Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses Portfolio Segmentation: At June 30, 2018 and December 31, 2017 , loans are summarized as follows (in thousands): June 30, 2018 December 31, 2017 PCI Loans 1 All Other Loans Total PCI Loans 1 All Other Loans Total Commercial real estate $ 18,474 $ 727,390 $ 745,864 $ 17,903 $ 625,085 $ 642,988 Consumer real estate 6,987 348,889 355,876 7,450 286,007 293,457 Construction and land development 5,690 173,741 179,431 5,120 130,289 135,409 Commercial and industrial 821 278,950 279,771 858 237,229 238,087 Consumer and other 686 13,807 14,493 1,463 11,854 13,317 Total loans 32,658 1,542,777 1,575,435 32,794 1,290,464 1,323,258 Less: Allowance for loan losses (19 ) (7,055 ) (7,074 ) (16 ) (5,844 ) (5,860 ) Loans, net $ 32,639 $ 1,535,722 $ 1,568,361 $ 32,778 $ 1,284,620 $ 1,317,398 1 Purchased Credit Impaired loans (“PCI loans”) are loans with evidence of credit deterioration at purchase. 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, agricultural, and municipal 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, educational loans, and other loans which do not fall into the categories above. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures. Note 5. Loans and Allowance for Loan Losses, Continued 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. Note 5. Loans and Allowance for Loan Losses, Continued Credit Risk Management (continued): The composition of loans by loan classification for impaired and performing loan status at June 30, 2018 and December 31, 2017 , is summarized in the tables below (in thousands): June 30, 2018 Commercial Real Estate Consumer Real Estate Construction and Land Development Commercial and Industrial Consumer and Other Total Performing loans $ 726,356 $ 347,893 $ 173,194 $ 278,431 $ 13,698 $ 1,539,572 Impaired loans 1,034 996 547 519 109 3,205 727,390 348,889 173,741 278,950 13,807 1,542,777 PCI loans 18,474 6,987 5,690 821 686 32,658 Total $ 745,864 $ 355,876 $ 179,431 $ 279,771 $ 14,493 $ 1,575,435 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, PCI, and performing loans as of June 30, 2018 and December 31, 2017 (in thousands): June 30, 2018 Commercial Real Estate Consumer Real Estate Construction and Land Development Commercial and Industrial Consumer and Other Total Performing loans $ 3,116 $ 1,491 $ 744 $ 1,145 $ 224 $ 6,720 PCI loans 19 — — — — 19 Impaired loans — 37 — 222 76 335 Total $ 3,135 $ 1,528 $ 744 $ 1,367 $ 300 $ 7,074 December 31, 2017 Commercial Real Estate Consumer Real Estate Construction and Land Development Commercial and Industrial Consumer and 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 Note 5. Loans and Allowance for Loan Losses, Continued Credit Risk Management (continued): The following tables detail the changes in the allowance for loan losses for the six month period ending June 30, 2018 and year ending December 31, 2017 , by loan classification (in thousands): June 30, 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 ) (25 ) — (78 ) (101 ) (242 ) Recoveries of loans charged off — 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 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 charge-offs 8 99 13 67 61 248 Provision (reallocation) charged to expense 88 226 (209 ) 499 179 783 Ending balance $ 2,465 $ 1,596 $ 521 $ 1,062 $ 216 $ 5,860 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. 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. Note 5. Loans and Allowance for Loan Losses, Continued Credit Risk Management (continued): 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 June 30, 2018 and December 31, 2017 (in thousands): June 30, 2018 Non PCI Loans Commercial Real Estate Consumer Real Estate Construction and Land Development Commercial and Industrial Consumer and Other Total Pass $ 724,763 $ 343,407 $ 172,972 $ 277,384 $ 13,184 $ 1,531,710 Watch 1,604 3,168 62 1,035 123 5,992 Special mention — 949 160 35 363 1,507 Substandard 1,023 1,365 547 483 111 3,529 Doubtful — — — 13 26 39 Total $ 727,390 $ 348,889 $ 173,741 $ 278,950 $ 13,807 $ 1,542,777 PCI Loans Pass $ 14,494 $ 4,558 $ 3,973 $ 210 $ 565 $ 23,800 Watch 1,513 898 653 2 18 3,084 Special mention 1,393 575 716 153 17 2,854 Substandard 1,074 956 348 456 86 2,920 Doubtful — — — — — — Total $ 18,474 $ 6,987 $ 5,690 $ 821 $ 686 $ 32,658 Total loans $ 745,864 $ 355,876 $ 179,431 $ 279,771 $ 14,493 $ 1,575,435 Note 5. Loans and Allowance for Loan Losses, Continued Credit Risk Management (continued): December 31, 2017 Non PCI Loans 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 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 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 the aging of the recorded investment in loans as of June 30, 2018 and December 31, 2017 (in thousands): June 30, 2018 30-89 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 $ 2,628 $ 82 $ 6 $ 2,716 $ 18,474 $ 724,674 $ 745,864 Consumer real estate 701 76 463 1,240 6,987 347,649 355,876 Construction and land development 403 338 547 1,288 5,690 172,453 179,431 Commercial and industrial 647 113 430 1,190 821 277,760 279,771 Consumer and other 189 58 92 339 686 13,468 14,493 Total $ 4,568 $ 667 $ 1,538 $ 6,773 $ 32,658 $ 1,536,004 $ 1,575,435 Note 5. Loans and Allowance for Loan Losses, Continued Past Due Loans (continued): December 31, 2017 30-89 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 $ 517 $ 728 $ 128 $ 1,373 $ 17,903 $ 623,712 $ 642,988 Consumer real estate 963 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 286 131 85 502 858 236,727 238,087 Consumer and other 165 291 13 469 1,463 11,385 13,317 Total $ 1,996 $ 1,509 $ 1,764 $ 5,269 $ 32,794 $ 1,285,195 $ 1,323,258 Impaired Loans: The following is an analysis of the impaired loan portfolio, excluding PCI loans, detailing the related allowance recorded as of June 30, 2018 and December 31, 2017 (in thousands): For the six months ended At June 30, 2018 June 30, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Impaired loans without a valuation allowance: Commercial real estate $ 1,034 $ 1,043 $ — $ 670 $ 15 Consumer real estate 793 823 — 699 12 Construction and land development 547 547 — 547 — Commercial and industrial 81 83 — 58 3 Consumer and other 16 16 — 5 — 2,471 2,512 — 1,979 30 Impaired loans with a valuation allowance: Commercial real estate — — — 8 — Consumer real estate 203 216 37 642 11 Construction and land development — — — — — Commercial and industrial 438 440 222 257 5 Consumer and other 93 95 76 72 2 734 751 335 979 18 PCI loans: Commercial real estate 27 127 19 5 3 Total impaired loans $ 3,232 $ 3,390 $ 354 $ 2,963 $ 51 Note 5. Loans and Allowance for Loan Losses, Continued 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: 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 Impaired loans with a valuation allowance: 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 June 30, 2018 and December 31, 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. Note 5. Loans and Allowance for Loan Losses, Continued 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 June 30, 2018 and December 31, 2017 , management had approximately, $660 thousand and $41 thousand, respectively, in loans that met the criteria for restructured, none of which were on nonaccrual. 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. 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 twelve month period ended December 31, 2017. There were no loans that were modified as troubled debt restructurings during the past three months and for which there was a subsequent payment default. Foreclosure Proceedings and Balances : As of June 30, 2018 the Company had $1.14 million in residential real estate included in foreclosed assets 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 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 as of is as follows (in thousands): June 30, 2018 December 31, 2017 Commercial real estate $ 25,700 $ 23,366 Consumer real estate 9,620 10,764 Construction and land development 6,793 6,285 Commercial and industrial 2,973 1,452 Consumer and other 1,014 1,710 Total loans 46,100 43,577 Less remaining purchase discount (13,442 ) (10,783 ) Total loans, net of purchase discount 32,658 32,794 Less: Allowance for loan losses (19 ) (16 ) Carrying amount, net of allowance $ 32,639 $ 32,778 Activity related to the accretable yield on loans acquired with deteriorated credit quality is as follows for the three and six months period ended June 30, 2018 and 2017 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2018 2017 2018 2017 Accretable yield, beginning of period $ 7,780 $ 8,482 $ 9,287 $ 8,950 Additions 1,292 — 1,292 — Accretion income (1,928 ) (973 ) (3,029 ) (1,670 ) Reclassification to accretable 120 366 382 610 Other changes, net (58 ) 600 (726 ) 585 Accretable yield $ 7,206 $ 8,475 $ 7,206 $ 8,475 Note 5. Loans and Allowance for Loan Losses, Continued Purchased Credit Impaired Loans (continued): Purchased credit impaired loans acquired from Southern Community Bank during the three and six months period ended June 30, 2018 for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands): Three and Six Months Ended June 30, 2018 Contractual principal and interest at acquisition $ 15,133 Nonaccretable difference 5,302 Expected cash flows at acquisition 9,831 Accretable yield 1,292 Fair value of purchased credit impaired loans $ 8,539 |