Allowance for Loan Losses | (5) Allowance for Loan Losses Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan and lease losses, the Company has segmented certain loans in the portfolio by product type. Loss migration rates for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve. The following economic factors are analyzed: • Changes in lending policies and procedures • Changes in experience and depth of lending and management staff • Changes in quality of credit review system • Changes in nature and volume of the loan portfolio • Changes in past due, classified and nonaccrual loans and TDRs • Changes in economic and business conditions • Changes in competition or legal and regulatory requirements • Changes in concentrations within the loan portfolio • Changes in the underlying collateral for collateral dependent loans The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $13,300 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2017. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2017 and 2016. Allowance for loan losses: March 31, 2017 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 2,018 $ (1 ) $ 56 $ (504 ) $ 1,569 Commercial Real Estate: Owner Occupied 2,171 — 2 86 2,259 Non-Owner 4,606 — 5 (68 ) 4,543 Residential Real Estate 3,089 (89 ) 55 (33 ) 3,022 Real Estate Construction 420 — 5 (12 ) 413 Farm Real Estate 442 — — (35 ) 407 Consumer and Other 314 (41 ) 3 78 354 Unallocated 245 — — 488 733 Total $ 13,305 $ (131 ) $ 126 $ — $ 13,300 For the three months ended March 31, 2017, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower loss rates, offset by an increase in the specific reserves required for this type. The result of these changes was represented as a decrease in the provision. The increase in allowance for Commercial Real Estate – Owner Occupied was due to an increase in the specific reserves required for this type, but also to an increase in general reserves due to higher loan balances, offset by a decrease in loss rates. The allowance for Commercial Real Estate – Non-Owner Allowance for loan losses: March 31, 2016 Beginning Charge- Recoveries Provision Ending Commercial & Agriculture $ 1,478 $ (22 ) $ 5 $ (15 ) $ 1,446 Commercial Real Estate: Owner Occupied 2,467 — 49 (144 ) 2,372 Non-Owner 4,657 — 40 14 4,711 Residential Real Estate 4,086 (96 ) 89 35 4,114 Real Estate Construction 371 — 1 36 408 Farm Real Estate 538 — — (42 ) 496 Consumer and Other 382 (8 ) 14 (30 ) 358 Unallocated 382 — — 146 528 Total $ 14,361 $ (126 ) $ 198 $ — $ 14,433 For the three months ended March 31, 2016, the allowance for Commercial & Agriculture loans was reduced by a decrease in loan balances outstanding and by a decrease in the specific reserves required for this type, offset by an increase in general reserves as a result of higher loss rates. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced not only by a decrease in specific reserves required for this type, but also by decreases in past due, classified and non-accrual The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2017 and December 31, 2016. March 31, 2017 Loans acquired Loans Loans Total Allowance for loan losses: Commercial & Agriculture $ 81 $ 243 $ 1,245 $ 1,569 Commercial Real Estate: Owner Occupied — 81 2,178 2,259 Non-Owner — — 4,543 4,543 Residential Real Estate 81 115 2,826 3,022 Real Estate Construction — — 413 413 Farm Real Estate — — 407 407 Consumer and Other — — 354 354 Unallocated — — 733 733 Total $ 162 $ 439 $ 12,699 $ 13,300 Outstanding loan balances: Commercial & Agriculture $ 87 $ 1,722 $ 137,640 $ 139,449 Commercial Real Estate: Owner Occupied — 1,875 166,029 167,904 Non-Owner — 358 400,053 400,411 Residential Real Estate 160 1,657 253,761 255,578 Real Estate Construction — — 55,266 55,266 Farm Real Estate — 614 37,421 38,035 Consumer and Other — — 18,597 18,597 Total $ 247 $ 6,226 $ 1,068,767 $ 1,075,240 December 31, 2016 Loans acquired Loans Loans Total Allowance for loan losses: Commercial & Agriculture $ 86 $ 82 $ 1,850 $ 2,018 Commercial Real Estate: Owner Occupied — 4 2,167 2,171 Non-Owner — — 4,606 4,606 Residential Real Estate 89 102 2,898 3,089 Real Estate Construction — — 420 420 Farm Real Estate — — 442 442 Consumer and Other — — 314 314 Unallocated — — 245 245 Total $ 175 $ 188 $ 12,942 $ 13,305 Outstanding loan balances: Commercial & Agriculture $ 88 $ 1,983 $ 133,391 $ 135,462 Commercial Real Estate: Owner Occupied — 1,896 159,468 161,364 Non-Owner — 359 395,572 395,931 Residential Real Estate 168 1,686 245,454 247,308 Real Estate Construction — — 56,293 56,293 Farm Real Estate — 614 40,556 41,170 Consumer and Other — 1 17,977 17,978 Total $ 256 $ 6,539 $ 1,048,711 $ 1,055,506 The following tables present credit exposures by internally assigned grades for the periods ended March 31, 2017 and December 31, 2016. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans. The Company’s internally assigned grades are as follows: • Pass • Special Mention • Substandard • Doubtful • Loss Generally, Residential Real Estate, Real Estate Construction and Consumer and Other loans are not risk-graded, except when collateral is used for a business purpose. March 31, 2017 Pass Special Substandard Doubtful Ending Commercial & Agriculture $ 131,626 $ 4,941 $ 2,882 $ — $ 139,449 Commercial Real Estate: Owner Occupied 156,728 5,377 5,799 — 167,904 Non-Owner 397,993 1,885 533 — 400,411 Residential Real Estate 62,235 1,628 6,745 — 70,608 Real Estate Construction 48,790 16 27 — 48,833 Farm Real Estate 32,035 3,832 2,168 — 38,035 Consumer and Other 1,814 — 81 — 1,895 Total $ 831,221 $ 17,679 $ 18,235 $ — $ 867,135 December 31, 2016 Pass Special Substandard Doubtful Ending Commercial & Agriculture $ 127,867 $ 4,300 $ 3,295 $ — $ 135,462 Commercial Real Estate: Owner Occupied 151,659 4,016 5,689 — 161,364 Non-Owner 393,592 1,676 663 — 395,931 Residential Real Estate 59,015 1,661 6,911 — 67,587 Real Estate Construction 50,678 16 27 — 50,721 Farm Real Estate 31,814 5,673 3,683 — 41,170 Consumer and Other 2,135 — 109 — 2,244 Total $ 816,760 $ 17,342 $ 20,377 $ — $ 854,479 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2017 and December 31, 2016 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. Residential Real Estate Consumer Total March 31, 2017 Performing $ 184,970 $ 6,433 $ 16,695 $ 208,098 Nonperforming — — 7 7 Total $ 184,970 $ 6,433 $ 16,702 $ 208,105 Residential Real Estate Consumer Total December 31, 2016 Performing $ 179,721 $ 5,572 $ 15,725 $ 201,018 Nonperforming — — 9 9 Total $ 179,721 $ 5,572 $ 15,734 $ 201,027 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2017 and December 31, 2016. March 31, 2017 30-59 60-89 90 Days Total Past Current Purchased Total Loans Past Due Commercial & Agriculture $ 211 $ 29 $ 87 $ 327 $ 139,035 $ 87 $ 139,449 $ — Commercial Real Estate: Owner Occupied 803 — 1,172 1,975 165,929 — 167,904 — Non-Owner 651 11 315 977 399,434 — 400,411 — Residential Real Estate 2,156 133 922 3,211 252,207 160 255,578 — Real Estate Construction — — 27 27 55,239 — 55,266 — Farm Real Estate — — — — 38,035 — 38,035 — Consumer and Other 282 15 9 306 18,291 — 18,597 7 Total $ 4,103 $ 188 $ 2,532 $ 6,823 $ 1,068,170 $ 247 $ 1,075,240 $ 7 December 31, 2016 30-59 60-89 90 Days Total Past Current Purchased Total Loans Past Due Commercial & Agriculture $ 156 $ 20 $ 152 $ 328 $ 135,046 $ 88 $ 135,462 $ — Commercial Real Estate: Owner Occupied 722 553 280 1,555 159,809 — 161,364 — Non-Owner 147 — 316 463 395,468 — 395,931 — Residential Real Estate 1,812 507 1,049 3,368 243,772 168 247,308 — Real Estate Construction — — 27 27 56,266 — 56,293 — Farm Real Estate 93 — — 93 41,077 — 41,170 — Consumer and Other 215 31 31 277 17,701 — 17,978 9 Total $ 3,145 $ 1,111 $ 1,855 $ 6,111 $ 1,049,139 $ 256 $ 1,055,506 $ 9 The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of March 31, 2017 and December 31, 2016. 2017 2016 Commercial & Agriculture $ 1,505 $ 1,622 Commercial Real Estate: Owner Occupied 2,354 1,461 Non-Owner 337 464 Residential Real Estate 3,090 3,266 Real Estate Construction 27 27 Farm Real Estate 1 2 Consumer and Other 76 101 Total $ 7,390 $ 6,943 Nonaccrual Loans: Modifications: Loans modified in a TDR are typically already on non-accrual There were no loans modified in a troubled debt restructuring during the three-month period ended March 31, 2017. Loan modifications that are considered TDRs completed during the three-month period ended March 31, 2016 were as follows: For the Three-Month Period Ended Number Pre- Post- Commercial & Agriculture 3 $ 483 $ 483 Commercial Real Estate - Owner Occupied — — — Commercial Real Estate - Non-Owner — — — Residential Real Estate 1 232 232 Real Estate Construction — — — Farm Real Estate 2 614 614 Consumer and Other — — — Total Loan Modifications 6 $ 1,329 $ 1,329 Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual Impaired Loans: charge-off The following table includes the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI loans, with the associated allowance amount, if applicable, as of March 31, 2017 and December 31, 2016. March 31, 2017 December 31, 2016 Recorded Unpaid Related Recorded Unpaid Related With no related allowance recorded: Commercial & Agriculture $ 979 $ 979 $ 1,230 $ 1,751 Commercial Real Estate: Owner Occupied 953 988 1,658 1,803 Non-Owner 358 385 359 386 Residential Real Estate 1,218 1,417 1,259 1,590 Farm Real Estate 614 614 614 614 Consumer and Other — — 1 1 Total 4,122 4,383 5,121 6,145 With an allowance recorded: Commercial & Agriculture 743 1,293 $ 243 753 1,303 $ 82 Commercial Real Estate: Owner Occupied 922 922 81 238 238 4 Non-Owner — — — — — — Residential Real Estate 439 443 115 427 431 102 Farm Real Estate — — — — — — Total 2,104 2,658 439 1,418 1,972 188 Total: Commercial & Agriculture 1,722 2,272 243 1,983 3,054 82 Commercial Real Estate: Owner Occupied 1,875 1,910 81 1,896 2,041 4 Non-Owner 358 385 — 359 386 — Residential Real Estate 1,657 1,860 115 1,686 2,021 102 Farm Real Estate 614 614 — 614 614 — Consumer and Other — — — 1 1 — Total $ 6,226 $ 7,041 $ 439 $ 6,539 $ 8,117 $ 188 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2017 and 2016. For the three months ended: March 31, 2017 March 31, 2016 Average Interest Average Interest Commercial & Agriculture $ 1,852 $ 6 $ 1,697 $ 3 Commercial Real Estate - Owner Occupied 1,886 22 1,895 25 Commercial Real Estate - Non-Owner 358 — 1,862 4 Residential Real Estate 1,671 16 1,753 19 Real Estate Construction — — — — Farm Real Estate 614 6 1,175 4 Consumer and Other 1 — 3 — Total $ 6,382 $ 50 $ 8,385 $ 55 Changes in the amortizable yield for PCI loans were as follows, since acquisition, for the three-month periods ended March 31, 2017 and 2016: At March 31, 2017 At March 31, 2016 (In Thousands) (In Thousands) Balance at beginning of period $ 49 $ 80 Acquisition of impaired loans — — Accretion (9 ) (6 ) Balance at end of period $ 40 $ 74 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 31, 2017 At December 31, 2016 Acquired Loans with 310-30) Acquired Loans with 310-30) (In Thousands) Outstanding balance $ 832 $ 850 Carrying amount 247 256 There has been $162 and $113 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2017 and March 31, 2016, respectively. Foreclosed Assets Held For Sale Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of March 31, 2017 and December 31, 2016, a total of $88 and $37, respectively of foreclosed assets were included with other assets. As of March 31, 2017, included within the foreclosed assets is $88 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of March 31, 2017 and December 31, 2016, the Company had initiated formal foreclosure procedures on $580 and $710, respectively, of consumer residential mortgages. |