Loans and Allowance for Loan Losses | (2) Loans and Allowance for Loan Losses Loans A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2017 and 2016 is as follows: (in thousands) 2017 2016 Commercial, financial, and agricultural $ 192,238 $ 182,881 Real estate construction - residential 26,492 18,907 Real estate construction - commercial 98,340 55,653 Real estate mortgage - residential 246,754 259,900 Real estate mortgage - commercial 472,455 426,470 Installment and other consumer 32,153 30,218 Total loans $ 1,068,432 $ 974,029 The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At December 31, 2017, $476.3 million of loans were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit. The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company, are summarized as follows: (in thousands) Balance at December 31, 2016 $ 3,273 New loans and new directors 3,419 Amounts collected (250 ) Balance at December 31, 2017 $ 6,442 Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features. Allowance for loan losses The following is a summary of the allowance for loan losses for the years ended December 31, 2017, 2016, and 2015: (in thousands) Commercial, Real Estate Real Estate Real Estate Real Estate Installment Un- Total Balance at December 31, 2014 $ 1,779 $ 171 $ 466 $ 2,527 $ 3,846 $ 270 $ 40 $ 9,099 Additions: Provision for loan losses 833 (434 ) 193 153 (713 ) 157 61 250 Deductions: Loans charged off 1,131 0 15 379 363 302 0 2,190 Less recoveries on loans (672 ) (322 ) 0 (138 ) (165 ) (148 ) 0 (1,445 ) Net loans charged off 459 (322 ) 15 241 198 154 0 745 Balance at December 31, 2015 $ 2,153 $ 59 $ 644 $ 2,439 $ 2,935 $ 273 $ 101 $ 8,60 4 Additions: Provision for loan losses 690 49 (732 ) 381 865 113 59 1,425 Deductions: Loans charged off 389 0 1 495 147 258 0 1,290 Less recoveries on loans (299 ) 0 (502 ) (60 ) (140 ) (146 ) 0 (1,147 ) Net loans charged off 90 0 (501 ) 435 7 112 0 143 Balance at December 31, 2016 $ 2,75 3 $ 108 $ 413 $ 2,385 $ 3,793 $ 274 $ 160 $ 9,886 Additions: Provision for loan losses 1,147 (26 ) 394 (560 ) 657 234 (81 ) 1,765 Deductions: Loans charged off 649 0 0 219 45 268 0 1,181 Less recoveries on loans (74 ) (88 ) 0 (83 ) (32 ) (105 ) 0 (382 ) Net loans charged off 575 (88 ) 0 136 13 163 0 799 Balance at December 31, 2017 $ 3,325 $ 170 $ 807 $ 1,689 $ 4,437 $ 345 $ 79 $ 10,852 Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Beginning in the first quarter of 2016, the Company began to lengthen its look-back period with the intent to increase such period from three to five years by December 31, 2017. The Company believes that the five-year look-back period, which is consistent with the Company’s practices prior to the start of the economic recession in 2008, provides a representative historical loss period in the current economic environment. As of December 31, 2017, the Company utilized a five-year look-back period. The following table provides the balance in the allowance for loan losses at December 31, 2017 and 2016, and the related loan balance by impairment methodology. (in thousands) Commercial, Real Estate Real Estate Real Estate Real Estate Installment Un- Total December 31, 2017 Allowance for loan losses: Individually evaluated for impairment $ 500 $ 0 $ 48 $ 521 $ 243 $ 21 $ 0 $ 1,333 Collectively evaluated for impairment 2,825 170 759 1,168 4,194 324 79 9,519 Total $ 3,325 $ 170 $ 807 $ 1,689 $ 4,437 $ 345 $ 79 $ 10,852 Loans outstanding: Individually evaluated for impairment $ 3,007 $ 0 $ 97 $ 5,072 $ 2,004 $ 176 $ 0 $ 10,356 Collectively evaluated for impairment 189,231 26,492 98,243 241,682 470,451 31,977 0 1,058,076 Total $ 192,238 $ 26,492 $ 98,340 $ 246,754 $ 472,455 $ 32,153 $ 0 $ 1,068,432 December 31, 2016 Allowance for loan losses: Individually evaluated for impairment $ 469 $ 0 $ 7 $ 319 $ 277 $ 8 $ 0 $ 1,080 Collectively evaluated for impairment 2,284 108 406 2,066 3,516 266 160 8,806 Total $ 2,753 $ 108 $ 413 $ 2,385 $ 3,793 $ 274 $ 160 $ 9,886 Loans outstanding: Individually evaluated for impairment $ 1,617 $ 0 $ 49 $ 5,471 $ 1,918 $ 89 $ 0 $ 9,144 Collectively evaluated for impairment 181,264 18,907 55,604 254,429 424,552 30,129 0 964,885 Total $ 182,881 $ 18,907 $ 55,653 $ 259,900 $ 426,470 $ 30,218 $ 0 $ 974,029 Impaired loans Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $10.4 million and $9.1 million at December 31, 2017 and 2016, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs). The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2017 and 2016, $7.0 million and $4.5 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2017, $1.3 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $10.4 million compared to $1.1 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $9.1 million at December 31, 2016. Management determined that $2.4 million, or 23%, of total impaired loans required no reserve allocation at December 31, 2017 compared to $2.1 million, or 23%, at December 31, 2016 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability. The categories of impaired loans at December 31, 2017 and 2016 are as follows: (in thousands) 2017 2016 Non-accrual loans $ 5,672 $ 3,429 Performing TDRs 4,684 5,715 Total impaired loans $ 10,356 $ 9,144 The following tables provide additional information about impaired loans at December 31, 2017 and 2016, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided. (in thousands) Recorded Unpaid Specific December 31, 2017 With no related allowance recorded: Commercial, financial and agricultural $ 1,393 $ 1,445 $ 0 Real estate - residential 674 688 0 Real estate - commercial 366 395 0 Total $ 2,433 $ 2,528 $ 0 With an allowance recorded: Commercial, financial and agricultural $ 1,614 $ 1,834 $ 500 Real estate - construction commercial 97 97 48 Real estate - residential 4,398 4,500 521 Real estate - commercial 1,638 1,743 243 Consumer 176 196 21 Total $ 7,923 $ 8,370 $ 1,333 Total impaired loans $ 10,356 $ 10,898 $ 1,333 (in thousands) Recorded Unpaid Specific December 31, 2016 With no related allowance recorded: Commercial, financial and agricultural $ 564 $ 706 $ 0 Real estate - residential 1,550 1,557 0 Total $ 2,114 $ 2,263 $ 0 With an allowance recorded: Commercial, financial and agricultural $ 1,053 $ 1,078 $ 469 Real estate - construction commercial 49 56 7 Real estate - residential 3,921 3,990 319 Real estate - commercial 1,918 1,988 277 Consumer 89 116 8 Total $ 7,030 $ 7,228 $ 1,080 Total impaired loans $ 9,144 $ 9,491 $ 1,080 The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2017 and 2016: 2017 2016 (in thousands) Average Interest Average Interest With no related allowance recorded: Commercial, financial and agricultural $ 957 $ 0 $ 669 $ 13 Real estate - residential 826 13 1,713 52 Real estate - commercial 373 0 353 0 Total $ 2,156 $ 13 $ 2,735 $ 65 With an allowance recorded: Commercial, financial and agricultural $ 1,536 $ 33 $ 899 $ 23 Real estate - construction commercial 49 0 51 0 Real estate - residential 4,575 149 3,553 114 Real estate - commercial 1,641 61 1,842 83 Consumer 114 0 109 0 Total $ 7,915 $ 243 $ 6,454 $ 220 Total impaired loans $ 10,071 $ 256 $ 9,189 $ 285 The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $256,000 and $285,000, for the years ended December 31, 2017 and 2016, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported. Delinquent and Non-Accrual Loans The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months. The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2017 and 2016. (in thousands) Current or 30-89 Days 90 Days Non-Accrual Total December 31, 2017 Commercial, Financial, and Agricultural $ 189,537 $ 192 $ 2 $ 2,507 $ 192,238 Real Estate Construction - Residential 25,930 287 275 0 26,492 Real Estate Construction - Commercial 98,243 0 0 97 98,340 Real Estate Mortgage - Residential 242,597 2,173 28 1,956 246,754 Real Estate Mortgage - Commercial 471,476 43 0 936 472,455 Installment and Other Consumer 31,715 239 23 176 32,153 Total $ 1,059,498 $ 2,934 $ 328 $ 5,672 $ 1,068,432 December 31, 2016 Commercial, Financial, and Agricultural $ 181,609 $ 290 $ 0 $ 982 $ 182,881 Real Estate Construction - Residential 18,681 226 0 0 18,907 Real Estate Construction - Commercial 55,603 0 0 50 55,653 Real Estate Mortgage - Residential 254,758 3,200 54 1,888 259,900 Real Estate Mortgage - Commercial 425,260 790 0 420 426,470 Installment and Other Consumer 29,920 198 11 89 30,218 Total $ 965,831 $ 4,704 $ 65 $ 3,429 $ 974,029 Credit Quality The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch substandard troubled debt restructuring TDR) non-accrual The following table presents the risk categories by class at December 31, 2017 and 2016. (in thousands) Commercial, Real Estate Real Estate Real Real Estate Installment Total At December 31, 2017 Watch $ 9,868 $ 1,459 $ 1,284 $ 9,978 $ 49,197 $ 0 $ 71,786 Substandard 658 462 0 2,262 723 16 4,121 Performing TDRs 500 0 0 3,116 1,068 0 4,684 Non-accrual 2,507 0 97 1,956 936 176 5,672 Total $ 13,533 $ 1,921 $ 1,381 $ 17,312 $ 51,924 $ 192 $ 86,263 At December 31, 2016 Watch $ 10,295 $ 665 $ 1,113 $ 16,577 $ 44,611 $ 0 $ 73,261 Substandard 798 640 0 2,159 426 24 4,047 Performing TDRs 635 0 0 3,582 1,498 0 5,715 Non-accrual 982 0 50 1,888 420 89 3,429 Total $ 12,710 $ 1,305 $ 1,163 $ 24,206 $ 46,955 $ 113 $ 86,452 Troubled Debt Restructurings At December 31, 2017, loans classified as TDRs totaled $6.4 million, of which $1.7 million were classified as nonperforming TDRs and included in non-accrual loans and $4.7 million were classified as performing TDRs. At December 31, 2016, loans classified as TDRs totaled $6.3 million, of which $619,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.7 million were classified as performing TDRs. Both performing and nonperforming TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $577,000 and $410,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2017 and 2016, respectively. The following table summarizes loans that were modified as TDRs during the years ended December 31, 2017 and 2016. 2017 2016 Recorded Investment (1) Recorded Investment (1) (in thousands) Number of Pre- Post- Number of Pre- Post- Troubled Debt Restructurings Commercial, financial and agricultural 3 $ 773 $ 773 0 $ 0 $ 0 Real estate mortgage - residential 2 118 116 7 536 536 Real estate mortgage - commercial 1 55 49 0 0 0 Total 6 $ 946 $ 938 7 $ 536 $ 536 (1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported. The Company’s portfolio of loans classified as TDRs include concessions for the borrower due to deteriorated financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. During the year ended December 31, 2017, six loans meeting the TDR criteria were modified compared to seven loans during the year ended December 31, 2016. Upon default, which is considered to be 90 days or more past due under the modified terms, the TDR is measured for impairment. The impairment amount is either charged off as a reduction to the allowance for loan losses, provided for as a specific reserve within the allowance for loan losses, or in the process of foreclosure. There was one TDR that defaulted and was charged off during the year ended December 31, 2017, within twelve months of its modification date, compared to three TDRs that defaulted during the year ended December 31, 2016. During 2016, two of the loans were charged off and one received an insurance settlement during the first quarter of 2017. |