LOANS AND ALLOWANCE FOR LOAN LOSSES | LOANS AND ALLOWANCE FOR LOAN LOSSES The Company’s loan portfolio consists of the following categories of loans as of the dates presented (dollars in thousands). March 31, 2019 December 31, 2018 Construction and development $ 171,483 $ 157,946 1-4 Family 299,061 287,137 Multifamily 57,487 50,501 Farmland 24,457 21,356 Commercial real estate 646,745 627,004 Total mortgage loans on real estate 1,199,233 1,143,944 Commercial and industrial 255,476 210,924 Consumer 40,210 45,957 Total loans $ 1,494,919 $ 1,400,825 Unamortized premiums and discounts on loans, included in the total loans balances above, were $2.5 million and $1.4 million at March 31, 2019 and December 31, 2018 , respectively. Nonaccrual and Past Due Loans Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. In determining whether or not a borrower may be unable to meet payment obligations for each class of loans, we consider the borrower’s debt service capacity through the analysis of current financial information, if available, and/or current information with regard to our collateral position. Regulatory provisions would typically require the placement of a loan on nonaccrual status if (i) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or (ii) full payment of principal and interest is not expected. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income on nonaccrual loans is recognized only to the extent that cash payments are received in excess of principal due. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower. The table below provides an analysis of the aging of loans as of the dates presented (dollars in thousands). March 31, 2019 Accruing Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Past Due & Nonaccrual Acquired Impaired Loans Total Loans Construction and development $ 170,870 $ 154 $ — $ — $ 448 $ 602 $ 11 $ 171,483 1-4 Family 296,218 1,263 10 — 1,095 2,368 475 299,061 Multifamily 57,378 — — — 109 109 — 57,487 Farmland 22,193 — — — — — 2,264 24,457 Commercial real estate 643,889 — — — 1,291 1,291 1,565 646,745 Total mortgage loans on real estate 1,190,548 1,417 10 — 2,943 4,370 4,315 1,199,233 Commercial and industrial 253,316 871 17 — 9 897 1,263 255,476 Consumer 39,143 209 31 — 784 1,024 43 40,210 Total loans $ 1,483,007 $ 2,497 $ 58 $ — $ 3,736 $ 6,291 $ 5,621 $ 1,494,919 December 31, 2018 Accruing Current 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Past Due Nonaccrual Total Past Due & Nonaccrual Acquired Impaired Loans Total Loans Construction and development $ 157,202 $ 175 $ — $ — $ 556 $ 731 $ 13 $ 157,946 1-4 Family 284,205 1,101 41 — 1,300 2,442 490 287,137 Multifamily 50,392 109 — — — 109 — 50,501 Farmland 19,092 — — — — — 2,264 21,356 Commercial real estate 624,244 66 — — 683 749 2,011 627,004 Total mortgage loans on real estate 1,135,135 1,451 41 — 2,539 4,031 4,778 1,143,944 Commercial and industrial 209,399 221 45 — 64 330 1,195 210,924 Consumer 44,493 375 51 — 994 1,420 44 45,957 Total loans $ 1,389,027 $ 2,047 $ 137 $ — $ 3,597 $ 5,781 $ 6,017 $ 1,400,825 Portfolio Segment Risk Factors The following describes the risk characteristics relevant to each of the Company’s loan portfolio segments. Construction and Development - Construction and development loans are generally made for the purpose of acquisition and development of land to be improved through the construction of commercial and residential buildings. The successful repayment of these types of loans is generally dependent upon a commitment for permanent financing from the Company, or from the sale of the constructed property. These loans carry more risk than commercial or residential real estate loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. One such risk is that loan funds are advanced upon the security of the property under construction, which is of uncertain value prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and to calculate related loan-to-value ratios. The Company attempts to minimize the risks associated with construction lending by limiting loan-to-value ratios as described above. In addition, as to speculative development loans, the Company generally makes such loans only to borrowers that have a positive pre-existing relationship with us. The Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations in any one business or industry. 1-4 Family - The 1-4 family portfolio mainly consists of residential mortgage loans to consumers to finance a primary residence. The majority of these loans are secured by properties located in the Company’s market areas and carry risks associated with the creditworthiness of the borrower and changes in the value of the collateral and loan-to-value-ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, employing experienced underwriting personnel, requiring standards for appraisers, and not making subprime loans. Multifamily - Multifamily loans are normally made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk, as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer. Farmland - Farmland loans are often for land improvements related to agricultural endeavors and may include construction of new specialized facilities. These loans are usually repaid through the conversion to permanent financing, or if scheduled loan amortization begins, for the long-term benefit of the borrower’s ongoing operations. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Commercial Real Estate - Commercial real estate loans are extensions of credit secured by owner occupied and non-owner occupied collateral. Underwriting generally involves intensive analysis of the financial strength of the borrower and guarantor, liquidation value of the subject collateral, the associated unguaranteed exposure, and any available secondary sources of repayment, with the greatest emphasis given to a borrower’s capacity to meet cash flow coverage requirements as set forth by Bank policies. Repayment is commonly derived from the successful ongoing operations of the property. General market conditions and economic activity may impact the performance of these types of loans, including fluctuations in the value of real estate, new job creation trends, and tenant vacancy rates. The Company attempts to limit risk by analyzing a borrower’s cash flow and collateral value on an ongoing basis. The Company also typically requires personal guarantees from the principal owners of the property, supported by a review of their personal financial statements, as an additional means of mitigating our risk. The Company manages risk by avoiding concentrations in any one business or industry. Commercial and Industrial - Commercial and industrial loans receive similar underwriting treatment as commercial real estate loans in that the repayment source is analyzed to determine its ability to meet cash flow coverage requirements as set forth by Bank policies. Repayment of these loans generally comes from the generation of cash flow as the result of the borrower’s business operations. Commercial lending generally involves different risks from those associated with commercial real estate lending or construction lending. Although commercial loans may be collateralized by equipment or other business assets (including real estate, if available as collateral), the repayment of these types of loans depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors). Thus, the general business conditions of the local economy and the borrower’s ability to sell its products and services, thereby generating sufficient operating revenue to repay us under the agreed upon terms and conditions, are the chief considerations when assessing the risk of a commercial loan. The liquidation of collateral, if any, is considered a secondary source of repayment because equipment and other business assets may, among other things, be obsolete or of limited resale value. The Company actively monitors certain financial measures of the borrower, including advance rate, cash flow, collateral value and other appropriate credit factors. Consumer - Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include auto loans, credit cards, and other consumer installment loans. Typically, the Company evaluates the borrower’s repayment ability through a review of credit scores and an evaluation of debt to income ratios. Repayment of consumer loans depends upon key consumer economic measures and upon the borrower’s financial stability, and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. A shortfall in the value of any collateral also may pose a risk of loss to the Company for these types of loans. Indirect auto loans comprised the largest component of our consumer loans, representing 64% of our total consumer loans at March 31, 2019. At March 31, 2019, the weighted average remaining term of the indirect auto loan portfolio was 2.6 years . We exited the indirect auto lending business at the end of 2015. Credit Quality Indicators Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance: Pass - Loans not meeting the criteria below are considered pass. These loans have high credit characteristics and financial strength. The borrowers at least generate profits and cash flow that are in line with peer and industry standards and have debt service coverage ratios above loan covenants and our policy guidelines. For some of these loans, a guaranty from a financially capable party mitigates characteristics of the borrower that might otherwise result in a lower grade. Special Mention - Loans classified as special mention possess some credit deficiencies that need to be corrected to avoid a greater risk of default in the future. For example, financial ratios relating to the borrower may have deteriorated. Often, a special mention categorization is temporary while certain factors are analyzed or matters addressed before the loan is re-categorized as either pass or substandard. Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower or the liquidation value of any collateral. If deficiencies are not addressed, it is likely that this category of loan will result in the Bank incurring a loss. Where a borrower has been unable to adjust to industry or general economic conditions, the borrower’s loan is often categorized as substandard. Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as recorded assets is not warranted. This classification does not mean that the assets have absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these assets. The table below presents the Company’s loan portfolio by category and credit quality indicator as of the dates presented (dollars in thousands). March 31, 2019 Pass Special Mention Substandard Doubtful Total Construction and development $ 170,907 $ — $ 443 $ 133 $ 171,483 1-4 Family 297,532 — 1,457 72 299,061 Multifamily 57,378 — 109 — 57,487 Farmland 22,193 — 2,264 — 24,457 Commercial real estate 645,454 — 1,291 — 646,745 Total mortgage loans on real estate 1,193,464 — 5,564 205 1,199,233 Commercial and industrial 252,462 — 3,014 — 255,476 Consumer 39,208 218 784 — 40,210 Total loans $ 1,485,134 $ 218 $ 9,362 $ 205 $ 1,494,919 December 31, 2018 Pass Special Mention Substandard Doubtful Total Construction and development $ 157,360 $ — $ 586 $ — $ 157,946 1-4 Family 285,692 69 1,303 73 287,137 Multifamily 50,501 — — — 50,501 Farmland 19,092 — 2,264 — 21,356 Commercial real estate 625,670 — 1,334 — 627,004 Total mortgage loans on real estate 1,138,315 69 5,487 73 1,143,944 Commercial and industrial 207,941 — 2,983 — 210,924 Consumer 44,798 167 992 — 45,957 Total loans $ 1,391,054 $ 236 $ 9,462 $ 73 $ 1,400,825 The Company had no loans that were classified as loss at March 31, 2019 or December 31, 2018 . Loan participations and whole loans sold to and serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $128.9 million and $135.4 million as of March 31, 2019 and December 31, 2018 , respectively. The unpaid principal balance of these loans was approximately $217.8 million and $187.6 million as of March 31, 2019 and December 31, 2018 , respectively. In the ordinary course of business, the Company makes loans to related parties including its executive officers, principal stockholders, directors and their immediate family members, as well as companies in which these individuals are principal owners. Loans outstanding to such related party borrowers amounted to approximately $92.3 million and $93.0 million as of March 31, 2019 and December 31, 2018 , respectively. The table below shows the aggregate principal balance of loans to such related parties as of the dates presented (dollars in thousands). March 31, 2019 December 31, 2018 Balance, beginning of period $ 93,021 $ 31,153 New loans 1,611 79,639 Repayments and changes in relationship (2,349 ) (17,771 ) Balance, end of period $ 92,283 $ 93,021 Loans Acquired with Deteriorated Credit Quality The Company accounts for certain loans acquired as acquired impaired loans under ASC 310-30 due to evidence of credit deterioration at acquisition and the probability that the Company will be unable to collect all contractually required payments. The acquired impaired loans had no accretable yield recorded for the three months ended March 31, 2019 and 2018 . Allowance for Loan Losses The table below shows a summary of the activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 (dollars in thousands). Three months ended March 31, 2019 2018 Balance, beginning of period $ 9,454 $ 7,891 Provision for loan losses 265 625 Loans charged off (104 ) (446 ) Recoveries 27 60 Balance, end of period $ 9,642 $ 8,130 The following tables outline the activity in the allowance for loan losses by collateral type for the three months ended March 31, 2019 and 2018 , and show both the allowances and portfolio balances for loans individually and collectively evaluated for impairment as of March 31, 2019 and 2018 (dollars in thousands). Three months ended March 31, 2019 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Industrial Consumer Total Allowance for loan losses: Beginning balance $ 1,038 $ 81 $ 1,465 $ 331 $ 4,182 $ 1,641 $ 716 $ 9,454 Provision 55 20 44 49 44 21 32 265 Charge-offs — — — — — — (104 ) (104 ) Recoveries 1 — 2 — — 11 13 27 Ending balance $ 1,094 $ 101 $ 1,511 $ 380 $ 4,226 $ 1,673 $ 657 $ 9,642 Ending allowance balance for loans individually evaluated for impairment $ 66 $ — $ — $ — $ — $ — $ 200 $ 266 Ending allowance balance for loans acquired with deteriorated credit quality — — — — — — — — Ending allowance balance for loans collectively evaluated for impairment $ 1,028 $ 101 $ 1,511 $ 380 $ 4,226 $ 1,673 $ 457 $ 9,376 Loans receivable: Balance of loans individually evaluated for impairment $ 395 $ — $ 1,247 $ 109 $ 1,368 $ 15 $ 748 $ 3,882 Balance of loans acquired with deteriorated credit quality 11 2,264 475 — 1,565 1,263 43 5,621 Balance of loans collectively evaluated for impairment 171,077 22,193 297,339 57,378 643,812 254,198 39,419 1,485,416 Total period-end balance $ 171,483 $ 24,457 $ 299,061 $ 57,487 $ 646,745 $ 255,476 $ 40,210 $ 1,494,919 Three months ended March 31, 2018 Construction & Development Farmland 1-4 Family Multifamily Commercial Real Estate Commercial & Industrial Consumer Total Allowance for loan losses: Beginning balance $ 945 $ 60 $ 1,287 $ 332 $ 3,599 $ 693 $ 975 $ 7,891 Provision 23 3 — 27 9 519 44 625 Charge-offs — — (7 ) — — (310 ) (129 ) (446 ) Recoveries 6 — 3 — — 33 18 60 Ending balance $ 974 $ 63 $ 1,283 $ 359 $ 3,608 $ 935 $ 908 $ 8,130 Ending allowance balance for loans individually evaluated for impairment $ — $ — $ — $ — $ — $ 58 $ 293 $ 351 Ending allowance balance for loans acquired with deteriorated credit quality — — — — — — — — Ending allowance balance for loans collectively evaluated for impairment $ 974 $ 63 $ 1,283 $ 359 $ 3,608 $ 877 $ 615 $ 7,779 Loans receivable: Balance of loans individually evaluated for impairment $ 159 $ — $ 1,133 $ — $ 1,186 $ 545 $ 1,056 $ 4,079 Balance of loans acquired with deteriorated credit quality 55 2,512 1,333 828 2,075 1,315 3 8,121 Balance of loans collectively evaluated for impairment 162,123 18,213 275,512 53,676 550,894 134,105 66,227 1,260,750 Total period-end balance $ 162,337 $ 20,725 $ 277,978 $ 54,504 $ 554,155 $ 135,965 $ 67,286 $ 1,272,950 Impaired Loans The Company considers a loan to be impaired when, based on current information and events, the Company determines that it will not be able to collect all amounts due according to the loan agreement, including scheduled interest payments. Determination of impairment is treated the same across all classes of loans. When the Company identifies a loan as impaired, it measures the impairment based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole (remaining) source of repayment for the loans is the operation or liquidation of the collateral. In these cases when foreclosure is probable, the Company uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If the Company determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), the Company recognizes impairment through an allowance estimate or a charge-off to the allowance. When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is on nonaccrual, all payments are applied to principal, under the cost recovery method. When the ultimate collectability of the total principal of an impaired loan is not in doubt and the loan is on nonaccrual, contractual interest is credited to interest income when received, under the cash basis method. The following tables contain information on the Company’s impaired loans, which include troubled debt restructurings (“TDRs”), discussed in more detail below, and nonaccrual loans individually evaluated for impairment for purposes of determining the allowance for loan losses. The average balances are calculated based on the month-end balances of the loans during the period reported (dollars in thousands). March 31, 2019 Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Construction and development $ 262 $ 281 $ — 1-4 Family 1,247 1,250 — Multifamily 109 109 — Commercial real estate 1,368 1,392 — Total mortgage loans on real estate 2,986 3,032 — Commercial and industrial 15 16 — Consumer 178 209 — Total 3,179 3,257 — With related allowance recorded: Construction and development 133 136 66 Total mortgage loans on real estate 133 136 66 Consumer 570 609 200 Total 703 745 266 Total loans: Construction and development 395 417 66 1-4 Family 1,247 1,250 — Multifamily 109 109 — Commercial real estate 1,368 1,392 — Total mortgage loans on real estate 3,119 3,168 66 Commercial and industrial 15 16 — Consumer 748 818 200 Total $ 3,882 $ 4,002 $ 266 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Construction and development $ 339 $ 359 $ — 1-4 Family 1,177 1,180 — Commercial real estate 761 777 — Total mortgage loans on real estate 2,277 2,316 — Commercial and industrial 76 77 Consumer 215 237 — Total 2,568 2,630 — With related allowance recorded: Consumer 701 738 236 Total 701 738 236 Total loans: Construction and development 339 359 — 1-4 Family 1,177 1,180 — Commercial real estate 761 777 — Total mortgage loans on real estate 2,277 2,316 — Commercial and industrial 76 77 — Consumer 916 975 236 Total $ 3,269 $ 3,368 $ 236 Presented in the tables below is the average recorded investment of the impaired loans and the related amount of interest income recognized during the time within the period that the loans were impaired. The average balances are calculated based on the month-end balances of the loans during the periods reported (dollars in thousands). Three months ended March 31, 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance recorded: Construction and development $ 264 $ 5 $ 160 $ 2 1-4 Family 1,232 10 1,210 11 Multifamily 108 — — — Commercial real estate 961 2 1,189 8 Total mortgage loans on real estate 2,565 17 2,559 21 Commercial and industrial 20 — 359 — Consumer 245 — 274 — Total 2,830 17 3,192 21 With related allowance recorded: Construction and development 134 — — — Total mortgage loans on real estate 134 — — — Commercial and industrial — — 387 — Consumer 582 — 862 — Total 716 — 1,249 — Total loans: Construction and development 398 5 160 2 1-4 Family 1,232 10 1,210 11 Multifamily 108 — — — Commercial real estate 961 2 1,189 8 Total mortgage loans on real estate 2,699 17 2,559 21 Commercial and industrial 20 — 746 — Consumer 827 — 1,136 — Total $ 3,546 $ 17 $ 4,441 $ 21 Troubled Debt Restructurings In situations where, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to the borrower that the Company would not otherwise consider, the related loan is classified as a TDR. The Company strives to identify borrowers in financial difficulty early and work with them to modify their loans to more affordable terms before such loans reach nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases in which the Company grants the borrower new terms that provide for a reduction of either interest or principal, or otherwise include a concession, the Company identifies the loan as a TDR and measures any impairment on the restructuring as previously noted for impaired loans. Loans classified as TDRs, consisting of 23 credits, totaled approximately $2.2 million at March 31, 2019 , compared to 24 credits totaling $2.2 million at December 31, 2018 . At March 31, 2019 , 15 of the restructured loans were considered TDRs due to modification of terms through adjustments to maturity, seven of the restructured loans were considered TDRs due to a reduction in the interest rate to a rate lower than the current market rate, and one restructured loan was considered a TDR due to forgiveness of interest due on the loan. As of March 31, 2019 and December 31, 2018 , three of the TDRs, consisting of one $0.5 million commercial real estate loan, one $0.3 million construction and development loan, and one $0.2 million 1-4 family loan, were in default of their modified terms and are included in nonaccrual loans. The Company individually evaluates each TDR for allowance purposes, primarily based on collateral value, and excludes these loans from the loan population that is collectively evaluated for impairment. At March 31, 2019 and December 31, 2018 , there were no available balances on loans classified as TDRs that the Company was committed to lend. There were no loans modified under TDRs during the three month periods ended March 31, 2019 and 2018 . There were no loans modified under TDRs during the previous twelve month period that subsequently defaulted during the three months ended March 31, 2019 . |