recorded as of and for the years ended December 31, 2018 and 2017 (amounts in thousands):



							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:
Non PCI Loans:
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

PCI loans: None in 2018

Impaired loans with a valuation allowance:
Non PCI Loans:
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	—		—		—		11		—

Total impaired loans	$	3,559	$	3,652	$	534	$	3,358	$	111

Impaired Loans (continued):



							For the year ended
	At December 31, 2017						December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Non PCI Loans:
Commercial real estate	$	424	$	454	$	—	$	204	$	44
Consumer real estate	415		420		—		401		16
Construction and land development	547		547		—		628		—
Commercial and industrial	41		41		—		44		3
Consumer and other	—		—		—		—		—
	1,427		1,462		—		1,277		63

PCI loans: None in 2017

Impaired loans with a valuation allowance:
Non PCI Loans:
Commercial real estate	23		23		5		5		1
Consumer real estate	1,007		1,033		256		601		38
Construction and land development	—		—		—		—		—
Commercial and industrial	172		172		172		117		10
Consumer and other	12		13		12		2		1
	1,214		1,241		445		725		50
PCI loans:
Commercial real estate	16		123		16		3		16

Total impaired loans	$	2,657	$	2,826	$	461	$	2,005	$	129

Troubled Debt Restructurings:

At December 31, 2018 and 2017, 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.

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 December 31, 2018 and 2017, management had approximately $116 thousand and $41 thousand , respectively, in loans that met the criteria for restructured. No restructured loans were on nonaccrual as of December 31, 2018 and 2017. 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.

The following table presents a summary of loans that were modified as troubled debt restructurings during the year ended December 31, 2018 (amounts in thousands):



December 31, 2018	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate	1	$	62	$	62
Commercial and industrial	1	18		18

There were no loans modified as troubled debt restructurings during the year ended December 31, 2017.

There were no loans that were modified as troubled debt restructurings during the past twelve months and for which there was a subsequent payment default.

Purchased Credit Impaired Loans:

The Company has acquired loans which 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 at for the years ended December 31, 2018 and 2017 is as follows (in thousands):



	2018			2017
Commercial real estate	$	24,849		$	23,366
Consumer real estate	11,108			10,764
Construction and land development	5,731			6,285
Commercial and industrial	5,824			1,452
Consumer and other	892			1,710
Total loans	$	48,404		$	43,577
Less remaining purchase discount	(14,246		)	(10,783		)
Total, gross	34,158			32,794
Less: Allowance for loan losses	—			(16		)
Carrying amount, net of allowance	$	34,158		$	32,778

Purchased Credit Impaired Loans (continued):

The following is a summary of the accretable discount on acquired loans for the years ended December 31, 2018 and 2017 (in thousands):



	2018			2017
Accretable yield, beginning of period	$	9,287		$	8,950
Additions	2,416			2,581
Accretion income	(5,368		)	(4,217		)
Reclassification from nonaccretable	1,494			926
Other changes, net	(777		)	1,047
Accretable yield, end of period	$	7,052		$	9,287

The Company increased the allowance for loan losses on purchase credit impaired loans in the amount of approximately $16 thousand during the year ended December 31, 2017. There were no allowance for loan losses on purchase credit impaired loans at the year ended December 31, 2018.

Purchased credit impaired loans acquired from TN Bancshares during the year ended December 31, 2018 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands):



	2018
Contractual principal and interest at acquisition	$	15,133
Nonaccretable difference	5,302
Expected cash flows at acquisition	9,831
Accretable yield	1,292
Basis in PCI loans at acquisition-estimated fair value	$	8,539

Purchased credit impaired loans acquired from Foothills Bancorp during the year ended December 31, 2018 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands):



	2018
Contractual principal and interest at acquisition	$	12,125
Nonaccretable difference	2,748
Expected cash flows at acquisition	9,377
Accretable yield	1,124
Basis in PCI loans at acquisition-estimated fair value	$	8,253

Related Party Loans:

In the ordinary course of business, the Company has granted loans to certain related parties, including directors, executive officers, and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. A summary of activity in loans to related parties is as follows (in thousands):



	2018			2017
Balance, beginning of year	$	18,330		$	12,999
Disbursements	34,639			14,533
Repayments	(21,723		)	(9,202		)
Balance, end of year	$	31,246		$	18,330

At December 31, 2018, the Company had pre-approved but unused lines of credit totaling approximately $4.5 million to related parties.