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, 2017 December 31, 2016 Commercial, financial and agricultural $ 447,482 $ 459,574 Real estate – construction 90,088 100,959 Real estate – commercial 473,046 481,155 Real estate – residential 155,676 157,872 Installment loans to individuals 63,148 82,660 Lease financing receivable 760 1,095 Other 5,769 767 1,235,969 1,284,082 Less allowance for loan losses (25,053 ) (24,372 ) $ 1,210,916 $ 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 September 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 $197.8 million , or 16.0% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At September 30, 2017 , loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $537.9 million , 56% of which are secured by owner-occupied commercial properties. Of the $537.9 million in loans secured by commercial real estate, $20.5 million , or 3.8% , were on nonaccrual status at September 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 three to five years, 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. Additionally, the Company utilizes the services of a third party to supplement its loan review efforts. 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, 2017 and 2016 is as follows (in thousands): September 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 (15,106 ) (70 ) (3,618 ) (293 ) (860 ) — — (19,947 ) Recoveries 537 — 158 97 235 — — 1,027 Provision 17,413 28 2,024 (40 ) 159 (1 ) 18 19,601 Ending balance $ 18,901 $ 543 $ 3,948 $ 704 $ 929 $ 4 $ 24 $ 25,053 Ending balance: individually evaluated for impairment $ 3,254 $ 17 $ 904 $ 7 $ 69 $ 1 $ — $ 4,252 Ending balance: collectively evaluated for impairment $ 15,647 $ 526 $ 3,044 $ 697 $ 860 $ 3 $ 24 $ 20,801 Loans: Ending balance $ 447,482 $ 90,088 $ 473,046 $ 155,676 $ 63,148 $ 760 $ 5,769 $ 1,235,969 Ending balance: individually evaluated for impairment $ 30,892 $ 2,416 $ 18,132 $ 1,031 $ 338 $ 34 $ — $ 52,843 Ending balance: collectively evaluated for impairment $ 416,590 $ 87,672 $ 454,488 $ 154,582 $ 62,810 $ 726 $ 5,769 $ 1,182,637 Ending balance: loans acquired with deteriorated credit quality $ — $ — $ 426 $ 63 $ — $ — $ — $ 489 September 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 (2,957 ) — (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 Non-Accrual and Past Due Loans Loans are considered past due if the required principal and interest payments 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, 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 $ 2,144 $ 512 $ 27,161 $ 29,817 $ 417,665 $ 447,482 $ 384 Real estate - construction 335 350 2,416 3,101 86,987 90,088 — Real estate - commercial 1,804 — 9,749 11,553 461,493 473,046 — Real estate - residential 2,467 28 898 3,393 152,283 155,676 — Installment loans to individuals 408 173 215 796 62,352 63,148 18 Lease financing receivable 33 — — 33 727 760 — Other loans 79 12 — 91 5,678 5,769 — $ 7,270 $ 1,075 $ 40,439 $ 48,784 $ 1,187,185 $ 1,235,969 $ 402 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): September 30, 2017 December 31, 2016 Commercial, financial, and agricultural $ 29,337 $ 31,461 Real estate - construction 2,416 9 Real estate - commercial 18,132 28,688 Real estate - residential 1,032 1,881 Installment loans to individuals 339 541 Lease financing receivable 33 — Other — — $ 51,289 $ 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 $2.6 million and $2.5 million for the nine months ended September 30, 2017 and 2016 , respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled $201,000 and $128,000 for the nine months ended September 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. The following table presents loans that are individually evaluated for impairment (in thousands). Interest income recognized represents interest on accruing loans modified in a TDR. September 30, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 19,853 $ 22,105 $ — $ 17,477 $ 61 Real estate - construction 2,366 2,366 — 1,188 — Real estate - commercial 15,371 17,820 — 14,040 — Real estate - residential 587 587 — 745 — Installment loans to individuals 91 91 — 82 — Finance leases — — — — — Subtotal: 38,268 42,969 — 33,532 61 With an allowance recorded: Commercial, financial, and agricultural 11,039 12,071 3,254 13,706 1 Real estate - construction 50 120 17 25 — Real estate - commercial 2,761 2,761 904 9,370 — Real estate - residential 445 445 7 684 — Installment loans to individuals 247 278 69 357 — Finance leases 33 33 1 17 — Subtotal: 14,575 15,708 4,252 24,159 1 Totals: Commercial 49,057 54,790 4,159 54,610 62 Construction 2,416 2,486 17 1,213 — Residential 1,032 1,032 7 1,429 — Consumer 338 369 69 439 — Grand total: $ 52,843 $ 58,677 $ 4,252 $ 57,691 $ 62 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 $ 90 Real estate - construction 9 9 — 23 — Real estate - commercial 12,710 12,710 — 9,297 14 Real estate - residential 903 903 — 1,134 — Installment loans to individuals 73 87 — 54 — Subtotal: 28,796 29,137 — 29,323 104 With an allowance recorded: Commercial, financial, and agricultural 16,372 16,470 4,369 10,781 1 Real estate - commercial 15,979 15,979 2,216 14,992 — Real estate - residential 923 923 260 730 — Installment loans to individuals 468 478 308 419 — Subtotal: 33,742 33,850 7,153 26,922 1 Totals: Commercial 60,162 60,587 6,585 53,885 105 Construction 9 9 — 23 — Residential 1,826 1,826 260 1,864 — Consumer 541 565 308 473 — Grand total: $ 62,538 $ 62,987 $ 7,153 $ 56,245 $ 105 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): September 30, 2017 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 345,629 $ 421,071 $ 766,700 83.29 % Special mention 15,321 8,654 23,975 2.60 % Substandard 86,523 43,321 129,844 14.11 % Doubtful 9 — 9 — % $ 447,482 $ 473,046 $ 920,528 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % of Total Pass $ 85,295 94.68 % Special mention 1,834 2.04 % Substandard 2,959 3.28 % $ 90,088 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 149,548 96.06 % Special mention 1,839 1.18 % Substandard 4,289 2.76 % $ 155,676 100.00 % Consumer and Other Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 62,791 $ 727 $ 5,769 $ 69,287 99.44 % Nonperforming 357 33 — 390 0.56 % $ 63,148 $ 760 $ 5,769 $ 69,677 100.00 % 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. The following tables present information about TDRs that were modified during the periods presented by portfolio segment: Three months ended September 30, 2017 September 30, 2016 Number of loans Pre-modification recorded investment Number of loans Pre-modification recorded investment Commercial, financial and agricultural 1 $ 18 — $ — Nine months ended September 30, 2017 September 30, 2016 Number of loans Pre-modification recorded investment Number of loans Pre-modification recorded investment Commercial, financial and agricultural 6 $ 2,002 2 $ 3,943 Real estate – commercial — — 2 1,572 6 $ 2,002 4 $ 5,515 The following table presents TDRs that had a payment default during the three and nine-month periods ending September 30, 2017 and 2016, and that were modified within the previous 12 months. The Company defines a payment default as any loan that is greater than 30 days past due or was past due greater than 30 days at any point during the reporting period, or since the date of modification, whichever is shorter. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Recorded Investment Recorded Investment Recorded Investment Recorded Investment Commercial, financial and agricultural $ 18 $ — $ 18 $ 3,943 Real estate – commercial — — — 1,572 $ 18 $ — $ 18 $ 5,515 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, 2017 , there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs. |