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): June 30, 2017 December 31, 2016 Commercial, financial and agricultural $ 451,767 $ 459,574 Real estate – construction 98,695 100,959 Real estate – commercial 461,064 481,155 Real estate – residential 156,394 157,872 Installment loans to individuals 70,031 82,660 Lease financing receivable 866 1,095 Other 1,436 767 1,240,253 1,284,082 Less allowance for loan losses (24,674 ) (24,372 ) $ 1,215,579 $ 1,259,710 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 June 30, 2017 , 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 $208.8 million , or 16.8% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At June 30, 2017 , loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $531.7 million , 51% of which are secured by owner-occupied commercial properties. Of the $531.7 million in loans secured by commercial real estate, $19.6 million , or 3.7% , were on nonaccrual status at June 30, 2017 . 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 six months ended June 30, 2017 and 2016 is as follows (in thousands): June 30, 2017 Real Estate Coml, Fin, and Agric Construction Commercial Residential Installment loans to individuals Lease financing receivable Other Total Allowance for loan losses: Beginning balance $ 16,057 $ 585 $ 5,384 $ 940 $ 1,395 $ 5 $ 6 $ 24,372 Charge-offs (11,319 ) (1 ) (3,448 ) (198 ) (599 ) — — (15,565 ) Recoveries 290 — 33 96 148 — — 567 Provision 13,272 623 1,845 (438 ) (1 ) (2 ) 1 15,300 Ending balance $ 18,300 $ 1,207 $ 3,814 $ 400 $ 943 $ 3 $ 7 $ 24,674 Ending balance: individually evaluated for impairment $ 3,092 $ 9 $ 1,120 $ 28 $ 103 $ — $ — $ 4,352 Ending balance: collectively evaluated for impairment $ 15,208 $ 1,198 $ 2,694 $ 372 $ 840 $ 3 $ 7 $ 20,322 Loans: Ending balance $ 451,767 $ 98,695 $ 461,064 $ 156,394 $ 70,031 $ 866 $ 1,436 $ 1,240,253 Ending balance: individually evaluated for impairment $ 35,276 $ 25 $ 19,526 $ 1,325 $ 311 $ — $ — $ 56,463 Ending balance: collectively evaluated for impairment $ 416,491 $ 98,670 $ 441,108 $ 155,003 $ 69,720 $ 866 $ 1,436 $ 1,183,294 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ 430 $ 66 $ — $ — $ — $ 496 June 30, 2016 Real Estate Coml, Fin, and Agric Construction 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 (2,373 ) — (12 ) (23 ) (611 ) — — (3,019 ) Recoveries 120 — 84 4 78 — — 286 Provision 5,013 (405 ) 162 (134 ) 464 (3 ) 3 5,100 Ending balance $ 14,028 $ 414 $ 4,848 $ 663 $ 1,399 $ 11 $ 15 $ 21,378 Ending balance: individually evaluated for impairment $ 1,027 $ — $ 2,260 $ 251 $ 265 $ — $ — $ 3,803 Ending balance: collectively evaluated for impairment $ 13,001 $ 414 $ 2,588 $ 412 $ 1,134 $ 11 $ 15 $ 17,575 Loans: Ending balance $ 456,264 $ 96,331 $ 463,142 $ 148,379 $ 94,522 $ 1,641 $ 2,110 $ 1,262,389 Ending balance: individually evaluated for impairment $ 29,688 $ 34 $ 27,292 $ 2,322 $ 471 $ — $ — $ 59,807 Ending balance: collectively evaluated for impairment $ 426,576 $ 96,297 $ 435,255 $ 145,981 $ 94,051 $ 1,641 $ 2,110 $ 1,201,911 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ 595 $ 76 $ — $ — $ — $ 671 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): June 30, 2017 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 $ 10,058 $ 191 $ 19,862 $ 30,111 $ 421,656 $ 451,767 $ 165 Real estate - construction 2,981 — 25 3,006 95,689 98,695 — Real estate - commercial 2,985 4,164 7,516 14,665 446,399 461,064 — Real estate - residential 694 157 1,095 1,946 154,448 156,394 — Installment loans to individuals 381 160 309 850 69,181 70,031 — Lease financing receivable — — — — 866 866 — Other loans 56 6 — 62 1,374 1,436 — $ 17,155 $ 4,678 $ 28,807 $ 50,640 $ 1,189,613 $ 1,240,253 $ 165 December 31, 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 $ 2,297 $ 902 $ 31,425 $ 34,624 $ 424,950 $ 459,574 $ 96 Real estate - construction 2,613 399 9 3,021 97,938 100,959 — Real estate - commercial 5,159 1,931 25,408 32,498 448,657 481,155 140 Real estate - residential 1,956 207 1,553 3,716 154,156 157,872 16 Installment loans to individuals 756 36 538 1,330 81,330 82,660 16 Lease financing receivable — — — — 1,095 1,095 — Other loans 89 5 — 94 673 767 — $ 12,870 $ 3,480 $ 58,933 $ 75,283 $ 1,208,799 $ 1,284,082 $ 268 Non-accrual loans are as follows (in thousands): June 30, 2017 December 31, 2016 Commercial, financial, and agricultural $ 33,623 $ 31,461 Real estate - construction 25 9 Real estate - commercial 19,525 28,688 Real estate - residential 1,326 1,881 Installment loans to individuals 311 541 Lease financing receivable — — Other — — $ 54,810 $ 62,580 The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $1.7 million and $757,000 for the six months ended June 30, 2017 and 2016 , respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled $195,000 and $59,000 for the six months ended June 30, 2017 and 2016, 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. All loan relationships with an outstanding commitment balance above a specified threshold are evaluated for potential impairment. All loan relationships with an outstanding commitment balance below the specified threshold are assigned an allowance allocation percentage that is determined by management and adjusted periodically based on certain factors. 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. Loans that are individually evaluated for impairment are as follows (in thousands): June 30, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 28,940 $ 32,239 $ — $ 22,020 $ 155 Real estate - construction — — — 5 — Real estate - commercial 6,407 6,407 — 9,558 75 Real estate - residential 801 801 — 852 1 Installment loans to individuals — — — 37 — Subtotal: 36,148 39,447 — 32,472 231 With an allowance recorded: Commercial, financial, and agricultural 6,336 6,420 3,092 11,354 54 Real estate - construction 25 25 9 13 — Real estate - commercial 13,119 15,567 1,120 14,549 132 Real estate - residential 524 524 28 724 1 Installment loans to individuals 311 341 103 389 1 Subtotal: 20,315 22,877 4,352 27,029 188 Totals: Commercial 54,802 60,633 4,212 57,481 416 Construction 25 25 9 18 — Residential 1,325 1,325 28 1,576 2 Consumer 311 341 103 426 1 Grand total: $ 56,463 $ 62,324 $ 4,352 $ 59,501 $ 419 December 31, 2016 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 15,101 $ 15,428 $ — $ 18,815 $ 191 Real estate - construction 9 9 — 23 — Real estate - commercial 12,710 12,710 — 9,297 64 Real estate - residential 903 903 — 1,134 — Installment loans to individuals 73 87 — 54 1 Subtotal: 28,796 29,137 — 29,323 256 With an allowance recorded: Commercial, financial, and agricultural 16,372 16,470 4,369 10,781 42 Real estate - commercial 15,979 15,979 2,216 14,992 28 Real estate - residential 923 923 260 730 — Installment loans to individuals 468 478 308 419 11 Subtotal: 33,742 33,850 7,153 26,922 81 Totals: Commercial 60,162 60,587 6,585 53,885 325 Construction 9 9 — 23 — Residential 1,826 1,826 260 1,864 — Consumer 541 565 308 473 12 Grand total: $ 62,538 $ 62,987 $ 7,153 $ 56,245 $ 337 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 are categorized into risk categories based on relevant information about the ability of borrowers to serve their debt, such as: current financial information, historical payment experience, credit documentation, public information, current economic trends, and other factors. Loans are analyzed individually and classified according to their credit risk. This analysis is performed on a continuous basis. The following definitions are used for risk ratings: Special Mention: Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status, and questionable management capabilities. Collateral values generally afford adequate coverage but may not be immediately marketable. Substandard: Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. Currently the borrower maintains the capacity to service the debt. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary. Doubtful: Specific weaknesses characterized as Substandard exist that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment. Loans classified as Doubtful will usually be placed on non-accrual status. The probability of some loss is extremely high but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans. The following tables present the classes of loans by risk rating (in thousands): June 30, 2017 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 343,330 $ 409,145 $ 752,475 82.43 % Special mention 13,330 3,336 16,666 1.82 % Substandard 94,235 48,583 142,818 15.65 % Doubtful 872 — 872 0.10 % $ 451,767 $ 461,064 $ 912,831 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % of Total Pass $ 95,865 97.13 % Special mention 2,589 2.62 % Substandard 241 0.25 % $ 98,695 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 152,236 97.34 % Special mention 1,364 0.87 % Substandard 2,794 1.79 % $ 156,394 100.00 % Consumer and Other Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 69,720 $ 866 $ 1,436 $ 72,022 99.57 % Nonperforming 311 — — 311 0.43 % $ 70,031 $ 866 $ 1,436 $ 72,333 100.00 % December 31, 2016 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 346,246 $ 420,970 $ 767,216 81.56 % Special mention 22,611 23,085 45,696 4.86 % Substandard 90,300 37,100 127,400 13.54 % Doubtful 417 — 417 0.04 % $ 459,574 $ 481,155 $ 940,729 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % Pass $ 100,775 99.82 % Special mention — — % Substandard 184 0.18 % $ 100,959 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 153,403 97.17 % Special mention 1,181 0.75 % Substandard 3,288 2.08 % $ 157,872 100.00 % Consumer and Other Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 82,103 $ 1,095 $ 767 $ 83,965 99.34 % Nonperforming 557 — — 557 0.66 % $ 82,660 $ 1,095 $ 767 $ 84,522 100.00 % 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): June 30, 2017 Current Past Due Greater Than 30 Days Nonaccrual TDRs Total TDRs Commercial, financial and agricultural $ 1,653 $ — $ 14,531 $ 16,184 Real estate – commercial — — 808 808 $ 1,653 $ — $ 15,339 $ 16,992 December 31, 2016 Current Past Due Greater Than 30 Days Nonaccrual TDRs Total TDRs Commercial, financial and agricultural $ 12 $ — $ 24,331 $ 24,343 Real estate – commercial — 140 808 948 $ 12 $ 140 $ 25,139 $ 25,291 During the three months ended June 30, 2017 , 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 June 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 six months ended June 30, 2017 , there was one loan relationship with a pre-modification balance of $2.0 million identified as a TDR after a reduction in payments. There were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the six months ended June 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. This one TDR subsequently defaulted on the modified terms and totaled $5.5 million at June 30, 2016. 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 June 30, 2017 , there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs. |