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 March 31, 2019 and 2018: 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 March 31, 2019 Beginning balance, January 1 $22,518 $15,393 $4,305 $368 $2,292 $283 $3,294 $48,453 Provision for loan losses 1,493 18 (161) 5 45 85 (285) 1,200 Loans charged-off (83) 0 0 0 (82) (119) 0 (284) 102 36 2 0 11 42 0 193 Net loans charged-off 19 36 2 0 (71) (77) 0 (91) Ending balance $24,030 $15,447 $4,146 $373 $2,266 $291 $3,009 $49,562 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 March 31, 2018 Beginning balance, January 1 $21,097 $14,714 $4,920 $577 $2,768 $379 $2,666 $47,121 Provision for loan losses 3,902 207 (76) (67) (794) (49) 177 3,300 Loans charged-off (4,360) (491) 0 0 (7) (119) 0 (4,977) Recoveries 86 8 4 0 51 34 0 183 Net loans charged-off (4,274) (483) 4 0 44 (85) 0 (4,794) Ending balance $20,725 $14,438 $4,848 $510 $2,018 $245 $2,843 $45,627 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 March 31, 2019 and December 31, 2018: 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 March 31, 2019 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $8,860 $398 $81 $0 $467 $28 $0 $9,834 Collectively evaluated for impairment 15,170 15,049 4,065 373 1,799 263 3,009 39,728 Total ending allowance balance $24,030 $15,447 $4,146 $373 $2,266 $291 $3,009 $49,562 Loans: Loans individually evaluated for impairment $18,611 $3,441 $430 $0 $2,022 $43 $0 $24,547 Loans collectively evaluated for impairment 1,408,737 1,623,594 301,976 111,875 383,913 84,368 0 3,914,463 Total ending loans balance $1,427,348 $1,627,035 $302,406 $111,875 $385,935 $84,411 $0 $3,939,010 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, 2018 Allowance for loan losses: Ending allowance balance attributable to loans: Individually evaluated for impairment $8,552 $921 $73 $0 $457 $26 $0 $10,029 Collectively evaluated for impairment 13,966 14,472 4,232 368 1,835 257 3,294 38,424 Total ending allowance balance $22,518 $15,393 $4,305 $368 $2,292 $283 $3,294 $48,453 Loans: Loans individually evaluated for impairment $19,734 $4,266 $433 $0 $2,240 $44 $0 $26,717 Loans collectively evaluated for impairment 1,385,604 1,562,899 370,174 95,520 388,053 85,778 0 3,888,028 Total ending loans balance $1,405,338 $1,567,165 $370,607 $95,520 $390,293 $85,822 $0 $3,914,745 The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2019: 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 $ 2,904 $ 212 $ 0 Non-working capital loans 2,345 950 0 Commercial real estate and multi-family residential loans: Owner occupied loans 2,272 1,667 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 224 143 0 Open end and junior lien loans 98 98 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 6,698 6,390 2,874 Non-working capital loans 11,016 11,059 5,986 Commercial real estate and multi-family residential loans: Owner occupied loans 1,774 1,774 398 Agri-business and agricultural loans: Loans secured by farmland 147 147 81 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,779 1,781 467 Other consumer loans 43 43 28 Total $ 29,903 $ 24,547 $ 9,834 The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018: Unpaid Allowance for Principal Recorded Loan Losses (dollars in thousands) Balance Investment Allocated With no related allowance recorded: Commercial and industrial loans: Non-working capital loans $ 3,284 $ 1,889 $ 0 Commercial real estate and multi-family residential loans: Owner occupied loans 1,773 1,527 0 Agri-business and agricultural loans: Loans secured by farmland 603 283 0 Consumer 1-4 family loans: Closed end first mortgage loans 583 502 0 Open end and junior lien loans 220 220 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 9,691 6,694 2,602 Non-working capital loans 11,099 11,151 5,950 Commercial real estate and multi-family residential loans: Construction and land development loans 291 291 142 Owner occupied loans 2,938 2,448 779 Agri-business and agricultural loans: Loans secured by farmland 150 150 73 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,517 1,518 457 Other consumer loans 45 44 26 Total $ 32,194 $ 26,717 $ 10,029 The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 2019: 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 $ 155 $ 1 $ 0 Non-working capital loans 1,549 29 24 Commercial real estate and multi-family residential loans: Owner occupied loans 1,621 11 8 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 380 1 1 Open end and junior lien loans 193 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 6,487 72 59 Non-working capital loans 11,416 132 128 Commercial real estate and multi-family residential loans: Owner occupied loans 2,080 13 12 Agri-business and agricultural loans: Loans secured by farmland 147 2 1 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 1,598 12 12 Other consumer loans 43 1 1 Total $ 25,952 $ 274 $ 246 The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 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 $ 7 $ 2 Non-working capital loans 1,728 15 5 Commercial real estate and multi-family residential loans: Construction and land development loans 102 1 0 Owner occupied loans 2,557 7 2 Agri-business and agricultural loans: Loans secured by farmland 283 0 0 Consumer 1-4 family loans: Closed end first mortgage loans 543 2 1 Open end and junior lien loans 92 0 0 With an allowance recorded: Commercial and industrial loans: Working capital lines of credit loans 1,608 2 1 Non-working capital loans 3,216 2 0 Commercial real estate and multi-family residential loans: Construction and land development loans 721 11 5 Owner occupied loans 1,194 0 0 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 968 7 4 Open end and junior lien loans 154 0 0 Other consumer loans 49 1 0 Total $ 14,226 $ 55 $ 20 The following table presents the aging of the recorded investment in past due loans as of March 31, 2019 by class of loans: Greater than 30-89 90 Days Past Total Past Loans Not Days Due and Still Due and (dollars in thousands) Past Due Past Due Accruing Nonaccrual Nonaccrual Total Commercial and industrial loans: Working capital lines of credit loans $ 720,597 $ 4,308 $ 0 $ 2,118 $ 6,426 $ 727,023 Non-working capital loans 695,711 3,354 0 1,260 4,614 700,325 Commercial real estate and multi-family residential loans: Construction and land development loans 292,627 0 0 0 0 292,627 Owner occupied loans 554,668 47 481 1,749 2,277 556,945 Nonowner occupied loans 536,900 142 0 0 142 537,042 Multifamily loans 240,421 0 0 0 0 240,421 Agri-business and agricultural loans: Loans secured by farmland 139,230 147 0 283 430 139,660 Loans for agricultural production 162,746 0 0 0 0 162,746 Other commercial loans 111,875 0 0 0 0 111,875 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 186,373 1,466 0 588 2,054 188,427 Open end and junior lien loans 184,217 87 0 98 185 184,402 Residential construction loans 13,106 0 0 0 0 13,106 Other consumer loans 84,265 146 0 0 146 84,411 Total $ 3,922,736 $ 9,697 $ 481 $ 6,096 $ 16,274 $ 3,939,010 The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans: Greater than 30-89 90 Days Past Total Past Loans Not Days Due and Still Due and (dollars in thousands) Past Due Past Due Accruing Nonaccrual Nonaccrual Total Commercial and industrial loans: Working capital lines of credit loans $ 684,191 $ 4,328 $ 0 $ 2,245 $ 6,573 $ 690,764 Non-working capital loans 709,629 3,368 0 1,577 4,945 714,574 Commercial real estate and multi-family residential loans: Construction and land development loans 265,544 0 0 0 0 265,544 Owner occupied loans 583,214 486 0 2,269 2,755 585,969 Nonowner occupied loans 520,431 57 0 0 57 520,488 Multi-family loans 195,164 0 0 0 0 195,164 Agri-business and agricultural loans: Loans secured by farmland 177,080 150 0 283 433 177,513 Loans for agricultural production 193,094 0 0 0 0 193,094 Other commercial loans 95,520 0 0 0 0 95,520 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 183,420 1,370 0 671 2,041 185,461 Open end and junior lien loans 188,320 98 0 220 318 188,638 Residential construction loans 16,194 0 0 0 0 16,194 Other consumer loans 85,654 168 0 0 168 85,822 Total $ 3,897,455 $ 10,025 $ 0 $ 7,265 $ 17,290 $ 3,914,745 Troubled Debt Restructurings: Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.9 million and $3.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2019 and December 31, 2018, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. March 31 December 31 (dollars in thousands) 2019 2018 Accruing troubled debt restructured loans $ 6,196 $ 8,016 Nonaccrual troubled debt restructured loans 3,812 4,384 Total troubled debt restructured loans $ 10,008 $ 12,400 During the three months ending March 31, 2019, 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 period. One of the loans is for a commercial real estate building where the cash flow does not support the loan with a recorded investment of $533,000. The other loan is for commercial and industrial non-working capital purposes and this borrower had a recorded investment of $70,000 that was subsequently paid off prior to March 31, 2019. 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 March 31, 2019: 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 35 35 1 0 Total 1 $ 35 $ 35 1 0 For the three month period ending March 31, 2019, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded. 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. Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period. 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 following table. The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended March 31, 2018: 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 1 1,400 1,400 1 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 5 $ 3,409 $ 3,408 5 0 239 For the three-month period ending March 31, 2018, the troubled debt restructurings described in the table above decreased the allowance for loan losses by $227,000, primarily due to the reduction of the allowance for loan losses on the construction and land development loan described in the table above. For the three-month period ending March 31, 2018, charge-offs of $1.6 million were recorded on the troubled debt restructurings described in the table above, which were from the charge-offs taken on the two commercial and industrial loans described in the table above. 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 $250,000. 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. Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 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 March 31, 2019, 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 $ 638,075 $ 59,140 $ 29,489 $ 0 $ 319 $ 727,023 Non-working capital loans 651,748 17,072 25,632 0 5,873 700,325 Commercial real estate and multi- family residential loans: Construction and land development loans 292,275 352 0 0 0 292,627 Owner occupied loans 509,539 25,024 22,382 0 0 556,945 Nonowner occupied loans 533,975 2,439 628 0 0 537,042 Multifamily loans 240,211 210 0 0 0 240,421 Agri-business and agricultural loans: Loans secured by farmland 128,492 9,388 1,780 0 0 139,660 Loans for agricultural production 153,470 7,476 1,800 0 0 162,746 Other commercial loans 111,871 0 0 0 4 111,875 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 56,681 0 1,924 0 129,822 188,427 Open end and junior lien loans 8,613 0 98 0 175,691 184,402 Residential construction loans 0 0 0 0 13,106 13,106 Other consumer loans 12,868 0 43 0 71,500 84,411 Total $ 3,337,818 $ 121,101 $ 83,776 $ 0 $ 396,315 $ 3,939,010 As of December 31, 2018, 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 $ 618,612 $ 43,240 $ 28,563 $ 0 $ 349 $ 690,764 Non-working capital loans 664,787 15,992 27,548 0 6,247 714,574 Commercial real estate and multi- family residential loans: Construction and land development loans 264,900 353 291 0 0 265,544 Owner occupied loans 541,734 21,864 22,371 0 0 585,969 Nonowner occupied loans 517,356 2,491 641 0 0 520,488 Multifamily loans 194,948 216 0 0 0 195,164 Agri-business and agricultural loans: Loans secured by farmland 166,623 9,107 1,783 0 0 177,513 Loans for agricultural production 183,189 8,155 1,750 0 0 193,094 Other commercial loans 95,516 0 0 0 4 95,520 Consumer 1-4 family mortgage loans: Closed end first mortgage loans 54,879 0 2,021 0 128,561 185,461 Open end and junior lien loans 8,810 0 220 0 179,608 188,638 Residential construction loans 0 0 0 0 16,194 16,194 Other consumer loans 12,700 0 44 0 73,078 85,822 Total $ 3,324,054 $ 101,418 $ 85,232 $ 0 $ 404,041 $ 3,914,745 |