Loans and Allowance for Loan Losses

Portfolio Segmentation:

Major categories of loans are summarized as follows (in thousands):



	June 30, 2019									December 31, 2018
	PCI Loans¹			All Other Loans²			Total			PCI Loans¹		All Other Loans²			Total
Commercial real estate	$	17,040		$	861,547		$	878,587		$	17,682	$	842,345		$	860,027
Consumer real estate	7,412			398,844			406,256			8,712		398,542			407,254
Construction and land development	4,669			200,027			204,696			4,602		183,293			187,895
Commercial and industrial	2,137			333,361			335,498			2,557		305,697			308,254
Consumer and other	400			11,552			11,952			605		13,204			13,809
Total loans	31,658			1,805,331			1,836,989			34,158		1,743,081			1,777,239
Less: Allowance for loan losses	(54		)	(9,043		)	(9,097		)	—		(8,275		)	(8,275		)
Loans, net	$	31,604		$	1,796,288		$	1,827,892		$	34,158	$	1,734,806		$	1,768,964

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

² Includes loans held for sale.

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 composition of loans by loan classification for impaired and performing loan status is summarized in the tables below (in thousands):



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
June 30, 2019:
Performing loans	$	861,288	$	398,061	$	199,326	$	333,109	$	11,552	$	1,803,336
Impaired loans	259		783		701		252		—		1,995
	861,547		398,844		200,027		333,361		11,552		1,805,331
PCI loans	17,040		7,412		4,669		2,137		400		31,658
Total	$	878,587	$	406,256	$	204,696	$	335,498	$	11,952	$	1,836,989



December 31, 2018:
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 (in thousands):



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
June 30, 2019:
Performing loans	$	4,062	$	1,935	$	946	$	1,641	$	114	$	8,698
PCI loans	40		14		—		—		—		54
Impaired loans	—		240		—		105		—		345
Total	$	4,102	$	2,189	$	946	$	1,746	$	114	$	9,097



December 31, 2018:
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

The following tables detail the changes in the allowance for loan losses by loan classification (in thousands):



	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Three Months Ended June 30, 2019:
Beginning balance	$	4,074	$	1,949	$	854	$	1,709		$	118		$	8,704
Loans charged off	—		—		—		(14		)	(80		)	(94		)
Recoveries of charge-offs	22		16		2		41			13			94
Provision (reallocation) charged to expense	6		224		90		10			63			393
Ending balance	$	4,102	$	2,189	$	946	$	1,746		$	114		$	9,097



Three Months Ended June 30, 2018:
Beginning balance	$	2,925	$	1,519		$	627	$	1,210	$	196		$	6,477
Loans charged off	—		(25		)	—		—		(59		)	(84		)
Recoveries of charge-offs	—		27			3		16		18			64
Provision (reallocation) charged to expense	210		7			114		141		145			617
Ending balance	$	3,135	$	1,528		$	744	$	1,367	$	300		$	7,074



	Commercial Real Estate		Consumer Real Estate			Construction and Land Development		Commercial and Industrial			Consumer and Other			Total
Six Months Ended June 30, 2019:
Beginning balance	$	3,639	$	1,789		$	795	$	1,746		$	306		$	8,275
Loans charged off	—		(2		)	—		(333		)	(210		)	(545		)
Recoveries of charge-offs	24		20			4		53			76			177
Provision (reallocation) charged to expense	439		382			147		280			(58		)	1,190
Ending balance	$	4,102	$	2,189		$	946	$	1,746		$	114		$	9,097



Six Months Ended June 30, 2018:
Beginning balance	$	2,465		$	1,596		$	521	$	1,062		$	216		$	5,860
Loans charged off	(38		)	(25		)	—		(78		)	(101		)	(242		)
Recoveries of charge-offs	—			50			5		56			40			151
Provision (reallocation) charged to expense	708			(93		)	218		327			145			1,305
Ending balance	$	3,135		$	1,528		$	744	$	1,367		$	300		$	7,074

The following tables outline the amount of each loan classification and the amount categorized into each risk rating (in thousands):



	June 30, 2019
Non PCI Loans:	Commercial Real Estate		Consumer Real Estate		Construction and Land Development		Commercial and Industrial		Consumer and Other		Total
Pass	$	848,287	$	395,438	$	198,469	$	326,328	$	11,459	$	1,779,981
Watch	12,387		2,353		624		5,492		44		20,900
Special mention	500		8		156		1,181		—		1,845
Substandard	373		875		778		352		25		2,403
Doubtful	—		170		—		8		24		202
Total	$	861,547	$	398,844	$	200,027	$	333,361	$	11,552	$	1,805,331



PCI Loans:
Pass	$	12,795	$	5,050	$	3,576	$	2,039	$	354	$	23,814
Watch	2,463		453		1,093		3		14		4,026
Special mention	920		434		—		—		7		1,361
Substandard	862		1,475		—		95		25		2,457
Doubtful	—		—		—		—		—		—
Total	$	17,040	$	7,412	$	4,669	$	2,137	$	400	$	31,658
Total loans	$	878,587	$	406,256	$	204,696	$	335,498	$	11,952	$	1,836,989



	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

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 an aging analysis of our loan portfolio (in thousands):



	June 30, 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	$	133	$	—	$	139	$	124	$	396	$	17,040	$	861,151	$	878,587
Consumer real estate	1,026		226		441		1,024		2,717		7,412		396,127		406,256
Construction and land development	838		112		—		624		1,574		4,669		198,453		204,696
Commercial and industrial	417		30		95		336		878		2,137		332,483		335,498
Consumer and other	131		—		15		40		186		400		11,366		11,952
Total	$	2,545	$	368	$	690	$	2,148	$	5,751	$	31,658	$	1,799,580	$	1,836,989



	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

Impaired Loans:

The following is an analysis of the impaired loan portfolio, including PCI loans, detailing the related allowance recorded (in thousands):



	June 30, 2019						December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Impaired loans without a valuation allowance:
Commercial real estate	$	259	$	263	$	—	$	636	$	648	$	—
Consumer real estate	385		386		—		1,073		1,089		—
Construction and land development	701		701		—		547		547		—
Commercial and industrial	—		—		—		69		70		—
Consumer and other	—		—		—		29		33		—
	1,345		1,350		—		2,354		2,387		—
Impaired loans with a valuation allowance:
Commercial real estate	—		—		—		—		—		—
Consumer real estate	398		399		240		163		205		26
Construction and land development	—		—		—		—		—		—
Commercial and industrial	252		267		105		955		973		442
Consumer and other	—		—		—		87		87		66
	650		666		345		1,205		1,265		534
PCI loans:
Commercial real estate	2,523		2,834		40		—		—		—
Consumer real estate	1,096		1,261		14		—		—		—
	3,619		4,095		54		—		—		—
Total impaired loans	$	5,614	$	6,111	$	399	$	3,559	$	3,652	$	534



	Three Months Ended June 30,
	2019				2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	424	$	5	$	793	$	8
Consumer real estate	624		—		841		7
Construction and land development	650		2		547		—
Commercial and industrial	16		—		67		2
Consumer and other	14		—		8		—
	1,728		7		2,256		17
Impaired loans with a valuation allowance:
Commercial real estate	24		—		—		—
Consumer real estate	217		2		460		—
Construction and land development	28		—		—		—
Commercial and industrial	293		—		300		3
Consumer and other	13		—		103		1
	575		2		863		4
PCI loans:
Commercial real estate	2,529		—		14		—
Consumer real estate	1,099		—		—		—
	3,628		—		14		—
Total impaired loans	$	5,931	$	9	$	3,133	$	21



	Six Months Ended June 30,
	2019					2018
	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Commercial real estate	$	495	$	25		$	670	$	15
Consumer real estate	774		4			699		12
Construction and land development	616		1			547		—
Commercial and industrial	33		1			58		3
Consumer and other	19		—			5		—
	1,937		31			1,979		30
Impaired loans with a valuation allowance:
Commercial real estate	16		—			8		—
Consumer real estate	199		9			642		11
Construction and land development	19		—			—		—
Commercial and industrial	514		9			257		5
Consumer and other	38		—			72		2
	786		18			979		18
PCI loans:
Commercial real estate	1,686		(9		)	5		3
Consumer real estate	732		2			—		—
	2,418		(7		)	5		3
Total impaired loans	$	5,141	$	42		$	2,963	$	51

Troubled Debt Restructurings:

At June 30, 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.

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 June 30, 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.

There were no loans that were modified as troubled debt restructurings during the six month period ended June 30, 2019. There was one commercial real estate loan for approximately $622 thousand modified as troubled debt restructurings during the six month period ended June 30, 2018.

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

Foreclosure Proceedings and Balances:

As of June 30, 2019, there was $257 thousand residential real estate included in other real estate owned 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 are as follows (in thousands):



	June 30, 2019			December 31, 2018
Commercial real estate	$	23,895		$	24,849
Consumer real estate	9,556			11,108
Construction and land development	5,700			5,731
Commercial and industrial	5,125			5,824
Consumer and other	612			892
Total loans	44,888			48,404
Less: Remaining purchase discount	(13,230		)	(14,246		)
Total loans, net of purchase discount	31,658			34,158
Less: Allowance for loan losses	(54		)	—
Carrying amount, net of allowance	$	31,604		$	34,158

Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Accretable yield, beginning of period	$	8,644		$	7,780		$	7,052		$	9,287
Additions	—			1,292			—			1,292
Accretion income	(1,026		)	(1,928		)	(2,280		)	(3,029		)
Reclassification	323			120			1,358			382
Other changes, net	339			(58		)	2,150			(726		)
Accretable yield, end of period	$	8,280		$	7,206		$	8,280		$	7,206