LOANS

Loans are generally stated at the amount of unpaid principal, reduced by unearned discount and allowance for loan losses. Interest on loans is accrued daily on the outstanding balances. Loan origination fees and certain direct loan origination costs are deferred and amortized as adjustments of the related loan yield over its contractual life. We categorize residential real estate loans in excess of $600,000 as jumbo loans.

Generally, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on nonaccrual status. Impaired loans are placed on nonaccrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on nonaccrual loans is recognized primarily using the cost-recovery method. Loans may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loans.

Commercial-related loans or portions thereof are charged off to the allowance for loan losses when the loss has been confirmed. This determination is made on a case by case basis considering many factors, including the prioritization of our claim in bankruptcy, expectations of the workout/restructuring of the loan and valuation of the borrower’s equity. We deem a loss confirmed when a loan or a portion of a loan is classified “loss” in accordance with bank regulatory classification guidelines, which state, “Assets classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted”.

Consumer-related loans are generally charged to the allowance for loan losses upon reaching specified stages of delinquency, in accordance with the Federal Financial Institutions Examination Council policy. For example, credit card loans are charged off by the end of the month in which the account becomes 180 days past due or within 60 days from receiving notification about a specified event (e.g., bankruptcy of the borrower), whichever is earlier. Residential mortgage loans are generally charged off to net realizable value no later than when the account becomes 180 days past due. Other consumer loans, if collateralized, are generally charged off to net realizable value at 120 days past due.

Loans are summarized as follows:



Dollars in thousands	2018		2017
Commercial	$	194,315	$	189,981
Commercial real estate
Owner-occupied	266,362		250,202
Non-owner occupied	564,826		484,902
Construction and development
Land and land development	68,833		67,219
Construction	24,731		33,412
Residential real estate
Non-jumbo	336,977		354,101
Jumbo	73,599		62,267
Home equity	80,910		84,028
Mortgage warehouse lines	39,140		30,757
Consumer	32,460		36,202
Other	12,899		13,238
Total loans, net of unearned fees	1,695,052		1,606,309
Less allowance for loan losses	13,047		12,565
Loans, net	$	1,682,005	$	1,593,744

The outstanding balance and the recorded investment of acquired loans included in the consolidated balance sheet at December 31, 2018 and 2017 are as follows:



	Acquired Loans
	2018						2017
Dollars in thousands	Purchased Credit Impaired		Purchased Performing		Total		Purchased Credit Impaired		Purchased Performing		Total
Outstanding balance	$	4,275	$	138,167	$	142,442	$	5,923	$	220,131	$	226,054

Recorded investment
Commercial	$	—	$	3,934	$	3,934	$	9	$	25,125	$	25,134
Commercial real estate
Owner-occupied	—		16,133		16,133		689		21,893		22,582
Non-owner occupied	1,162		23,431		24,593		1,837		33,293		35,130
Construction and development
Land and land development	—		5,161		5,161		—		7,512		7,512
Construction	—		—		—		—		2,760		2,760
Residential real estate
Non-jumbo	1,374		77,894		79,268		1,485		109,570		111,055
Jumbo	975		2,577		3,552		999		3,400		4,399
Home equity	—		2,805		2,805		—		3,311		3,311
Consumer	—		4,630		4,630		—		11,229		11,229
Other	—		122		122		—		211		211
Total recorded investment	$	3,511	$	136,687	$	140,198	$	5,019	$	218,304	$	223,323

The following table presents a summary of the change in the accretable yield of the purchased credit impaired ("PCI") loan portfolio during 2018 and 2017:



Dollars in thousands	2018			2017
Accretable yield, January 1	$	745		$	290
Additions for First Century Bankshares, Inc. acquisition	—			661
Accretion	(115		)	(162		)
Reclassification of nonaccretable difference due to improvement in expected cash flows	—			(31		)
Other changes, net	2			(13		)
Accretable yield, December 31	$	632		$	745

The following presents loan maturities at December 31, 2018:



	Within		After 1 but		After
Dollars in thousands	1 Year		within 5 Years		5 Years
Commercial	$	96,076	$	63,124	$	35,115
Commercial real estate	37,675		113,790		679,723
Construction and development	29,718		23,207		40,639
Residential real estate	22,176		50,982		418,328
Mortgage warehouse lines	39,140		—		—
Consumer	5,181		23,172		4,107
Other	1,229		2,302		9,368
	$	231,195	$	276,577	$	1,187,280
Loans due after one year with:
Variable rates			$	546,499
Fixed rates			917,358
			$	1,463,857

The following table presents the contractual aging of the recorded investment in past due loans by class as of December 31, 2018 and 2017.



	At December 31, 2018
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	254	$	51	$	483	$	788	$	193,527	$	—
Commercial real estate
Owner-occupied	—		—		612		612		265,750		—
Non-owner occupied	156		255		1,756		2,167		562,659		—
Construction and development
Land and land development	190		4		3,174		3,368		65,465		—
Construction	—		—		—		—		24,731		—
Residential mortgage
Non-jumbo	4,120		2,235		3,753		10,108		326,869		—
Jumbo	—		—		675		675		72,924		—
Home equity	754		261		181		1,196		79,714		—
Mortgage warehouse lines	—		—		—		—		39,140		—
Consumer	502		121		125		748		31,712		36
Other	31		—		—		31		12,868		—
Total	$	6,007	$	2,927	$	10,759	$	19,693	$	1,675,359	$	36



	At December 31, 2017
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	488	$	98	$	229	$	815	$	189,166	$	—
Commercial real estate
Owner-occupied	626		162		507		1,295		248,907		—
Non-owner occupied	369		150		2,065		2,584		482,318		237
Construction and development
Land and land development	1,132		—		3,563		4,695		62,524		—
Construction	—		—		—		—		33,412		—
Residential mortgage
Non-jumbo	4,220		2,379		4,451		11,050		343,051		—
Jumbo	—		—		—		—		62,267		—
Home equity	1,978		—		530		2,508		81,520		—
Mortgage warehouse lines	—		—		—		—		30,757		—
Consumer	417		196		167		780		35,422		37
Other	—		—		—		—		13,238		—
Total	$	9,230	$	2,985	$	11,512	$	23,727	$	1,582,582	$	274

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at December 31, 2018 and 2017.



Dollars in thousands	2018		2017
Commercial	$	935	$	696
Commercial real estate
Owner-occupied	1,028		726
Non-owner occupied	2,210		2,201
Construction and development
Land & land development	3,198		3,569
Construction	—		—
Residential mortgage
Non-jumbo	6,532		6,944
Jumbo	675		—
Home equity	299		712
Mortgage warehouse lines	—		—
Consumer	112		201
Total	$	14,989	$	15,049

Impaired loans: Impaired loans include the following:

▪

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.5 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.


▪	Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

The following tables present loans individually evaluated for impairment at December 31, 2018 and 2017.



	December 31, 2018
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	1,019	$	1,253	$	—	$	321	$	16
Commercial real estate
Owner-occupied	8,600		8,605		—		7,730		318
Non-owner occupied	9,666		9,673		—		9,753		493
Construction and development
Land & land development	4,767		4,767		—		4,947		102
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,279		3,284		—		3,401		180
Jumbo	4,132		4,130		—		3,517		166
Home equity	523		523		—		523		30
Mortgage warehouse lines	—		—		—		—		—
Consumer	9		10		—		13		1
Total without a related allowance	$	31,995	$	32,245	$	—	$	30,205	$	1,306

With a related allowance
Commercial	$	3,343	$	3,342	$	682	$	705	$	39
Commercial real estate
Owner-occupied	2,969		2,969		462		2,397		117
Non-owner occupied	189		191		9		226		16
Construction and development
Land & land development	1,057		1,057		298		1,073		56
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,982		2,981		585		2,539		98
Jumbo	821		822		106		827		48
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	11,361	$	11,362	$	2,142	$	7,767	$	374

Total
Commercial	$	31,610	$	31,857	$	1,451	$	27,152	$	1,157
Residential real estate	11,737		11,740		691		10,807		522
Consumer	9		10		—		13		1
Total	$	43,356	$	43,607	$	2,142	$	37,972	$	1,680

The above table does not include PCI loans.



	December 31, 2017
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	243	$	243	$	—	$	259	$	13
Commercial real estate
Owner-occupied	7,109		7,111		—		5,149		265
Non-owner occupied	9,105		9,106		—		9,736		684
Construction and development
Land & land development	5,018		5,018		—		4,743		329
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	4,190		4,199		—		4,214		240
Jumbo	3,555		3,554		—		3,592		228
Home equity	523		523		—		523		35
Mortgage warehouse lines	—		—		—		—		—
Consumer	17		17		—		28		3
Total without a related allowance	$	29,760	$	29,771	$	—	$	28,244	$	1,797

With a related allowance
Commercial	$	252	$	252	$	252	$	262	$	—
Commercial real estate
Owner-occupied	2,436		2,436		125		2,451		161
Non-owner occupied	1,338		1,344		517		676		43
Construction and development
Land & land development	1,464		1,464		524		1,477		74
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	1,717		1,718		158		1,691		100
Jumbo	838		839		14		845		57
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	8,045	$	8,053	$	1,590	$	7,402	$	435

Total
Commercial	$	26,965	$	26,974	$	1,418	$	24,753	$	1,569
Residential real estate	10,823		10,833		172		10,865		660
Consumer	17		17		—		28		3
Total	$	37,805	$	37,824	$	1,590	$	35,646	$	2,232

The above table does not include PCI loans.

The average recorded investment of impaired loans during 2016 was $37.9 million and $1.3 million interest income was recognized on those loans while impaired.

A modification of a loan is considered a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of both. A loan continues to be classified as a TDR for the life of the loan. Included in impaired loans are TDRs of $27 million, of which $26.6 million were current with respect to restructured contractual payments at December 31, 2018 and $28.4 million, all of which were current with respect to restructured contractual payments at December 31, 2017. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during 2018 and 2017. Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.



	2018					2017
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial	2	$	157	$	157	—	$	—	$	—
Commercial real estate
Owner-occupied	—	—		—		1	2,302		2,302
Non-owner occupied	2	183		183		2	489		489
Construction and development
Land & land development	—	—		—		1	438		438
Residential real estate
Non-jumbo	8	899		899		4	642		642
Total	12	$	1,239	$	1,239	8	$	3,871	$	3,871

The following table presents defaults during the stated period of TDRs that were restructured during the past twelve months. For purposes of these tables, a default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.



	2018			2017
Dollars in thousands	Number of Defaults	Recorded Investment at Default Date		Number of Defaults	Recorded Investment at Default Date
Commercial	2	$	157	—	$	—
Commercial real estate
Owner-occupied	—	—		1	2,291
Construction and development
Land & land development	—	—		1	437
Residential real estate
Non-jumbo	7	847		3	767
Total	9	$	1,004	5	$	3,495

The following table details the activity regarding TDRs by loan type during 2018 and the related allowance on TDRs.



2018
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance January 1, 2018	$	3,043		$	—	$	412		$	9,545		$	5,234		$	5,195		$	4,393		$	523	$	—	$	18		$	—	$	28,363
Additions	—			—		157			—			183			899			—			—		—		—			—		1,239
Charge-offs	—			—		—			—			—			(55		)	—			—		—		—			—		(55		)
Net (paydowns) advances	(389		)	—		(296		)	(180		)	(13		)	(1,549		)	(115		)	—		—		(8		)	—		(2,550		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, December 31, 2018	$	2,654		$	—	$	273		$	9,365		$	5,404		$	4,490		$	4,278		$	523	$	—	$	10		$	—	$	26,997

Allowance related to troubled debt restructurings	$	298		$	—	$	9		$	270		$	8		$	189		$	105		$	—	$	—	$	—		$	—	$	879

We categorize loans 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. We analyze loans individually by classifying the loans as to credit risk. We internally grade all commercial loans at the time of loan origination. In addition, we perform an annual loan review on all non-homogenous commercial loan relationships with an aggregate exposure of $2.5 million, at which time these loans are re-graded. We use the following definitions for our risk grades:

Pass: Loans graded as Pass are loans to borrowers of acceptable credit quality and risk. They are higher quality loans that do not fit any of the other categories described below.

OLEM (Special Mention): Commercial loans categorized as OLEM are potentially weak. The credit risk may be relatively minor yet represent a risk given certain specific circumstances. If the potential weaknesses are not monitored or mitigated, the asset may weaken or inadequately protect our position in the future.

Substandard: Commercial loans categorized as Substandard are inadequately protected by the borrower’s ability to repay, equity and/or the collateral pledged to secure the loan. These loans have identified weaknesses that could hinder normal repayment or collection of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the identified weaknesses are not mitigated.

Doubtful: Commercial loans categorized as Doubtful have all the weaknesses inherent in those loans classified as Substandard, with the added elements that the full collection of the loan is improbable and the possibility of loss is high.

Loss: Loans classified as loss are considered to be non-collectible and of such little value that their continuance as a bankable asset is not warranted. This does not mean that 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.

The following table presents the recorded investment in construction and development, commercial and commercial real estate loans which are generally evaluated based upon our internal risk ratings defined above.



Loan Risk Profile by Internal Risk Rating
	Construction and Development												Commercial Real Estate
	Land and Land Development				Construction				Commercial				Owner Occupied				Non-Owner Occupied				Mortgage Warehouse Lines
Dollars in thousands	2018		2017		2018		2017		2018		2017		2018		2017		2018		2017		2018		2017
Pass	$	63,743	$	60,850	$	24,589	$	33,412	$	182,651	$	186,941	$	259,360	$	242,702	$	556,609	$	474,522	$	39,140	$	30,757
OLEM (Special Mention)	472		1,397		142		—		6,748		2,267		1,864		3,534		1,554		2,221		—		—
Substandard	4,618		4,972		—		—		4,916		773		5,138		3,966		6,663		8,159		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	68,833	$	67,219	$	24,731	$	33,412	$	194,315	$	189,981	$	266,362	$	250,202	$	564,826	$	484,902	$	39,140	$	30,757

The following table presents the recorded investment in consumer, residential real estate and home equity loans, which are generally evaluated based on the aging status of the loans, which was previously presented, and payment activity.



	Performing				Nonperforming
Dollars in thousands	2018		2017		2018		2017
Residential real estate
Non-jumbo	$	330,445	$	347,183	$	6,532	$	6,918
Jumbo	72,924		62,267		675		—
Home Equity	80,611		83,316		299		712
Consumer	32,312		35,932		148		270
Other	12,899		13,238		—		—
Total	$	529,191	$	541,936	$	7,654	$	7,900

Industry concentrations: At December 31, 2018 and 2017, we had no concentrations of loans to any single industry in excess of 10% of total loans.

Loans to related parties: We have had, and may be expected to have in the future, banking transactions in the ordinary course of business with our directors, principal officers, their immediate families and affiliated companies in which they are principal shareholders (commonly referred to as related parties). These transactions have been, in our opinion, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.

The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status):



Dollars in thousands	2018			2017
Balance, beginning	$	45,698		$	45,164
Additions	6,750			13,497
Amounts collected	(6,992		)	(11,802		)
Other changes, net	(1,557		)	(1,161		)
Balance, ending	$	43,899		$	45,698