ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY | NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended June 30, 2017 and 2016: Commercial Real Estate Commercial and Agri-business Consumer and Multifamily and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total Three Months Ended June 30, 2017 Beginning balance, April 1 $19,781 $13,718 $3,459 $545 $2,790 $379 $3,102 $43,774 Provision for loan losses 160 61 405 23 (123) 23 (49) 500 Loans charged-off (11) (211) 0 0 (6) (33) 0 (261) 289 207 6 0 28 20 0 550 Net (charge-offs)/recoveries 278 (4) 6 0 22 (13) 0 289 Ending balance $20,219 $13,775 $3,870 $568 $2,689 $389 $3,053 $44,563 Real Estate Commercial and Agri-business Consumer and Multifamily and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total Three Months Ended June 30, 2016 Beginning balance, April 1 $20,465 $12,752 $2,454 $559 $3,586 $344 $3,124 $43,284 Provision for loan losses 605 (315) 589 (194) (563) 6 (128) 0 Loans charged-off (160) 0 0 0 (92) (45) 0 (297) Recoveries 25 200 4 0 3 28 0 260 Net (charge-offs)/recoveries (135) 200 4 0 (89) (17) 0 (37) Ending balance $20,935 $12,637 $3,047 $365 $2,934 $333 $2,996 $43,247 The following tables present the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 2017 and 2016: Commercial Real Estate Commercial and Agri-business Consumer and Multifamily and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total Six Months Ended June 30, 2017 Beginning balance, January 1 $20,272 $13,452 $3,532 $461 $2,827 $387 $2,787 $43,718 Provision for loan losses (179) 318 328 107 (200) 60 266 700 Loans charged-off (386) (259) 0 0 (13) (106) 0 (764) 512 264 10 0 75 48 0 909 Net (charge-offs)/recoveries 126 5 10 0 62 (58) 0 145 Ending balance $20,219 $13,775 $3,870 $568 $2,689 $389 $3,053 $44,563 Commercial Real Estate Commercial and Agri-business Consumer and Multifamily and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total Six Months Ended June 30, 2016 Beginning balance, January 1 $21,564 $12,473 $2,445 $574 $3,395 $319 $2,840 $43,610 Provision for loan losses (342) 121 593 (209) (367) 48 156 0 Loans charged-off (374) (168) 0 0 (130) (90) 0 (762) Recoveries 87 211 9 0 36 56 0 399 Net (charge-offs)/recoveries (287) 43 9 0 (94) (34) 0 (363) Ending balance $20,935 $12,637 $3,047 $365 $2,934 $333 $2,996 $43,247 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2017 and December 31, 2016: Commercial Real Estate Commercial and Agri-business Consumer and Multifamily and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total June 30, 2017 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $3,734 $561 $0 $0 $286 $44 $0 $4,625 Collectively evaluated for impairment 16,485 13,214 3,870 568 2,403 345 3,053 39,938 Total ending allowance balance $20,219 $13,775 $3,870 $568 $2,689 $389 $3,053 $44,563 Loans: Loans individually evaluated for impairment $11,192 $6,661 $283 $0 $1,391 $53 $0 $19,580 Loans collectively evaluated for impairment 1,353,075 1,334,473 331,173 116,493 353,809 68,401 0 3,557,424 Total ending loans balance $1,364,267 $1,341,134 $331,456 $116,493 $355,200 $68,454 $0 $3,577,004 Commercial Real Estate Commercial and Agri-business Consumer and Multi-family and Other 1-4 Family Other (dollars in thousands) Industrial Residential Agricultural Commercial Mortgage Consumer Unallocated Total December 31, 2016 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $3,191 $576 $0 $0 $296 $51 $0 $4,114 Collectively evaluated for impairment 17,081 12,876 3,532 461 2,531 336 2,787 39,604 Total ending allowance balance $20,272 $13,452 $3,532 $461 $2,827 $387 $2,787 $43,718 Loans: Loans individually evaluated for impairment $9,776 $9,151 $283 $0 $1,427 $55 $0 $20,692 Loans collectively evaluated for impairment 1,258,682 1,290,131 394,621 98,265 347,408 61,128 0 3,450,235 Total ending loans balance $1,268,458 $1,299,282 $394,904 $98,265 $348,835 $61,183 $0 $3,470,927 The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2017: Unpaid Allowance for Principal Recorded Loan Losses (dollars in thousands) Balance Investment Allocated With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $515 $515 $0 Non-working capital loans 3,052 1,303 0 Commercial real estate and multi-family residential loans: Construction and land development loans 126 126 0 Owner occupied loans 2,515 2,267 0 Nonowner occupied loans 2,797 2,797 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 341 260 0 Open end and junior lien loans 366 154 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 2,839 2,536 1,212 Non-working capital loans 6,839 6,838 2,522 Commercial real estate and multi-family residential loans: Owner occupied loans 1,472 1,471 561 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 976 977 286 Other consumer loans 53 53 44 Total $22,494 $19,580 $4,625 The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016: Unpaid Allowance for Principal Recorded Loan Losses (dollars in thousands) Balance Investment Allocated With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $951 $494 $0 Non-working capital loans 3,007 1,358 0 Commercial real estate and multi-family residential loans: Construction and land development loans 126 126 0 Owner occupied loans 2,868 2,620 0 Nonowner occupied loans 4,632 4,633 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 161 147 0 Open end and junior lien loans 408 195 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 1,100 1,099 465 Non-working capital loans 6,827 6,825 2,726 Commercial real estate and multi-family residential loans: Owner occupied loans 1,773 1,772 576 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,152 1,085 296 Other consumer loans 55 55 51 Total $23,663 $20,692 $4,114 The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 2017: Cash Basis Average Interest Interest Recorded Income Income (dollars in thousands) Investment Recognized Recognized With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $ 562 $ 8 $ 8 Non-working capital loans 1,310 9 6 Commercial real estate and multi-family residential loans: Construction and land development loans 126 1 1 Owner occupied loans 2,390 2 1 Nonowner occupied loans 2,803 70 59 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 213 2 2 Open end and junior lien loans 155 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 2,376 11 4 Non-working capital loans 6,855 42 30 Commercial real estate and multi-family residential loans: Owner occupied loans 1,544 3 2 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,028 5 2 Other consumer loans 53 1 0 Total $ 19,698 $ 154 $ 115 The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 2016: Cash Basis Average Interest Interest Recorded Income Income (dollars in thousands) Investment Recognized Recognized With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $493 $0 $0 Non-working capital loans 557 0 0 Commercial real estate and multi-family residential loans: Owner occupied loans 2,536 0 0 Nonowner occupied loans 4,783 88 89 Agri-business and agricultural loans: Loans secured by farmland 471 0 0 Loans for ag production 2,032 5 4 Consumer 1-4 family loans: Closed end first mortgage loans 149 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 841 5 5 Non-working capital loans 4,077 33 34 Commercial real estate and multi-family residential loans: Construction and land development loans 297 4 2 Owner occupied loans 975 0 0 Multifamily loans 383 5 5 Agri-business and agricultural loans: Other commercial loans 12 2 0 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,363 10 14 Open end and junior lien loans 165 0 0 Other consumer loans 58 1 1 Total $19,192 $153 $154 The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 2017: Cash Basis Average Interest Interest Recorded Income Income (dollars in thousands) Investment Recognized Recognized With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $ 570 $ 15 $ 15 Non-working capital loans 1,345 17 14 Commercial real estate and multi-family residential loans: Construction and land development loans 126 2 2 Owner occupied loans 2,481 3 2 Nonowner occupied loans 3,703 154 143 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 202 3 3 Open end and junior lien loans 156 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 1,870 22 17 Non-working capital loans 6,777 91 81 Commercial real estate and multi-family residential loans: Owner occupied loans 1,605 8 7 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,050 12 9 Other consumer loans 54 2 1 Total $ 20,222 $ 329 $ 294 The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 2016: Cash Basis Average Interest Interest Recorded Income Income (dollars in thousands) Investment Recognized Recognized With no related allowance recorded: Commercial and industrial loans: Working capital lines of credit loans $256 $0 $0 Non-working capital loans 615 0 0 Commercial real estate and multi-family residential loans: Owner occupied loans 2,630 0 0 Nonowner occupied loans 4,796 117 112 Agri-business and agricultural loans: Loans secured by farmland 471 0 0 Loans for ag production 1,016 5 4 Consumer 1-4 family loans: Closed end first mortgage loans 98 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 1,097 10 10 Non-working capital loans 4,356 67 68 Commercial real estate and multi-family residential loans: Construction and land development loans 318 7 5 Owner occupied loans 959 0 0 Nonowner occupied loans 38 0 0 Multifamily loans 384 10 10 Agri-business and agricultural loans: Other commercial loans 12 2 0 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,495 25 25 Open end and junior lien loans 208 0 0 Other consumer loans 58 2 2 Total $18,807 $245 $236 The following table presents the ageing of the recorded investment in past due loans as of June 30, 2017 by class of loans: 30-89 Greater than Loans Not Days 90 Days Total (dollars in thousands) Past Due Past Due Past Due Nonaccrual Past Due Total Commercial and industrial loans: Working capital lines of credit loans $716,236 $0 $0 $1,614 $1,614 $717,850 Non-working capital loans 642,356 1 0 4,060 4,061 646,417 Commercial real estate and multi-family residential loans: Construction and land development loans 208,881 0 0 0 0 208,881 Owner occupied loans 507,600 48 0 3,471 3,519 511,119 Nonowner occupied loans 450,427 0 0 106 106 450,533 Multifamily loans 170,601 0 0 0 0 170,601 Agri-business and agricultural loans: Loans secured by farmland 155,745 30 0 283 313 156,058 Loans for agricultural production 175,398 0 0 0 0 175,398 Other commercial loans 116,493 0 0 0 0 116,493 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 169,758 1,198 0 196 1,394 171,152 Open end and junior lien loans 173,646 156 0 154 310 173,956 Residential construction loans 10,092 0 0 0 0 10,092 Other consumer loans 68,325 129 0 0 129 68,454 Total $3,565,558 $1,562 $0 $9,884 $11,446 $3,577,004 The following table presents the ageing of the recorded investment in past due loans as of December 31, 2016 by class of loans: 30-89 Greater than Loans Not Days 90 Days Total (dollars in thousands) Past Due Past Due Past Due Nonaccrual Past Due Total Commercial and industrial loans: Working capital lines of credit loans $624,213 $9 $0 $140 $149 $624,362 Non-working capital loans 642,014 0 0 2,082 2,082 644,096 Commercial real estate and multi-family residential loans: Construction and land development loans 244,411 0 0 0 0 244,411 Owner occupied loans 465,789 0 0 3,598 3,598 469,387 Nonowner occupied loans 457,880 0 0 122 122 458,002 Multi-family loans 127,482 0 0 0 0 127,482 Agri-business and agricultural loans: Loans secured by farmland 172,349 0 0 283 283 172,632 Loans for agricultural production 222,272 0 0 0 0 222,272 Other commercial loans 98,265 0 0 0 0 98,265 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 161,499 1,072 53 213 1,338 162,837 Open end and junior lien loans 170,372 448 0 195 643 171,015 Residential construction loans 14,983 0 0 0 0 14,983 Other consumer loans 61,119 64 0 0 64 61,183 Total $3,462,648 $1,593 $53 $6,633 $8,279 $3,470,927 Troubled Debt Restructurings: Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.9 million and $2.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2017 and December 31, 2016. June 30 December 31 (dollars in thousands) 2017 2016 Accruing troubled debt restructured loans $8,425 $10,351 Nonaccrual troubled debt restructured loans 6,852 5,633 Total troubled debt restructured loans $15,277 $15,984 During the three months ended June 30, 2017, no loans were modified as troubled debt restructurings. During the three months ended March 31, 2017, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three months ended March 31, 2017. The loans to two of the borrowers are for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $500,000. The loans to two other borrowers are for commercial and industrial non-working capital loans with recorded investments of $690,000. These concessions are not included in table below. Modified Repayment Terms Pre-Modification Post-Modification Extension Outstanding Outstanding Period or Number of Recorded Recorded Number of Range (dollars in thousands) Loans Investment Investment Loans (in months) Troubled Debt Restructurings Commercial and industrial loans: Non-working capital loans 2 $1,712 $1,712 2 6 Commercial real estate and multi- family residential loans: Owner occupied loans 1 486 486 1 6 Consumer 1-4 family loans: Closed end first mortgage loans 1 44 46 1 350 Total 4 $2,242 $2,244 4 6-350 For the three-month period ended June 30, 2017, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $8,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above decreased the allowance for loan losses by $5,000. For the six-month period ended June 30, 2017, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $42,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $44,000. No charge-offs resulted from any troubled debt restructurings described above during the three- or six-month periods ended June 30, 2017. During the three months ended June 30, 2016, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal. During the three months ended June 30, 2016, there were renewal terms, which are considered additional concessions, offered to three borrowers under financial duress with previously identified troubled debt restructured loans which did not require additional compensation or consideration, and the terms offered would not have been readily available in the marketplace for loans bearing a similar risk profile. In these instances, it was determined that a concession had been granted. The loan to one of the borrowers was for a commercial real estate building where the collateral value and cash flows from the company occupying the building does not support the loan with a recorded investment of $374,000. The loans to the other two borrowers are for commercial and industrial non-working capital loans with recorded investments of $574,000. These concessions are not included in the table below. Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-months ended March 31, 2016. The loans to two of the borrowers are for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $542,000. The other loans were to a borrower engaged in land development, where the aggregate recorded investment totaled $484,000. These concessions are not included in table below. The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended June 30, 2016: Modified Repayment Terms Pre-Modification Post-Modification Extension Outstanding Outstanding Period or Number of Recorded Recorded Number of Range (dollars in thousands) Loans Investment Investment Loans (in months) Troubled Debt Restructurings Commercial and industrial loans: Non-working capital loans 3 $775 $775 3 9-15 Commercial real estate and multi- family residential loans: Owner occupied loans 1 305 305 1 13 Total 4 $1,080 $1,080 4 9-15 The following table presents loans by class modified as new troubled debt restructurings that occurred during the six months ended June 30, 2016: Modified Repayment Terms Pre-Modification Post-Modification Extension Outstanding Outstanding Period or Number of Recorded Recorded Number of Range (dollars in thousands) Loans Investment Investment Loans (in months) Troubled Debt Restructurings Commercial and industrial loans: Non-working capital loans 3 $775 $775 3 9-15 Commercial real estate and multi- family residential loans: Owner occupied loans 2 640 640 2 13-15 Total 5 $1,415 $1,415 5 9-15 For the three months ended June 30, 2016, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $182,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above decreased the allowance for loan losses by $145,000. For the six months ended June 30, 2016, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $684,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $15,000. No charge-offs resulted from any troubled debt restructurings described above during the three- or six-month periods ended June 30, 2016. There were no troubled debt restructurings that had payment defaults within the twelve months following modification during the three- or six-month periods ended June 30, 2017 and 2016. Credit Quality Indicators: The Company categorizes 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. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $150,000. The Company uses the following definitions for risk ratings: Special Mention. Substandard. Doubtful. Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of June 30, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Special Not (dollars in thousands) Pass Mention Substandard Doubtful Rated Total Commercial and industrial loans: Working capital lines of credit loans $660,503 $30,547 $26,602 $0 $198 $717,850 Non-working capital loans 596,679 23,539 22,546 0 3,653 646,417 Commercial real estate and multi- family residential loans: Construction and land development loans 207,566 1,315 0 0 0 208,881 Owner occupied loans 483,925 14,384 12,810 0 0 511,119 Nonowner occupied loans 445,235 4,475 823 0 0 450,533 Multifamily loans 170,349 252 0 0 0 170,601 Agri-business and agricultural loans: Loans secured by farmland 146,607 7,051 2,400 0 0 156,058 Loans for agricultural production 170,484 4,209 705 0 0 175,398 Other commercial loans 116,489 0 0 0 4 116,493 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 45,974 0 1,237 0 123,941 171,152 Open end and junior lien loans 7,275 0 0 0 166,681 173,956 Residential construction loans 0 0 0 0 10,092 10,092 Other consumer loans 19,612 0 53 0 48,789 68,454 Total $3,070,698 $85,772 $67,176 $0 $353,358 $3,577,004 As of December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Special Not (dollars in thousands) Pass Mention Substandard Doubtful Rated Total Commercial and industrial loans: Working capital lines of credit loans $577,208 $17,636 $29,396 $0 $122 $624,362 Non-working capital loans 583,135 32,587 24,405 0 3,969 644,096 Commercial real estate and multi- family residential loans: Construction and land development loans 242,964 1,447 0 0 0 244,411 Owner occupied loans 444,143 10,285 14,959 0 0 469,387 Nonowner occupied loans 451,390 4,550 2,062 0 0 458,002 Multi-family loans 127,219 263 0 0 0 127,482 Agri-business and agricultural loans: Loans secured by farmland 168,660 3,689 283 0 0 172,632 Loans for agricultural production 218,581 3,691 0 0 0 222,272 Other commercial loans 98,261 0 0 0 4 98,265 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 44,687 126 1,232 0 116,792 162,837 Open end and junior lien loans 7,028 0 0 0 163,987 171,015 Residential construction loans 0 0 0 0 14,983 14,983 Other consumer loans 17,717 0 55 0 43,411 61,183 Total $2,980,993 $74,274 $72,392 $0 $343,268 $3,470,927 |