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ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

6 Months Ended

Jun. 30, 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 June 30, 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 June 30, 2019

Beginning balance, April 1

24,030

15,447

4,146

373

2,266

291

3,009

49,562

Provision for loan losses

824

(31)

(242)

(18)

(124)

336

785

Loans charged-off

(17)

(5)

(62)

(84)

Recoveries

187

301

Net loans charged-off

170

(42)

217

Ending balance

25,024

15,492

3,906

355

2,153

289

3,345

50,564


			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 June 30, 2018
Beginning balance, April 1	$	20,725	$	14,438	$	4,848	$	510	$	2,018	$	245	$	2,843	$	45,627
Provision for loan losses		1,392		508		(268)		(46)		(68)		65		117		1,700
Loans charged-off		(57)		0		0		0		0		(71)		0		(128)
Recoveries		464		8		5		0		3		27		0		507
Net loans charged-off		407		8		5		0		3		(44)		0		379
Ending balance	$	22,524	$	14,954	$	4,585	$	464	$	1,953	$	266	$	2,960	$	47,706

The following tables present the activity in the allowance for loan losses by portfolio segment for the six-month periods ended June 30, 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

Six Months Ended June 30, 2019

Beginning balance, January 1

22,518

15,393

4,305

368

2,292

283

3,294

48,453

Provision for loan losses

2,317

(13)

(403)

(13)

(79)

125

1,985

Loans charged-off

(100)

(87)

(181)

(368)

Recoveries

289

112

494

Net loans charged-off

189

112

(60)

(119)

126

Ending balance

25,024

15,492

3,906

355

2,153

289

3,345

50,564


			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
Six Months Ended June 30, 2018
Beginning balance, January 1	$	21,097	$	14,714	$	4,920	$	577	$	2,768	$	379	$	2,666	$	47,121
Provision for loan losses		5,294		715		(344)		(113)		(862)		16		294		5,000
Loans charged-off		(4,417)		(491)		0		0		(7)		(190)		0		(5,105)
Recoveries		550		16		9		0		54		61		0		690
Net loans charged-off		(3,867)		(475)		9		0		47		(129)		0		(4,415)
Ending balance	$	22,524	$	14,954	$	4,585	$	464	$	1,953	$	266	$	2,960	$	47,706

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 June 30, 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

June 30, 2019

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

9,208

394

339

10,028

Collectively evaluated for impairment

15,816

15,098

3,819

355

1,814

289

3,345

40,536

Total ending allowance balance

25,024

15,492

3,906

355

2,153

289

3,345

50,564

Loans:

Loans individually evaluated for impairment

18,819

3,193

430

1,851

24,293

Loans collectively evaluated for impairment

1,431,542

1,649,854

314,153

103,949

388,078

86,749

3,974,325

Total ending loans balance

1,450,361

1,653,047

314,583

103,949

389,929

86,749

3,998,618


			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 June 30, 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	$	3,129	$	437	$	0
Non-working capital loans		2,321		926		0
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,975		1,437		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		200		119		0
Open end and junior lien loans		92		92		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,610		6,301		2,995
Non-working capital loans		11,135		11,155		6,213
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,756		1,756		394
Agri-business and agricultural loans:
Loans secured by farmland		148		147		87
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,637		1,640		339
Total	$	29,606	$	24,293	$	10,028

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 June 30, 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	$	287	$	0	$	1
Non-working capital loans		933		9		4
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,450		10		10
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		164		1		1
Open end and junior lien loans		93		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,326		75		26
Non-working capital loans		11,105		127		94
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,763		16		11
Agri-business and agricultural loans:
Loans secured by farmland		147		1		0
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,680		13		13
Other consumer loans		28		1		0
Total	$	24,259	$	253	$	160

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended June 30, 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	$	6	$	14
Non-working capital loans		1,738		16		26
Commercial real estate and multi-family residential loans:
Construction and land development loans		88		2		3
Owner occupied loans		2,868		9		12
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		533		2		3
Open end and junior lien loans		247		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		3,005		2		2
Non-working capital loans		3,513		3		6
Commercial real estate and multi-family residential loans:
Construction and land development loans		491		6		13
Owner occupied loans		1,041		1		1
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		993		8		10
Other consumer loans		48		0		2
Total	$	15,859	$	55	$	92

The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 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	$	221	$	1	$	1
Non-working capital loans		1,241		38		28
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,535		21		18
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		272		2		2
Open end and junior lien loans		143		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,406		147		85
Non-working capital loans		11,260		259		222
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,922		29		23
Agri-business and agricultural loans:
Loans secured by farmland		147		3		1
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,639		25		25
Other consumer loans		36		2		1
Total	$	25,105	$	527	$	406

The following table presents loans individually evaluated for impairment by class of loans as of and for the six-month period ended June 30, 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	$	13	$	16
Non-working capital loans		1,733		31		31
Commercial real estate and multi-family residential loans:
Construction and land development loans		95		3		3
Owner occupied loans		2,712		16		14
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		538		4		4
Open end and junior lien loans		169		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		2,307		4		3
Non-working capital loans		3,365		5		6
Commercial real estate and multi-family residential loans:
Construction and land development loans		606		17		18
Owner occupied loans		1,117		1		1
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		981		15		14
Open end and junior lien loans		77		0		0
Other consumer loans		48		1		2
Total	$	15,042	$	110	$	112

The following table presents the aging of the recorded investment in past due loans as of June 30, 2019 by class of loans:

30‑89

Greater than

Total Past

Loans Not

Days

90 Days

Due and

(dollars in thousands)

Past Due

Nonaccrual

Total

Commercial and industrial loans:

Working capital lines of credit loans

748,862

6,364

6,384

755,246

Non-working capital loans

689,781

5,329

5,334

695,115

Commercial real estate and multi-family residential loans:

Construction and land development loans

320,380

320,404

Owner occupied loans

554,607

2,185

556,792

Nonowner occupied loans

533,215

103

533,318

Multifamily loans

242,533

Agri-business and agricultural loans:

Loans secured by farmland

148,469

430

148,899

Loans for agricultural production

165,684

Other commercial loans

103,949

Consumer 1‑4 family mortgage loans:

Closed end first mortgage loans

185,676

1,235

597

1,832

187,508

Open end and junior lien loans

189,150

945

1,037

190,187

Residential construction loans

12,234

Other consumer loans

86,624

125

86,749

Total

3,981,164

2,457

14,997

17,454

3,998,618

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 June 30, 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.


	June 30,		December 31,
(dollars in thousands)	2019		2018
Accruing troubled debt restructured loans	$	6,082	$	8,016
Nonaccrual troubled debt restructured loans		3,512		4,384
Total troubled debt restructured loans	$	9,594	$	12,400

During the three months ended June 30, 2019, no loans were modified as troubled debt restructurings.

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 six months ended June 30, 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 and six month periods ending June 30, 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 June 30, 2018, one commercial and industrial loan was modified as a troubled debt restructuring due to receiving inadequate compensation for the terms of the restructure and is included in the tables on the next page.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended June 30, 2018. The loan to one of the borrowers is for a commercial real estate building where the collateral value and cash flows from the company occupying the building do not support the loan with a recorded investment of $107,000. The loan to another one of the borrowers is for a vacant commercial real estate building that does not generate cash flow to support the loan with a recorded investment of $875,000. The other loans are to a borrower for an investment in land for residential development which has not had sales activity to support loans with a recorded investment of $484,000. These concessions are not included in table below.

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. These concessions are included in the table below.

Additional concessions were granted to borrowers with previously identified troubled debt restructured loans during the three-month period ended March 31, 2018. 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 table below.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the three months ended June 30, 2018:

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:

Non-working capital loans

Total

The following table presents loans by class modified as new troubled debt restructurings that occurred during the six months ended June 30, 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	2		1,420		1,420	2	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	6	$	3,429	$	3,428	6	0‑239

For the three-month period ended June 30, 2018, the troubled debt restructuring described above did not impact the allowance for loan losses and no charge-off was recorded. For the six-month period ended June 30, 2018, the debt restructurings described above decreased the allowance for loan losses by $166,000, and resulted in charge-offs of $1.6 million.

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 June 30, 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

660,816

70,866

23,244

320

755,246

Non-working capital loans

645,632

25,350

18,804

5,329

695,115

Commercial real estate and multi-family residential loans:

Construction and land development loans

320,115

289

320,404

Owner occupied loans

517,431

21,043

18,318

556,792

Nonowner occupied loans

530,491

2,209

618

533,318

Multifamily loans

242,329

204

242,533

Agri-business and agricultural loans:

Loans secured by farmland

134,805

12,840

1,254

148,899

Loans for agricultural production

153,961

11,723

165,684

Other commercial loans

103,945

103,949

Consumer 1‑4 family mortgage loans:

Closed end first mortgage loans

55,538

131,875

187,508

Open end and junior lien loans

11,007

179,125

190,187

Residential construction loans

12,234

Other consumer loans

14,077

72,672

86,749

Total

3,390,147

144,524

62,388

401,559

3,998,618

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