Credit Quality of Loans and Allowance for Loan Losses | Credit Quality of Loans and Allowance for Loan Losses The loan portfolio consisted of the following (in thousands): September 30, 2016 December 31, 2015 Commercial, financial and agricultural $ 463,031 $ 454,028 Real estate – construction 96,365 74,952 Real estate – commercial 464,853 471,141 Real estate – residential 155,653 149,064 Installment loans to individuals 88,537 111,009 Lease financing receivable 1,449 1,968 Other 2,912 1,483 1,272,800 1,263,645 Less allowance for loan losses (23,268 ) (19,011 ) $ 1,249,532 $ 1,244,634 The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At September 30, 2016 , one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio. The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $243.3 million , or 19.1% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At September 30, 2016 , loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $542.2 million . Of the $542.2 million , $464.9 million represent CRE loans, 54% of which are secured by owner-occupied commercial properties. Of the $542.2 million in loans secured by commercial real estate, $28.3 million , or 5.2% , were on nonaccrual status at September 30, 2016 . Allowance for Loan Losses The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery. Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various factors. Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries). The allowance is composed of general reserves and specific reserves. General reserves are determined by applying loss percentages to segments of the portfolio. The loss percentages are based on each segment’s historical loss experience, generally over the past twelve to eighteen months, and adjustment factors derived from conditions in the Company’s internal and external environment. All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP. Loans for which specific reserves are provided are excluded from the calculation of general reserves. Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference. The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses. A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, 2016 and 2015 is as follows (in thousands): September 30, 2016 Real Estate Coml, Fin, and Agric Constru-ction Commercial Residential Installment loans to individuals Lease financing receivable Other Total Allowance for loan losses: Beginning balance $ 11,268 $ 819 $ 4,614 $ 816 $ 1,468 $ 14 $ 12 $ 19,011 Charge-offs (2,957 ) — (208 ) (24 ) (991 ) — — (4,180 ) Recoveries 193 — 115 4 125 — — 437 Provision 6,747 (478 ) 1,042 (97 ) 781 (5 ) 10 8,000 Ending balance $ 15,251 $ 341 $ 5,563 $ 699 $ 1,383 $ 9 $ 22 $ 23,268 Ending balance: individually evaluated for impairment $ 1,105 $ — $ 2,270 $ 194 $ 268 $ — $ — $ 3,837 Ending balance: collectively evaluated for impairment $ 14,146 $ 341 $ 3,293 $ 505 $ 1,115 $ 9 $ 22 $ 19,431 Loans: Ending balance $ 463,031 $ 96,365 $ 464,853 $ 155,653 $ 88,537 $ 1,449 $ 2,912 $ 1,272,800 Ending balance: individually evaluated for impairment $ 29,887 $ 10 $ 28,285 $ 1,831 $ 464 $ — $ — $ 60,477 Ending balance: collectively evaluated for impairment $ 433,144 $ 96,355 $ 435,985 $ 153,747 $ 88,073 $ 1,449 $ 2,912 $ 1,211,665 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ 583 $ 75 $ — $ — $ — $ 658 September 30, 2015 Real Estate Coml, Fin, and Agric Constr-uction Commercial Residential Installment loans to individuals Lease financing receivable Other Total Allowance for loan losses: Beginning balance $ 5,729 $ 954 $ 2,402 $ 810 $ 1,311 $ 16 $ 4 $ 11,226 Charge-offs (2,310 ) (76 ) (169 ) (45 ) (883 ) — — (3,483 ) Recoveries 185 1 20 10 80 — — 296 Provision 8,016 (62 ) 2,107 (104 ) 923 13 7 10,900 Ending balance $ 11,620 $ 817 $ 4,360 $ 671 $ 1,431 $ 29 $ 11 $ 18,939 Ending balance: individually evaluated for impairment $ 2,569 $ 26 $ 1,739 $ 147 $ 216 $ — $ — $ 4,697 Ending balance: collectively evaluated for impairment $ 9,051 $ 791 $ 2,621 $ 524 $ 1,215 $ 29 $ 11 $ 14,242 Loans: Ending balance $ 482,452 $ 74,279 $ 473,319 $ 151,667 $ 113,199 $ 4,790 $ 1,746 $ 1,301,452 Ending balance: individually evaluated for impairment $ 29,185 $ 212 $ 19,928 $ 1,796 $ 386 $ — $ — $ 51,507 Ending balance: collectively evaluated for impairment $ 453,267 $ 74,067 $ 452,758 $ 149,788 $ 112,813 $ 4,790 $ 1,746 $ 1,249,229 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ 633 $ 83 $ — $ — $ — $ 716 Non-Accrual and Past Due Loans Loans are considered past due if the required principal and interest payment have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual. For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance. Interest income is recorded after principal has been satisfied and as payments are received. Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms. An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands): September 30, 2016 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 days and Accruing Commercial, financial, and agricultural $ 3,213 $ 1,255 $ 29,710 $ 34,178 $ 428,853 $ 463,031 $ 42 Real estate - construction 206 — 829 1,035 95,330 96,365 819 Real estate - commercial 3,539 — 26,219 29,758 435,095 464,853 — Real estate - residential 853 457 1,587 2,897 152,756 155,653 82 Installment loans to individuals 397 370 489 1,256 87,281 88,537 25 Lease financing receivable — — — — 1,449 1,449 — Other loans 83 11 — 94 2,818 2,912 — $ 8,291 $ 2,093 $ 58,834 $ 69,218 $ 1,203,582 $ 1,272,800 $ 968 December 31, 2015 30-59 Days Past Due 60-89 Days Past Due Greater than 90 Days Past Due Total Past Due Current Total Loans Recorded Investment > 90 days and Accruing Commercial, financial, and agricultural $ 1,362 $ 2,317 $ 25,696 $ 29,375 $ 424,653 $ 454,028 $ 59 Real estate - construction 1,047 — 12 1,059 73,893 74,952 — Real estate - commercial 1,164 514 19,512 21,190 449,951 471,141 — Real estate - residential 1,703 367 1,563 3,633 145,431 149,064 19 Installment loans to individuals 1,022 244 409 1,675 109,334 111,009 69 Lease financing receivable — — — — 1,968 1,968 — Other loans 101 4 — 105 1,378 1,483 — $ 6,399 $ 3,446 $ 47,192 $ 57,037 $ 1,206,608 $ 1,263,645 $ 147 Non-accrual loans are as follows (in thousands): September 30, 2016 December 31, 2015 Commercial, financial, and agricultural $ 29,874 $ 27,705 Real estate - construction 10 37 Real estate - commercial 28,285 19,907 Real estate - residential 1,889 1,998 Installment loans to individuals 464 404 Lease financing receivable — — Other — — $ 60,522 $ 50,051 The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $2.5 million and $1.3 million for the nine months ended September 30, 2016 and 2015 , respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled at September 30, 2016 and 2015 was $128,000 and $19,000 , respectively. Impaired Loans Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collaterally dependent. All impaired loans are reviewed, at a minimum, on a quarterly basis. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance no specific allocation is reserved. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment. Loans that are individually evaluated for impairment are as follows (in thousands): September 30, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 26,802 $ 27,383 $ — $ 13,401 $ 131 Real estate - construction 10 10 — 23 — Real estate - commercial 13,254 13,254 — 9,341 56 Real estate - residential 1,062 1,062 — 1,115 3 Installment loans to individuals 20 20 — 10 — Subtotal: 41,148 41,729 — 23,890 190 With an allowance recorded: Commercial, financial, and agricultural 3,085 3,182 1,105 4,137 25 Real estate - commercial 15,031 15,031 2,270 14,518 28 Real estate - residential 769 769 194 653 — Installment loans to individuals 444 469 268 407 8 Subtotal: 19,329 19,451 3,837 19,715 61 Totals: Commercial 58,172 58,850 3,375 41,397 240 Construction 10 10 — 23 — Residential 1,831 1,831 194 1,768 3 Consumer 464 489 268 417 8 Grand total: $ 60,477 $ 61,180 $ 3,837 $ 43,605 $ 251 December 31, 2015 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 22,529 $ 22,793 $ — $ 11,484 $ 745 Real estate - construction 37 37 — 45 — Real estate - commercial 5,886 5,886 — 3,903 97 Real estate - residential 1,365 1,385 — 954 17 Installment loans to individuals 34 34 — 56 — Subtotal: 29,851 30,135 — 16,442 859 With an allowance recorded: Commercial, financial, and agricultural 5,189 6,373 961 3,704 138 Real estate - commercial 14,004 14,004 1,585 9,236 161 Real estate - residential 538 538 160 533 7 Installment loans to individuals 370 384 221 334 8 Subtotal: 20,101 21,299 2,927 13,807 314 Totals: Commercial 47,608 49,056 2,546 28,327 1,141 Construction 37 37 — 45 — Residential 1,903 1,923 160 1,487 24 Consumer 404 418 221 390 8 Grand total: $ 49,952 $ 51,434 $ 2,927 $ 30,249 $ 1,173 Credit Quality The Company manages credit risk by observing written underwriting standards and lending policy established by the Board of Directors and management to govern all lending activities. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors. Loans can be classified into the following three risk rating grades: pass, special mention, and substandard/doubtful. Factors considered in determining a risk rating grade include debt service capacity, capital structure/liquidity, management, collateral quality, industry risk, company trends/operating performance, repayment source, revenue diversification/customer concentration, quality of financial information, and financing alternatives. Pass grade signifies the highest quality of loans to loans with reasonable credit risk, which may include borrowers with marginally adequate financial performance, but have the ability to repay the debt. Special mention loans have potential weaknesses that warrant extra attention from the loan officer and other management personnel, but still have the ability to repay the debt. Substandard classification includes loans with well-defined weaknesses with risk of potential loss. Loans classified as doubtful are considered to have little recovery value and are charged off. The following tables present the classes of loans by risk rating (in thousands): September 30, 2016 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 358,670 $ 403,961 $ 762,631 82.20 % Special mention 28,270 25,173 53,443 5.76 % Substandard 75,923 35,719 111,642 12.03 % Doubtful 168 — 168 0.02 % $ 463,031 $ 464,853 $ 927,884 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % of Total Pass $ 96,178 99.81 % Special mention — — % Substandard 187 0.19 % $ 96,365 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 151,053 97.04 % Special mention 1,227 0.79 % Substandard 3,373 2.17 % $ 155,653 100.00 % Consumer and Commercial Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 88,048 $ 1,449 $ 2,912 $ 92,409 99.47 % Nonperforming 489 — — 489 0.53 % $ 88,537 $ 1,449 $ 2,912 $ 92,898 100.00 % December 31, 2015 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 383,897 $ 412,141 $ 796,038 86.04 % Special mention 32,506 28,217 60,723 6.55 % Substandard 37,353 30,783 68,136 7.36 % Doubtful 272 — 272 0.03 % $ 454,028 $ 471,141 $ 925,169 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % Pass $ 74,794 99.79 % Special mention 34 0.04 % Substandard 124 0.17 % $ 74,952 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 144,704 97.08 % Special mention 1,225 0.82 % Substandard 3,135 2.10 % $ 149,064 100.00 % Consumer and Commercial Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 110,536 $ 1,968 $ 1,483 $ 113,987 99.59 % Nonperforming 473 — — 473 0.41 % $ 111,009 $ 1,968 $ 1,483 $ 114,460 100.00 % Troubled Debt Restructurings A troubled debt restructuring (“TDR”) is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider. The Company grants the concession in an attempt to protect as much of its investment as possible. Information about the Company’s TDRs is as follows (in thousands): September 30, 2016 Current Past Due Greater Than 30 Days Nonaccrual TDRs Total TDRs Commercial, financial and agricultural $ 13 $ — $ 24,568 $ 24,581 Real estate – commercial — 140 1,573 1,713 $ 13 $ 140 $ 26,141 $ 26,294 December 31, 2015 Current Past Due Greater Than 30 Days Nonaccrual TDRs Total TDRs Commercial, financial and agricultural $ 16 $ — $ 20,865 $ 20,881 Real estate – commercial — 148 — 148 $ 16 $ 148 $ 20,865 $ 21,029 During the three months ended September 30, 2016 , there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the three months ended September 30, 2015 , there were no loans identified as a TDR. There was one TDR totaling $21.1 million that defaulted on the modified terms of its agreement during the three months ended September 30, 2015. During the nine months ended September 30, 2016 , there was one loan relationship with a pre-modification balance of $5.5 million identified as a TDR after conversion of the loans to interest only for a limited amount of time. Subsequent to its conversion to TDR status, this one TDR totaling $5.5 million defaulted on the modified terms during the nine months ended September 30, 2016. During the nine months ended September 30, 2015 , there was one loan relationship with a pre-modification balance of $21.4 million identified as a TDR after conversion of the loans to interest only for a limited amount of time. This one TDR subsequently defaulted on the modified terms and totaled $21.1 million at September 30, 2015. For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans. As of September 30, 2016 , there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs. |