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ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

3 Months Ended

Mar. 31, 2019

ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

NOTE 4. ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

The following tables present the activity in the allowance for loan losses by portfolio segment for the three-month periods ended March 31, 2019 and 2018:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Three Months Ended March 31, 2019
Beginning balance, January 1	$22,518	$15,393	$4,305	$368	$2,292	$283	$3,294	$48,453
Provision for loan losses	1,493	18	(161)	5	45	85	(285)	1,200
Loans charged-off	(83)	0	0	0	(82)	(119)	0	(284)
Recoveries	102	36	2	0	11	42	0	193
Net loans charged-off	19	36	2	0	(71)	(77)	0	(91)
Ending balance	$24,030	$15,447	$4,146	$373	$2,266	$291	$3,009	$49,562

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
Three Months Ended March 31, 2018
Beginning balance, January 1	$21,097	$14,714	$4,920	$577	$2,768	$379	$2,666	$47,121
Provision for loan losses	3,902	207	(76)	(67)	(794)	(49)	177	3,300
Loans charged-off	(4,360)	(491)	0	0	(7)	(119)	0	(4,977)
Recoveries	86	8	4	0	51	34	0	183
Net loans charged-off	(4,274)	(483)	4	0	44	(85)	0	(4,794)
Ending balance	$20,725	$14,438	$4,848	$510	$2,018	$245	$2,843	$45,627

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2019 and December 31, 2018:

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
March 31, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$8,860	$398	$81	$0	$467	$28	$0	$9,834
Collectively evaluated for impairment	15,170	15,049	4,065	373	1,799	263	3,009	39,728
Total ending allowance balance	$24,030	$15,447	$4,146	$373	$2,266	$291	$3,009	$49,562

Loans:
Loans individually evaluated for impairment	$18,611	$3,441	$430	$0	$2,022	$43	$0	$24,547
Loans collectively evaluated for impairment	1,408,737	1,623,594	301,976	111,875	383,913	84,368	0	3,914,463
Total ending loans balance	$1,427,348	$1,627,035	$302,406	$111,875	$385,935	$84,411	$0	$3,939,010

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multifamily	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$8,552	$921	$73	$0	$457	$26	$0	$10,029
Collectively evaluated for impairment	13,966	14,472	4,232	368	1,835	257	3,294	38,424
Total ending allowance balance	$22,518	$15,393	$4,305	$368	$2,292	$283	$3,294	$48,453

Loans:
Loans individually evaluated for impairment	$19,734	$4,266	$433	$0	$2,240	$44	$0	$26,717
Loans collectively evaluated for impairment	1,385,604	1,562,899	370,174	95,520	388,053	85,778	0	3,888,028
Total ending loans balance	$1,405,338	$1,567,165	$370,607	$95,520	$390,293	$85,822	$0	$3,914,745

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2019:

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
(dollars in thousands)	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	2,904	$	212	$	0
Non-working capital loans		2,345		950		0
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,272		1,667		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Consumer 1-4 family loans:
Closed end first mortgage loans		224		143		0
Open end and junior lien loans		98		98		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,698		6,390		2,874
Non-working capital loans		11,016		11,059		5,986
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,774		1,774		398
Agri-business and agricultural loans:
Loans secured by farmland		147		147		81
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,779		1,781		467
Other consumer loans		43		43		28
Total	$	29,903	$	24,547	$	9,834

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018:

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
(dollars in thousands)	Balance		Investment		Allocated
With no related allowance recorded:
Commercial and industrial loans:
Non-working capital loans	$	3,284	$	1,889	$	0
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,773		1,527		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Consumer 1-4 family loans:
Closed end first mortgage loans		583		502		0
Open end and junior lien loans		220		220		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		9,691		6,694		2,602
Non-working capital loans		11,099		11,151		5,950
Commercial real estate and multi-family residential loans:
Construction and land development loans		291		291		142
Owner occupied loans		2,938		2,448		779
Agri-business and agricultural loans:
Loans secured by farmland		150		150		73
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,517		1,518		457
Other consumer loans		45		44		26
Total	$	32,194	$	26,717	$	10,029

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 2019:

					Cash Basis
	Average		Interest		Interest
	Recorded		Income		Income
(dollars in thousands)	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	155	$	1	$	0
Non-working capital loans		1,549		29		24
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,621		11		8
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		380		1		1
Open end and junior lien loans		193		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,487		72		59
Non-working capital loans		11,416		132		128
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,080		13		12
Agri-business and agricultural loans:
Loans secured by farmland		147		2		1
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,598		12		12
Other consumer loans		43		1		1
Total	$	25,952	$	274	$	246

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 2018:

					Cash Basis
	Average		Interest		Interest
	Recorded		Income		Income
(dollars in thousands)	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	$	1,011	$	7	$	2
Non-working capital loans		1,728		15		5
Commercial real estate and multi-family residential loans:
Construction and land development loans		102		1		0
Owner occupied loans		2,557		7		2
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		543		2		1
Open end and junior lien loans		92		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		1,608		2		1
Non-working capital loans		3,216		2		0
Commercial real estate and multi-family residential loans:
Construction and land development loans		721		11		5
Owner occupied loans		1,194		0		0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		968		7		4
Open end and junior lien loans		154		0		0
Other consumer loans		49		1		0
Total	$	14,226	$	55	$	20

The following table presents the aging of the recorded investment in past due loans as of March 31, 2019 by class of loans:

					Greater than
			30-89		90 Days Past				Total Past
	Loans Not		Days		Due and Still				Due and
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	720,597	$	4,308	$	0	$	2,118	$	6,426	$	727,023
Non-working capital loans		695,711		3,354		0		1,260		4,614		700,325
Commercial real estate and multi-family
residential loans:
Construction and land development loans		292,627		0		0		0		0		292,627
Owner occupied loans		554,668		47		481		1,749		2,277		556,945
Nonowner occupied loans		536,900		142		0		0		142		537,042
Multifamily loans		240,421		0		0		0		0		240,421
Agri-business and agricultural loans:
Loans secured by farmland		139,230		147		0		283		430		139,660
Loans for agricultural production		162,746		0		0		0		0		162,746
Other commercial loans		111,875		0		0		0		0		111,875
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		186,373		1,466		0		588		2,054		188,427
Open end and junior lien loans		184,217		87		0		98		185		184,402
Residential construction loans		13,106		0		0		0		0		13,106
Other consumer loans		84,265		146		0		0		146		84,411
Total	$	3,922,736	$	9,697	$	481	$	6,096	$	16,274	$	3,939,010

The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans:

					Greater than
			30-89		90 Days Past				Total Past
	Loans Not		Days		Due and Still				Due and
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	684,191	$	4,328	$	0	$	2,245	$	6,573	$	690,764
Non-working capital loans		709,629		3,368		0		1,577		4,945		714,574
Commercial real estate and multi-family
residential loans:
Construction and land development loans		265,544		0		0		0		0		265,544
Owner occupied loans		583,214		486		0		2,269		2,755		585,969
Nonowner occupied loans		520,431		57		0		0		57		520,488
Multi-family loans		195,164		0		0		0		0		195,164
Agri-business and agricultural loans:
Loans secured by farmland		177,080		150		0		283		433		177,513
Loans for agricultural production		193,094		0		0		0		0		193,094
Other commercial loans		95,520		0		0		0		0		95,520
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		183,420		1,370		0		671		2,041		185,461
Open end and junior lien loans		188,320		98		0		220		318		188,638
Residential construction loans		16,194		0		0		0		0		16,194
Other consumer loans		85,654		168		0		0		168		85,822
Total	$	3,897,455	$	10,025	$	0	$	7,265	$	17,290	$	3,914,745

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.9 million and $3.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2019 and December 31, 2018, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.

	March 31		December 31
(dollars in thousands)	2019		2018
Accruing troubled debt restructured loans	$	6,196	$	8,016
Nonaccrual troubled debt restructured loans		3,812		4,384
Total troubled debt restructured loans	$	10,008	$	12,400

During the three months ending March 31, 2019, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period. One of the loans is for a commercial real estate building where the cash flow does not support the loan with a recorded investment of $533,000. The other loan is for commercial and industrial non-working capital purposes and this borrower had a recorded investment of $70,000 that was subsequently paid off prior to March 31, 2019. These concessions are not included in table below.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended March 31, 2019:

Modified Repayment Terms

Pre-Modification

Post-Modification

Extension

Outstanding

Period or

Number of

Recorded

Number of

Range

(dollars in thousands)

Loans

Investment

Loans

(in months)

Troubled Debt Restructurings

Commercial and industrial loans:

Working capital lines of credit loans

Total

For the three month period ending March 31, 2019, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded.

During the three months ended March 31, 2018, certain loans were modified as troubled debt restructurings. The modified terms of these loans include one or a combination of the following: inadequate compensation for the terms of the restructure or renewal; a modification of the repayment terms which delays principal repayment for some period; or renewal terms offered to borrowers in financial distress where no additional credit enhancements were obtained at the time of renewal.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the period. The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the companies occupying the buildings do not support the loan with recorded investments of $341,000. The loans to two other borrowers are for commercial and industrial capital and non-working capital loans with recorded investments of $551,000. These concessions are not included in the following table.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended March 31, 2018:

							Modified Repayment Terms
			Pre-Modification		Post-Modification				Extension
			Outstanding		Outstanding				Period or
	Number of		Recorded		Recorded		Number of		Range
(dollars in thousands)	Loans		Investment		Investment		Loans		(in months)
Troubled Debt Restructurings
Commercial and industrial loans:
Working capital lines of credit loans		1	$	600	$	600		1		0
Non-working capital loans		1		1,400		1,400		1		0
Commercial real estate and multi-
family residential loans:
Construction and land
development loans		1		824		824		1		12
Owner occupied loans		1		387		387		1		12
Consumer 1-4 family loans:
Closed end first mortgage loans		1		198		197		1		239
Total		5	$	3,409	$	3,408		5		0 - 239

For the three-month period ending March 31, 2018, the troubled debt restructurings described in the table above decreased the allowance for loan losses by $227,000, primarily due to the reduction of the allowance for loan losses on the construction and land development loan described in the table above.

For the three-month period ending March 31, 2018, charge-offs of $1.6 million were recorded on the troubled debt restructurings described in the table above, which were from the charge-offs taken on the two commercial and industrial loans described in the table above.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes commercial loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis for Special Mention, Substandard and Doubtful grade loans and annually on Pass grade loans over $250,000.

The Company uses the following definitions for risk ratings:

Special Mention.

Loans classified as Special Mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard.

Loans classified as Substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful.

Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be Pass rated loans with the exception of consumer troubled debt restructurings which are evaluated and listed with Substandard commercial grade loans and consumer nonaccrual loans which are evaluated individually and listed with Not Rated loans. Loans listed as Not Rated are consumer loans or commercial loans with consumer characteristics included in groups of homogenous loans which are analyzed for credit quality indicators utilizing delinquency status. As of March 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special						Not
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Rated		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	638,075	$	59,140	$	29,489	$	0	$	319	$	727,023
Non-working capital loans		651,748		17,072		25,632		0		5,873		700,325
Commercial real estate and multi-
family residential loans:
Construction and land development loans		292,275		352		0		0		0		292,627
Owner occupied loans		509,539		25,024		22,382		0		0		556,945
Nonowner occupied loans		533,975		2,439		628		0		0		537,042
Multifamily loans		240,211		210		0		0		0		240,421
Agri-business and agricultural loans:
Loans secured by farmland		128,492		9,388		1,780		0		0		139,660
Loans for agricultural production		153,470		7,476		1,800		0		0		162,746
Other commercial loans		111,871		0		0		0		4		111,875
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		56,681		0		1,924		0		129,822		188,427
Open end and junior lien loans		8,613		0		98		0		175,691		184,402
Residential construction loans		0		0		0		0		13,106		13,106
Other consumer loans		12,868		0		43		0		71,500		84,411
Total	$	3,337,818	$	121,101	$	83,776	$	0	$	396,315	$	3,939,010

As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special						Not
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Rated		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	618,612	$	43,240	$	28,563	$	0	$	349	$	690,764
Non-working capital loans		664,787		15,992		27,548		0		6,247		714,574
Commercial real estate and multi-
family residential loans:
Construction and land development loans		264,900		353		291		0		0		265,544
Owner occupied loans		541,734		21,864		22,371		0		0		585,969
Nonowner occupied loans		517,356		2,491		641		0		0		520,488
Multifamily loans		194,948		216		0		0		0		195,164
Agri-business and agricultural loans:
Loans secured by farmland		166,623		9,107		1,783		0		0		177,513
Loans for agricultural production		183,189		8,155		1,750		0		0		193,094
Other commercial loans		95,516		0		0		0		4		95,520
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		54,879		0		2,021		0		128,561		185,461
Open end and junior lien loans		8,810		0		220		0		179,608		188,638
Residential construction loans		0		0		0		0		16,194		16,194
Other consumer loans		12,700		0		44		0		73,078		85,822
Total	$	3,324,054	$	101,418	$	85,232	$	0	$	404,041	$	3,914,745