Allowance for Loan Losses | (5) Allowance for Loan Losses Management has an established methodology for determining 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 $13,822 adequate to cover loan losses inherent in the loan portfolio, at March 31, 2019. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three months ended March 31, 2019 and 2018. Allowance for loan losses: March 31, 2019 Beginning Charge-offs Recoveries Provision Ending Balance Commercial & Agriculture $ 1,747 $ — $ 1 $ 86 $ 1,834 Commercial Real Estate: Owner Occupied 1,962 (60 ) 223 (146 ) 1,979 Non-Owner Occupied 5,803 — 14 172 5,989 Residential Real Estate 1,531 (98 ) 124 (123 ) 1,434 Real Estate Construction 1,046 (24 ) — (51 ) 971 Farm Real Estate 397 — 1 (32 ) 366 Consumer and Other 284 (57 ) 19 5 251 Unallocated 909 — — 89 998 Total $ 13,679 $ (239 ) $ 382 $ — $ 13,822 For the three months ended March 31, 2019, the allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate –Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances, offset by lower loss rates and recoveries on previously charged off amounts. This was represented as a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances. This was represented as an increase 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 and recoveries on previously charged off amounts, represented by a decrease in the provision. The allowance for Real Estate Construction loans decreased due to a decrease in general reserves required as a result of lower loan balances. 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. 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 at March 31, 2019. Allowance for loan losses: March 31, 2018 Beginning balance 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. The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of March 31, 2019 and December 31, 2018. March 31, 2019 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ 53 $ 1,781 $ 1,834 Commercial Real Estate: Owner Occupied — 10 1,969 1,979 Non-Owner Occupied — — 5,989 5,989 Residential Real Estate — 124 1,310 1,434 Real Estate Construction — — 971 971 Farm Real Estate — 7 359 366 Consumer and Other — — 251 251 Unallocated — — 998 998 Total $ — $ 194 $ 13,628 $ 13,822 Outstanding loan balances: Commercial & Agriculture $ 35 $ 367 $ 178,798 $ 179,200 Commercial Real Estate: Owner Occupied — 472 216,558 217,030 Non-Owner Occupied — 382 539,038 539,420 Residential Real Estate 823 1,148 459,369 461,340 Real Estate Construction — — 123,905 123,905 Farm Real Estate — 692 34,953 35,645 Consumer and Other — — 16,653 16,653 Total $ 858 $ 3,061 $ 1,569,274 $ 1,573,193 December 31, 2018 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ — $ — $ 1,747 $ 1,747 Commercial Real Estate: Owner Occupied — 12 1,950 1,962 Non-Owner Occupied — — 5,803 5,803 Residential Real Estate 8 122 1,401 1,531 Real Estate Construction — — 1,046 1,046 Farm Real Estate — 7 390 397 Consumer and Other — — 284 284 Unallocated — — 909 909 Total $ 8 $ 141 $ 13,530 $ 13,679 Outstanding loan balances: Commercial & Agriculture $ 41 $ 367 $ 176,693 $ 177,101 Commercial Real Estate: Owner Occupied — 484 209,637 210,121 Non-Owner Occupied — 31 523,567 523,598 Residential Real Estate 883 1,279 455,688 457,850 Real Estate Construction — — 135,195 135,195 Farm Real Estate — 696 37,817 38,513 Consumer and Other — — 19,563 19,563 Total $ 924 $ 2,857 $ 1,558,160 $ 1,561,941 The following tables present credit exposures by internally assigned risk grades as of March 31, 2019 and December 31, 2018. 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 risk 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. Only those loans that have been risk rated are included below. March 31, 2019 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 174,339 $ 2,978 $ 1,883 $ — $ 179,200 Commercial Real Estate: Owner Occupied 208,242 3,532 5,256 — 217,030 Non-Owner Occupied 536,178 2,384 858 — 539,420 Residential Real Estate 73,163 490 6,143 — 79,796 Real Estate Construction 115,899 12 12 — 115,923 Farm Real Estate 31,218 1,955 2,472 — 35,645 Consumer and Other 776 — 24 — 800 Total $ 1,139,815 $ 11,351 $ 16,648 $ — $ 1,167,814 December 31, 2018 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 173,783 $ 1,509 $ 1,809 $ — $ 177,101 Commercial Real Estate: Owner Occupied 201,228 3,512 5,381 — 210,121 Non-Owner Occupied 520,487 2,023 1,088 — 523,598 Residential Real Estate 70,908 580 7,363 — 78,851 Real Estate Construction 124,769 13 41 — 124,823 Farm Real Estate 32,908 3,096 2,509 — 38,513 Consumer and Other 1,713 — 20 — 1,733 Total $ 1,125,796 $ 10,733 $ 18,211 $ — $ 1,154,740 The following tables present performing and nonperforming loans based solely on payment activity for the periods ended March 31, 2019 and December 31, 2018 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, 2019 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 381,544 $ 7,982 $ 15,843 $ 405,369 Nonperforming — — 10 10 Total $ 381,544 $ 7,982 $ 15,853 $ 405,379 December 31, 2018 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 378,999 $ 10,372 $ 17,830 $ 407,201 Nonperforming — — — — Total $ 378,999 $ 10,372 $ 17,830 $ 407,201 The following tables include an aging analysis of the recorded investment of past due loans outstanding as of March 31, 2019 and December 31, 2018. March 31, 2019 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 $ 80 $ 13 $ 107 $ 200 $ 178,965 $ 35 $ 179,200 $ — Commercial Real Estate: Owner Occupied 862 336 534 1,732 215,298 — 217,030 — Non-Owner Occupied 72 — 159 231 539,189 — 539,420 — Residential Real Estate 3,031 201 758 3,990 456,527 823 461,340 — Real Estate Construction 11 — — 11 123,894 — 123,905 — Farm Real Estate — 70 152 222 35,423 — 35,645 — Consumer and Other 118 42 25 185 16,468 — 16,653 10 Total $ 4,174 $ 662 $ 1,735 $ 6,571 $ 1,565,764 $ 858 $ 1,573,193 $ 10 December 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 $ 225 $ — $ 92 $ 317 $ 176,743 $ 41 $ 177,101 $ — Commercial Real Estate: Owner Occupied 547 413 564 1,524 208,597 — 210,121 — Non-Owner Occupied 288 290 372 950 522,648 — 523,598 — Residential Real Estate 7,118 677 806 8,601 448,366 883 457,850 — Real Estate Construction — 12 27 39 135,156 — 135,195 — Farm Real Estate 33 — 158 191 38,322 — 38,513 — Consumer and Other 117 57 9 183 19,380 — 19,563 — Total $ 8,328 $ 1,449 $ 2,028 $ 11,805 $ 1,549,212 $ 924 $ 1,561,941 $ — The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of March 31, 2019 and December 31, 2018. March 31, 2019 December 31, 2018 Commercial & Agriculture $ 333 $ 270 Commercial Real Estate: Owner Occupied 917 942 Non-Owner Occupied 160 374 Residential Real Estate 3,240 3,886 Real Estate Construction 12 41 Farm Real Estate 329 338 Consumer and Other 21 18 Total $ 5,012 $ 5,869 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, 2019, TDRs accounted for $194 of the allowance for loan losses. As of December 31, 2018, TDRs accounted for $143 of the allowance for loan losses. Loan modifications that are considered TDRs completed during the periods ended March 31, 2019 and March 31, 2018 were as follows: For the three months ended March 31, 2019 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Commercial & Agriculture — $ — $ — Commercial Real Estate—Owner Occupied — — — Commercial Real Estate—Non-Owner Occupied 1 382 382 Residential Real Estate — — — Real Estate Construction — — — Farm Real Estate — — — Consumer and Other — — — Total Loan Modifications 1 $ 382 $ 382 For the three months 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, 2019 and March 31, 2018, there were no defaults on loans that were modified and considered TDRs during the respective previous twelve months. Impaired Loans: The following table includes the recorded investment and unpaid principal balances for impaired loans, excluding PCI loans, with the associated allowance amount, if applicable, as of March 31, 2019 and December 31, 2018. March 31, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial & Agriculture $ 168 $ 168 $ 367 $ 367 Commercial Real Estate: Owner Occupied 187 187 193 193 Non-Owner Occupied 382 382 31 34 Residential Real Estate 892 964 1,017 1,089 Farm Real Estate 252 252 256 256 Total 1,881 1,953 1,864 1,939 With an allowance recorded: Commercial & Agriculture 199 199 $ 53 — — $ — Commercial Real Estate: Owner Occupied 285 285 10 291 291 12 Residential Real Estate 256 260 124 262 265 122 Farm Real Estate 440 440 7 440 440 7 Total 1,180 1,184 194 993 996 141 Total: Commercial & Agriculture 367 367 53 367 367 — Commercial Real Estate: Owner Occupied 472 472 10 484 484 12 Non-Owner Occupied 382 382 — 31 34 — Residential Real Estate 1,148 1,224 124 1,279 1,354 122 Farm Real Estate 692 692 7 696 696 7 Total $ 3,061 $ 3,137 $ 194 $ 2,857 $ 2,935 $ 141 The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three-month periods ended March 31, 2019 and 2018. March 31, 2019 March 31, 2018 For the three months ended Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 367 $ 6 $ 732 $ 7 Commercial Real Estate—Owner Occupied 478 8 771 9 Commercial Real Estate—Non-Owner Occupied 206 4 43 1 Residential Real Estate 1,213 16 1,348 17 Farm Real Estate 694 7 701 7 Total $ 2,958 $ 41 $ 3,595 $ 41 Changes in the amortizable yield for PCI loans were as follows, since acquisition: For the Three-Month Period Ended March 31, 2019 For the Three-Month Period Ended March 31, 2018 (In Thousands) (In Thousands) Balance at beginning of period $ 336 $ 15 Acquisition of PCI loans — — Accretion (10 ) (7 ) Balance at end of period $ 326 $ 8 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 31, 2019 At December 31, 2018 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 $ 1,693 $ 1,805 Carrying amount 858 924 There has been $0 and $8 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, respectively, foreclosed assets included in other assets totaled $0. As of March 31, 2019 and December 31, 2018, the Company had initiated formal foreclosure procedures on $365 and $311, respectively, of consumer residential mortgages. |