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, 2018 and 2017: 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, 2018 Beginning balance, April 1 $20,725 $14,438 $4,848 $510 $2,018 $245 $2,843 $45,627 Provision for loan losses 1,392 508 (268) (46) (68) 65 117 1,700 Loans charged-off (57) 0 0 0 0 (71) 0 (128) Recoveries 464 8 5 0 3 27 0 507 Net loans charged-off 407 8 5 0 3 (44) 0 379 Ending balance $22,524 $14,954 $4,585 $464 $1,953 $266 $2,960 $47,706 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) Recoveries 289 207 6 0 28 20 0 550 Net loans charged-off 278 (4) 6 0 22 (13) 0 289 Ending balance $20,219 $13,775 $3,870 $568 $2,689 $389 $3,053 $44,563 The following tables present the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 2018 and 2017: 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, 2018 Beginning balance, January 1 $21,097 $14,714 $4,920 $577 $2,768 $379 $2,666 $47,121 Provision for loan losses 5,294 715 (344) (113) (862) 16 294 5,000 Loans charged-off (4,417) (491) 0 0 (7) (190) 0 (5,105) Recoveries 550 16 9 0 54 61 0 690 Net loans charged-off (3,867) (475) 9 0 47 (129) 0 (4,415) Ending balance $22,524 $14,954 $4,585 $464 $1,953 $266 $2,960 $47,706 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) Recoveries 512 264 10 0 75 48 0 909 Net loans charged-off 126 5 10 0 62 (58) 0 145 Ending balance $20,219 $13,775 $3,870 $568 $2,689 $389 $3,053 $44,563 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, 2018 and December 31, 2017: 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, 2018 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $2,046 $536 $0 $0 $205 $26 $0 $2,813 Collectively evaluated for impairment 20,478 14,418 4,585 464 1,748 240 2,960 44,893 Total ending allowance balance $22,524 $14,954 $4,585 $464 $1,953 $266 $2,960 $47,706 Loans: Loans individually evaluated for impairment $10,603 $4,291 $283 $0 $1,712 $47 $0 $16,936 Loans collectively evaluated for impairment 1,461,326 1,503,794 304,033 120,395 372,394 79,835 0 3,841,777 Total ending loans balance $1,471,929 $1,508,085 $304,316 $120,395 $374,106 $79,882 $0 $3,858,713 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 December 31, 2017 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $2,067 $795 $0 $0 $310 $44 $0 $3,216 Collectively evaluated for impairment 19,030 13,919 4,920 577 2,458 335 2,666 43,905 Total ending allowance balance $21,097 $14,714 $4,920 $577 $2,768 $379 $2,666 $47,121 Loans: Loans individually evaluated for impairment $6,979 $4,802 $283 $0 $1,756 $50 $0 $13,870 Loans collectively evaluated for impairment 1,411,648 1,438,219 382,643 123,922 374,013 74,144 0 3,804,589 Total ending loans balance $1,418,627 $1,443,021 $382,926 $123,922 $375,769 $74,194 $0 $3,818,459 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 $491 $491 $0 Non-working capital loans 3,006 1,611 0 Commercial real estate and multi-family residential loans: Construction and land development loans 88 88 0 Owner occupied loans 2,928 2,548 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 579 500 0 Open end and junior lien loans 243 244 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 7,282 4,594 707 Non-working capital loans 4,857 3,907 1,339 Commercial real estate and multi-family residential loans: Construction and land development loans 325 324 124 Owner occupied loans 1,689 1,331 412 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 967 968 205 Other consumer loans 47 47 26 Total $23,105 $16,936 $2,813 The following table presents loans individually evaluated for impairment by class of loans as of December 31, 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 $ 491 $ 491 $ 0 Non-working capital loans 2,973 1,579 0 Commercial real estate and multi-family residential loans: Construction and land development loans 88 88 0 Owner occupied loans 2,558 2,310 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 636 570 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 1,617 1,617 667 Non-working capital loans 3,292 3,292 1,400 Commercial real estate and multi-family residential loans: Construction and land development loans 827 827 350 Owner occupied loans 1,577 1,577 445 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 950 950 269 Open end and junior lien loans 235 236 41 Other consumer loans 50 50 44 Total $ 15,897 $ 13,870 $ 3,216 The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 2018: 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 $1,011 $6 $14 Non-working capital loans 1,738 16 26 Commercial real estate and multi-family residential loans: Construction and land development loans 88 2 3 Owner occupied loans 2,868 9 12 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 533 2 3 Open end and junior lien loans 247 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 3,005 2 2 Non-working capital loans 3,513 3 6 Commercial real estate and multi-family residential loans: Construction and land development loans 491 6 13 Owner occupied loans 1,041 1 1 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 993 8 10 Other consumer loans 48 0 2 Total $15,859 $55 $92 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 six-month period ended June 30, 2018: 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 $1,011 $13 $16 Non-working capital loans 1,733 31 31 Commercial real estate and multi-family residential loans: Construction and land development loans 95 3 3 Owner occupied loans 2,712 16 14 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 538 4 4 Open end and junior lien loans 169 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 2,307 4 3 Non-working capital loans 3,365 5 6 Commercial real estate and multi-family residential loans: Construction and land development loans 606 17 18 Owner occupied loans 1,117 1 1 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 981 15 14 Open end and junior lien loans 77 0 0 Other consumer loans 48 1 2 Total $15,042 $110 $112 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 30-89 Greater than Total Past Loans Not Days 90 Days Due and (dollars in thousands) Past Due Past Due Past Due Nonaccrual Nonaccrual Total Commercial and industrial loans: Working capital lines of credit loans $776,348 $30 $0 $4,611 $4,641 $780,989 Non-working capital loans 686,853 0 0 4,087 4,087 690,940 Commercial real estate and multi-family residential loans: Construction and land development loans 199,046 324 0 0 324 199,370 Owner occupied loans 565,838 0 0 3,242 3,242 569,080 Nonowner occupied loans 518,475 0 0 0 0 518,475 Multifamily loans 221,160 0 0 0 0 221,160 Agri-business and agricultural loans: Loans secured by farmland 148,118 0 0 283 283 148,401 Loans for agricultural production 155,915 0 0 0 0 155,915 Other commercial loans 120,395 0 0 0 0 120,395 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 178,347 1,084 0 310 1,394 179,741 Open end and junior lien loans 180,860 66 0 244 310 181,170 Residential construction loans 13,138 57 0 0 57 13,195 Other consumer loans 79,828 54 0 0 54 79,882 Total $3,844,321 $1,615 $0 $12,777 $14,392 $3,858,713 The following table presents the ageing of the recorded investment in past due loans as of December 31, 2017 by class of loans: 30-89 Greater than Total Past Loans Not Days 90 Days Due and (dollars in thousands) Past Due Past Due Past Due Nonaccrual Nonaccrual Total Commercial and industrial loans: Working capital lines of credit loans $742,205 $11 $0 $1,459 $1,470 $743,675 Non-working capital loans 671,490 0 0 3,462 3,462 674,952 Commercial real estate and multi-family residential loans: Construction and land development loans 215,713 8,000 0 0 8,000 223,713 Owner occupied loans 534,648 0 0 3,620 3,620 538,268 Nonowner occupied loans 507,696 0 0 0 0 507,696 Multifamily loans 173,100 244 0 0 244 173,344 Agri-business and agricultural loans: Loans secured by farmland 186,160 0 0 283 283 186,443 Loans for agricultural production 196,483 0 0 0 0 196,483 Other commercial loans 123,922 0 0 0 0 123,922 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 177,410 1,183 6 342 1,531 178,941 Open end and junior lien loans 183,056 89 0 236 325 183,381 Residential construction loans 13,447 0 0 0 0 13,447 Other consumer loans 74,102 92 0 0 92 74,194 Total $3,799,432 $9,619 $6 $9,402 $19,027 $3,818,459 Troubled Debt Restructurings: Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.1 million and $2.3 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2018 and December 31, 2017, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. June 30 December 31 (dollars in thousands) 2018 2017 Accruing troubled debt restructured loans $3,402 $2,893 Nonaccrual troubled debt restructured loans 7,666 7,750 Total troubled debt restructured loans $11,068 $10,643 During the three months ended June 30, 2018, one commercial and industrial loan was modified as a troubled debt restructuring due to receiving inadequate compensation for the terms of the restructure and is included in the tables below. Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended June 30, 2018. The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the company occupying the building do not support the loan with a recorded investment of $107,000. The loan to another one of the borrowers is for a vacant commercial real estate building that does not generate cash flow to support the loan with a recorded investment of $875,000. The other loans are to a borrower for an investment in land for residential development which has not had sales activity to support loans with a recorded investment of $484,000. These concessions are not included in table below. During the three months ended March 31, 2018, 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. These concessions are included in the table below. Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended March 31, 2018. The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the companies occupying the buildings do not support the loan with recorded investments of $341,000. The loans to two other borrowers are for commercial and industrial capital and non-working capital loans with recorded investments of $551,000. These concessions are not included in the table below. The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended June 30, 2018: All Modifications 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 1 $20 $20 1 0 Total 1 $20 $20 1 0 The following table presents loans by class modified as new troubled debt restructurings that occurred during the six months ended June 30, 2018: All Modifications 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: Working capital lines of credit loans 1 $600 $600 1 0 Non-working capital loans 2 1,420 1,420 2 0 Commercial real estate and multi- family residential loans: Construction and land development loans 1 824 824 1 12 Owner occupied loans 1 387 387 1 12 Consumer 1-4 family loans: Closed end first mortgage loans 1 198 197 1 239 Total 6 $3,429 $3,428 6 0-239 For the three-month period ended June 30, 2018, the troubled debt restructuring described above did not impact the allowance for loan losses and no charge-off was recorded. For the six-month period ended June 30, 2018, the debt restructurings described above decreased the allowance for loan losses by $166,000, and resulted in charge-offs of $1.6 million. 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 and are reflected in the table presented below. 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. All Modifications Modified Repayment Terms Pre-Modification Post-Modification 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, troubled debt restructurings described above increased the allowance for loan losses by $3,000 and no charge-offs resulted from the modifications. For the six-month period ended June 30, 2017, the troubled debt restructurings described above increased the allowance for loan losses by $86,000 and no charge-offs resulted from the modifications. 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, 2018 and 2017. 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. Loans classified as Special Mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. 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. Special Not (dollars in thousands) Pass Mention Substandard Doubtful Rated Total Commercial and industrial loans: Working capital lines of credit loans $692,253 $64,679 $23,698 $0 $359 $780,989 Non-working capital loans 634,295 27,890 23,657 0 5,098 690,940 Commercial real estate and multi- family residential loans: Construction and land development loans 198,605 441 324 0 0 199,370 Owner occupied loans 523,574 23,609 21,897 0 0 569,080 Nonowner occupied loans 515,925 1,883 667 0 0 518,475 Multifamily loans 220,931 229 0 0 0 221,160 Agri-business and agricultural loans: Loans secured by farmland 136,465 8,358 3,578 0 0 148,401 Loans for agricultural production 144,728 9,287 1,900 0 0 155,915 Other commercial loans 120,391 0 0 0 4 120,395 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 52,761 0 1,467 0 125,513 179,741 Open end and junior lien loans 8,306 0 244 0 172,620 181,170 Residential construction loans 0 0 0 0 13,195 13,195 Other consumer loans 13,832 0 47 0 66,003 79,882 Total $3,262,066 $136,376 $77,479 $0 $382,792 $3,858,713 As of December 31, 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 $688,748 $33,337 $21,350 $0 $240 $743,675 Non-working capital loans 624,275 20,171 25,834 0 4,672 674,952 Commercial real estate and multi- family residential loans: Construction and land development loans 222,445 441 827 0 0 223,713 Owner occupied loans 496,231 19,361 22,676 0 0 538,268 Nonowner occupied loans 505,033 1,970 693 0 0 507,696 Multifamily loans 173,100 244 0 0 0 173,344 Agri-business and agricultural loans: Loans secured by farmland 174,118 7,988 4,337 0 0 186,443 Loans for agricultural production 185,772 9,716 995 0 0 196,483 Other commercial loans 123,917 0 0 0 5 123,922 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 52,301 0 1,520 0 125,120 178,941 Open end and junior lien loans 8,259 0 236 0 174,886 183,381 Residential construction loans 0 0 0 0 13,447 13,447 Other consumer loans 18,642 0 50 0 55,502 74,194 Total $3,272,841 $93,228 $78,518 $0 $373,872 $3,818,459 |