Loans and Allowance for Loan Losses | Portfolio Segmentation: At December 31, 2018 and 2017 , loans consisted of the following (in thousands): December 31, 2018 December 31, 2017 PCI All Other Total PCI All Other 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 Consumer Construction Commercial Consumer 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 60-89 Days Past Due and Accruing Past Due 90 Nonaccrual Total PCI Loans Current Total 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 60-89 Days Past Due and Accruing Past Due 90 Nonaccrual Total PCI Current Total 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. |