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, 2018 December 31, 2017 Commercial, financial and agricultural $ 354,944 $ 435,207 Real estate – construction 98,108 90,287 Real estate – commercial 414,526 448,406 Real estate – residential 141,104 146,751 Installment loans to individuals 47,406 56,398 Lease financing receivable 632 732 Other 1,243 5,645 1,057,963 1,183,426 Less allowance for loan losses (23,514 ) (26,888 ) $ 1,034,449 $ 1,156,538 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, 2018 , 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 $153.6 million , or 14.5% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At June 30, 2018 , loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $481.0 million , or 45.5% of total loans, of which 52% are secured by owner-occupied commercial properties. Of the $481.0 million in loans secured by commercial real estate, $31.4 million , or 6.5% , were on nonaccrual status at June 30, 2018 . 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. The current analysis indicates no additional allowance is necessary on our acquired loan portfolio as of June 30, 2018. 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 six months ended June 30, 2018 and 2017 is as follows (in thousands): June 30, 2018 Real Estate Coml, Fin, and Agric Construction Commercial Residential Installment loans to individuals Lease financing receivable Other Total Allowance for loan losses: Beginning balance $ 20,577 $ 596 $ 3,893 $ 837 $ 957 $ 3 $ 25 $ 26,888 Charge-offs (3,647 ) (6 ) (216 ) (321 ) (448 ) — — (4,638 ) Recoveries 696 — 6 1 121 — — 824 Provision 172 (201 ) (460 ) 623 323 — (17 ) 440 Ending balance $ 17,798 $ 389 $ 3,223 $ 1,140 $ 953 $ 3 $ 8 $ 23,514 Ending balance: individually evaluated for impairment $ 4,452 $ 49 $ 126 $ 198 $ 13 $ — $ — $ 4,838 Ending balance: collectively evaluated for impairment $ 13,346 $ 340 $ 3,097 $ 942 $ 940 $ 3 $ 8 $ 18,676 Loans: Ending balance $ 354,944 $ 98,108 $ 414,526 $ 141,104 $ 47,406 $ 632 $ 1,243 $ 1,057,963 Ending balance: individually evaluated for impairment $ 40,228 $ 717 $ 29,917 $ 3,623 $ 65 $ — $ — $ 74,550 Ending balance: collectively evaluated for impairment $ 314,716 $ 97,391 $ 384,609 $ 137,481 $ 47,341 $ 632 $ 1,243 $ 983,413 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 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): June 30, 2018 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 $ 8,504 $ 4,347 $ 24,762 $ 37,613 $ 317,331 $ 354,944 $ 3 Real estate - construction 1,175 — 220 1,395 96,713 98,108 — Real estate - commercial 1,655 9,523 18,102 29,280 385,246 414,526 — Real estate - residential 1,077 99 1,692 2,868 138,236 141,104 — Installment loans to individuals 215 27 61 303 47,103 47,406 — Lease financing receivable — — — — 632 632 — Other loans 51 10 — 61 1,182 1,243 — $ 12,677 $ 14,006 $ 44,837 $ 71,520 $ 986,443 $ 1,057,963 $ 3 December 31, 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 $ 1,195 $ 1,893 $ 14,847 $ 17,935 $ 417,272 $ 435,207 $ 545 Real estate - construction 616 — 190 806 89,481 90,287 125 Real estate - commercial 5,889 6,402 4,163 16,454 431,952 448,406 58 Real estate - residential 1,065 235 559 1,859 144,892 146,751 — Installment loans to individuals 276 32 34 342 56,056 56,398 — Lease financing receivable — — — — 732 732 — Other loans — — — — 5,645 5,645 — $ 9,041 $ 8,562 $ 19,793 $ 37,396 $ 1,146,030 $ 1,183,426 $ 728 Non-accrual loans are as follows (in thousands): June 30, 2018 December 31, 2017 Commercial, financial, and agricultural $ 39,218 $ 37,418 Real estate - construction 1,531 66 Real estate - commercial 29,916 11,128 Real estate - residential 2,808 618 Installment loans to individuals 65 48 $ 73,538 $ 49,278 The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $3.4 million and $1.7 million for the six months ended June 30, 2018 and 2017 , respectively. Interest received on non-accrual loans subsequent to their transfer to non-accrual status totaled $176,000 and $195,000 for the six months ended June 30, 2018 and 2017 , 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 collateral 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 troubled debt restructuring (TDR). June 30, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 28,188 $ 32,776 $ — $ 26,424 $ 32 Real estate - construction 1,164 1,164 — 582 — Real estate - commercial 29,020 30,242 — 19,745 — Real estate - residential 1,599 1,599 — 950 — Installment loans to individuals 24 24 — 12 — Finance leases — — — — — Subtotal: 59,995 65,805 — 47,713 32 With an allowance recorded: Commercial, financial, and agricultural 12,040 13,959 4,452 13,079 — Real estate - construction 367 367 49 216 — Real estate - commercial 897 1,028 126 777 — Real estate - residential 1,210 1,897 198 763 — Installment loans to individuals 41 41 13 45 — Finance leases — — — — — Subtotal: 14,555 17,292 4,838 14,880 — Totals: Commercial 70,145 78,005 4,578 60,025 32 Construction 1,531 1,531 49 798 — Residential 2,809 3,496 198 1,713 — Consumer 65 65 13 57 — Grand total: $ 74,550 $ 83,097 $ 4,838 $ 62,593 $ 32 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized With no related allowance recorded: Commercial, financial, and agricultural $ 24,659 $ 30,630 $ — $ 19,880 $ 90 Real estate - construction — — — 5 — Real estate - commercial 10,471 11,965 — 11,590 — Real estate - residential 302 302 — 602 — Installment loans to individuals — — — 37 — Subtotal: 35,432 42,897 — 32,114 90 With an allowance recorded: Commercial, financial, and agricultural 14,119 14,150 7,197 15,245 1 Real estate - construction 66 136 23 33 — Real estate - commercial 657 657 131 8,318 — Real estate - residential 316 316 5 620 — Installment loans to individuals 48 50 14 258 — Subtotal: 15,206 15,309 7,370 24,474 1 Totals: Commercial 49,906 57,402 7,328 55,033 91 Construction 66 136 23 38 — Residential 618 618 5 1,222 — Consumer 48 50 14 295 — Grand total: $ 50,638 $ 58,206 $ 7,370 $ 56,588 $ 91 Credit Quality The Company manages credit risk by observing written underwriting standards and the 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, 2018 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 275,744 $ 361,281 $ 637,025 82.79 % Special mention 21,320 9,985 31,305 4.07 % Substandard 57,880 43,260 101,140 13.14 % $ 354,944 $ 414,526 $ 769,470 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % of Total Pass $ 96,225 98.08 % Special mention 85 0.09 % Substandard 1,798 1.83 % $ 98,108 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 134,952 95.64 % Special mention 602 0.43 % Substandard 5,550 3.93 % $ 141,104 100.00 % Consumer and Other Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 47,355 $ 632 $ 1,243 $ 49,230 99.90 % Nonperforming 51 — — 51 0.10 % $ 47,406 $ 632 $ 1,243 $ 49,281 100.00 % December 31, 2017 Commercial Credit Exposure Credit Risk Profile by Creditworthiness Category Commercial, Real estate - commercial Total % of Total Pass $ 358,373 $ 411,280 $ 769,653 87.10 % Special mention 9,687 3,823 13,510 1.53 % Substandard 67,147 33,303 100,450 11.37 % $ 435,207 $ 448,406 $ 883,613 100.00 % Construction Credit Exposure Credit Risk Profile by Real estate - construction % Pass $ 89,323 98.93 % Special mention 600 0.67 % Substandard 364 0.40 % $ 90,287 100.00 % Residential Credit Exposure Credit Risk Profile by Creditworthiness Category Real estate - residential % of Total Pass $ 144,250 98.30 % Special mention 1,233 0.84 % Substandard 1,268 0.86 % $ 146,751 100.00 % Consumer and Other Credit Exposure Credit Risk Profile Based on Payment Activity Installment loans to individuals Lease financing receivable Other Total % of Total Performing $ 56,041 $ 699 $ 5,645 $ 62,385 99.38 % Nonperforming 357 33 — 390 0.62 % $ 56,398 $ 732 $ 5,645 $ 62,775 100.00 % Troubled Debt Restructurings A 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 (in thousands): Three months ended June 30, 2018 June 30, 2017 Number of loans Pre-modification recorded investment Number of loans Pre-modification recorded investment Commercial, financial and agricultural — $ — — $ — Six months ended June 30, 2018 June 30, 2017 Number of loans Pre-modification recorded investment Number of loans Pre-modification recorded investment Commercial, financial and agricultural — $ — 1 $ 1,984 During the three month periods ending June 30, 2018 and 2017 , there were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the six months ended June 30, 2018 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. 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. 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, 2018 , there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs. |