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 $12,814 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2018. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2018 and 2017. Allowance for loan losses: March 31, 2018 Beginning Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 1,562 $ (125 ) $ 19 $ (97 ) $ 1,359 Commercial Real Estate: Owner Occupied 2,043 (193 ) 9 171 2,030 Non-Owner Occupied 5,307 (44 ) 14 393 5,670 Residential Real Estate 1,910 (22 ) 58 (196 ) 1,750 Real Estate Construction 834 — — (14 ) 820 Farm Real Estate 430 — 1 (20 ) 411 Consumer and Other 290 (41 ) 4 (6 ) 247 Unallocated 758 — — (231 ) 527 Total $ 13,134 $ (425 ) $ 105 $ — $ 12,814 For the three months ended March 31, 2018, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower outstanding balances and lower loss rates. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves and charge-offs. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in outstanding loan balances and loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans decreased due to lower outstanding loan balances for this type of loan. The result was represented as a decrease in the provision. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances. The result was represented as a decrease in the provision. The allowance for Consumer and Other loans decreased due to a decrease in general reserves required for this type as a result of lower loss rates, lower outstanding balances and net charge-offs. The result was represented as a decrease in the provision. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio. Allowance for loan losses: March 31, 2017 Beginning balance Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 2,018 $ (1 ) $ 56 $ (504 ) $ 1,569 Commercial Real Estate: Owner Occupied 2,171 — 2 86 2,259 Non-Owner Occupied 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 the 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 Occupied loans was reduced by a decrease in loss rates required for this type. The result of these changes was represented as a decrease in the provision. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans decreased due to lower outstanding loan balances for this type of loan and recoveries, which was represented as a decrease in the provision. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances and a decrease in classified loans for this type. The result of these changes was represented as a decrease in the provision. The allowance for Consumer and Other loans was increased by an increase in general reserves required for this type as a result of higher loss rates. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2018 and December 31, 2017. March 31, 2018 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ 60 $ 1,299 $ 1,359 Commercial Real Estate: Owner Occupied — 8 2,022 2,030 Non-Owner Occupied — — 5,670 5,670 Residential Real Estate 37 105 1,608 1,750 Real Estate Construction — — 820 820 Farm Real Estate — 6 405 411 Consumer and Other — — 247 247 Unallocated — — 527 527 Total $ 37 $ 179 $ 12,598 $ 12,814 Outstanding loan balances: Commercial & Agriculture $ 80 $ 1,025 $ 135,971 $ 137,076 Commercial Real Estate: Owner Occupied — 532 162,453 162,985 Non-Owner Occupied — 43 436,117 436,160 Residential Real Estate 119 1,335 265,976 267,430 Real Estate Construction — — 95,856 95,856 Farm Real Estate — 793 37,135 37,928 Consumer and Other — — 16,323 16,323 Total $ 199 $ 3,728 $ 1,149,831 $ 1,153,758 December 31, 2017 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ 82 $ 4 $ 1,476 $ 1,562 Commercial Real Estate: Owner Occupied — 6 2,037 2,043 Non-Owner Occupied — — 5,307 5,307 Residential Real Estate 44 109 1,757 1,910 Real Estate Construction — — 834 834 Farm Real Estate — 6 424 430 Consumer and Other — — 290 290 Unallocated — — 758 758 Total $ 126 $ 125 $ 12,883 $ 13,134 Outstanding loan balances: Commercial & Agriculture $ 87 $ 438 $ 151,948 $ 152,473 Commercial Real Estate: Owner Occupied — 1,010 163,089 164,099 Non-Owner Occupied — 44 425,579 425,623 Residential Real Estate 128 1,360 267,247 268,735 Real Estate Construction — — 97,531 97,531 Farm Real Estate — 608 38,853 39,461 Consumer and Other — — 16,739 16,739 Total $ 215 $ 3,460 $ 1,160,986 $ 1,164,661 The following tables present credit exposures by internally assigned grades as of March 31, 2018 and December 31, 2017. 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, 2018 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 131,082 $ 2,820 $ 3,174 $ — $ 137,076 Commercial Real Estate: Owner Occupied 155,400 1,273 6,312 — 162,985 Non-Owner Occupied 433,379 2,334 447 — 436,160 Residential Real Estate 61,428 1,884 5,628 — 68,940 Real Estate Construction 89,195 1,276 27 — 90,498 Farm Real Estate 29,034 6,094 2,800 — 37,928 Consumer and Other 1,434 — 67 — 1,501 Total $ 900,952 $ 15,681 $ 18,455 $ — $ 935,088 December 31, 2017 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 140,842 $ 8,412 $ 3,219 $ — $ 152,473 Commercial Real Estate: Owner Occupied 155,756 1,166 7,177 — 164,099 Non-Owner Occupied 422,363 2,321 939 — 425,623 Residential Real Estate 62,628 1,997 5,873 — 70,498 Real Estate Construction 91,545 15 27 — 91,587 Farm Real Estate 25,228 11,236 2,997 — 39,461 Consumer and Other 1,312 — 70 — 1,382 Total $ 899,674 $ 25,147 $ 20,302 $ — $ 945,123 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2018 and December 31, 2017 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. March 31, 2018 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 198,490 $ 5,358 $ 14,802 $ 218,650 Nonperforming — — 20 20 Total $ 198,490 $ 5,358 $ 14,822 $ 218,670 December 31, 2017 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 198,237 $ 5,944 $ 15,341 $ 219,522 Nonperforming — — 16 16 Total $ 198,237 $ 5,944 $ 15,357 $ 219,538 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2018 and December 31, 2017. March 31, 2018 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 188 $ 41 $ 808 $ 1,037 $ 135,959 $ 80 $ 137,076 $ — Commercial Real Estate: Owner Occupied 320 44 390 754 162,231 — 162,985 — Non-Owner Occupied — 49 167 216 435,944 — 436,160 — Residential Real Estate 1,643 64 554 2,261 265,050 119 267,430 — Real Estate Construction — — 27 27 95,829 — 95,856 — Farm Real Estate 152 — 186 338 37,590 — 37,928 — Consumer and Other 64 76 20 160 16,163 — 16,323 20 Total $ 2,367 $ 274 $ 2,152 $ 4,793 $ 1,148,766 $ 199 $ 1,153,758 $ 20 December 31, 2017 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Purchased Credit- Impaired Loans Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 575 $ 2 $ 685 $ 1,262 $ 151,124 $ 87 $ 152,473 $ — Commercial Real Estate: Owner Occupied 897 104 484 1,485 162,614 — 164,099 — Non-Owner Occupied 133 — 470 603 425,020 — 425,623 — Residential Real Estate 1,613 229 785 2,627 265,980 128 268,735 — Real Estate Construction — — 27 27 97,504 — 97,531 — Farm Real Estate 27 — 186 213 39,248 — 39,461 — Consumer and Other 92 96 16 204 16,535 — 16,739 16 Total $ 3,337 $ 431 $ 2,653 $ 6,421 $ 1,158,025 $ 215 $ 1,164,661 $ 16 The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of March 31, 2018 and December 31, 2017. March 31, 2018 December 31, 2017 Commercial & Agriculture $ 1,004 $ 887 Commercial Real Estate: Owner Occupied 806 1,476 Non-Owner Occupied 268 711 Residential Real Estate 2,589 2,778 Real Estate Construction 27 27 Farm Real Estate 186 186 Consumer and Other 64 67 Total $ 4,944 $ 6,132 Nonaccrual Loans: Modifications: Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of March 31, 2018, TDRs accounted for $216 of the allowance for loan losses. As of December 31, 2017, TDRs accounted for $169 of the allowance for loan losses. Loan modifications that are considered TDRs completed during the three-month period ended March 31, 2018 were as follows. There were no loans modified in trouble debt restructuring during the three-month period ended March 31, 2017: For the Three-Month Period Ended March 31, 2018 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture 3 $ 591 $ 591 Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied — — — Residential Real Estate — — — Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 3 $ 591 $ 591 Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans. During the three-month periods ended March 31, 2018 and March 31, 2017, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months. Impaired Loans: 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, 2018 and December 31, 2017. March 31, 2018 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ 760 $ 760 $ — $ — Commercial Real Estate: Owner Occupied 218 218 693 913 Non-Owner Occupied 43 47 44 48 Residential Real Estate 957 1,030 977 1,049 Farm Real Estate 333 333 148 148 Consumer and Other — — — — Total 2,311 2,388 1,862 2,158 With an allowance recorded: Commercial & Agriculture 265 365 $ 60 438 438 $ 4 Commercial Real Estate: Owner Occupied 314 314 8 317 317 6 Non-Owner Occupied — — — — — — Residential Real Estate 378 381 105 383 387 109 Farm Real Estate 460 460 6 460 460 6 Total 1,417 1,520 179 1,598 1,602 125 Total: Commercial & Agriculture 1,025 1,125 60 438 438 4 Commercial Real Estate: Owner Occupied 532 532 8 1,010 1,230 6 Non-Owner Occupied 43 47 — 44 48 — Residential Real Estate 1,335 1,411 105 1,360 1,436 109 Farm Real Estate 793 793 6 608 608 6 Consumer and Other — — — — — — Total $ 3,728 $ 3,908 $ 179 $ 3,460 $ 3,760 $ 125 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2018 and 2017. March 31, 2018 March 31, 2017 For the three months ended: Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 732 $ 7 $ 1,852 $ 6 Commercial Real Estate—Owner Occupied 771 9 1,886 22 Commercial Real Estate—Non-Owner Occupied 43 1 358 — Residential Real Estate 1,348 17 1,671 16 Real Estate Construction — — — — Farm Real Estate 701 7 614 6 Consumer and Other — — 1 — Total $ 3,595 $ 41 $ 6,382 $ 50 Changes in the amortizable yield for PCI loans were as follows, since acquisition: For the Three-Month Period Ended March 31, 2018 For the Three-Month Period Ended March 31, 2017 (In Thousands) (In Thousands) Balance at beginning of period $ 15 $ 49 Acquisition of PCI loans — — Accretion (7 ) (9 ) Balance at end of period $ 8 $ 40 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 31, 2018 At December 31, 2017 Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) (In Thousands) Outstanding balance $ 752 $ 775 Carrying amount 199 215 There has been $37 and $126 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, a total of $11 and $16, respectively of foreclosed assets were included with other assets. As of March 31, 2018, included within the foreclosed assets is $11 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, 2018 and December 31, 2017, the Company had initiated formal foreclosure procedures on $454 and $239, respectively, of consumer residential mortgages. |