Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:



Loan Type (Dollars in thousands)	September 30, 2017			% of Total Loans		December 31, 2016			% of Total Loans
Commercial:
Commercial and industrial	$	90,511		11.6	%	$	88,652		11.7	%
Agricultural land and production	18,074			2.4	%	25,509			3.4	%
Total commercial	108,585			14.0	%	114,161			15.1	%
Real estate:
Owner occupied	191,918			24.6	%	191,665			25.3	%
Real estate construction and other land loans	84,135			10.8	%	69,200			9.1	%
Commercial real estate	212,008			27.2	%	184,225			24.3	%
Agricultural real estate	72,082			9.3	%	86,761			11.5	%
Other real estate	19,572			2.6	%	18,945			2.7	%
Total real estate	579,715			74.5	%	550,796			72.9	%
Consumer:
Equity loans and lines of credit	61,822			8.0	%	64,494			8.5	%
Consumer and installment	27,595			3.5	%	25,910			3.5	%
Total consumer	89,417			11.5	%	90,404			12.0	%
Net deferred origination costs	1,009					1,267
Total gross loans	778,726			100.0	%	756,628			100.0	%
Allowance for credit losses	(8,916		)			(9,326		)
Total loans	$	769,810				$	747,302

At September 30, 2017 and December 31, 2016, loans originated under Small Business Administration (SBA) programs totaling $24,569,000 and $16,590,000, respectively, were included in the real estate and commercial categories, of which, $18,170,000 or 74% and $12,188,000 or 73%, respectively, are secured by government guarantees.

Purchased Credit Impaired Loans

The Company has loans that were acquired in acquisitions for which there was at acquisition evidence of deterioration of credit quality since origination, and for which it was probable at acquisition that all contractually required payments would not be collected.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at September 30, 2017 and December 31, 2016. The amounts of loans at September 30, 2017 and December 31, 2016 are as follows (in thousands):



	September 30, 2017		December 31, 2016
Commercial	$	404	$	612
Outstanding balance	$	404	$	612
Carrying amount, net of allowance of $0	$	404	$	612

Purchased credit impaired (PCI) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Loans acquired during each year for which it was probable at acquisition that all contractually required payments would not be collected are as follows (in thousands):



	September 30, 2017		December 31, 2016
Contractually required payments receivable on PCI loans at acquisition:
Commercial	$	—	$	982
Total	$	—	$	982
Cash flows expected to be collected at acquisition	$	—	$	693
Fair value of acquired loans at acquisition	$	—	$	631

Certain of the loans acquired by the Company that are within the scope of Topic ASC 310-30 are not accounted for using the income recognition model of the Topic because the Company cannot reliably estimate cash flows expected to be collected. The carrying amounts of such loans (which are included in the carrying amount, net of allowance, described above) are as follows.



	September 30, 2017		December 31, 2016
Loans acquired during the year	$	—	$	631
Loans at the end of the period	$	404	$	612

Allowance for Credit Losses

The allowance for credit losses (the “Allowance”) is a valuation allowance for probable incurred credit losses in the Company’s loan portfolio. The Allowance is established through a provision for credit losses which is charged to expense. Additions to the Allowance are expected to maintain the adequacy of the total Allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the Allowance. Cash received on previously charged-off credits is recorded as a recovery to the Allowance. The overall Allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

For all portfolio segments, the determination of the general reserve for loans that are not impaired is based on estimates made by management, including but not limited to, consideration of historical losses by portfolio segment (and in certain cases peer data) over the most recent 20 quarters, and qualitative factors including economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The following table shows the summary of activities for the Allowance as of and for the three months ended September 30, 2017 and 2016 by portfolio segment (in thousands):



	Commercial			Real Estate			Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, July 01, 2017	$	2,196		$	5,931		$	793		$	377		$	9,297
(Reversal) provision charged to operations	(532		)	(251		)	(35		)	(82		)	(900		)
Losses charged to allowance	(4		)	—			(18		)	—			(22		)
Recoveries	514			5			22			—			541
Ending balance, September 30, 2017	$	2,174		$	5,685		$	762		$	295		$	8,916

Allowance for credit losses:
Beginning balance, July 1, 2016	$	2,972		$	5,660		$	948		$	292		$	9,872
(Reversal) provision charged to operations	(963		)	259			(23		)	(273		)	(1,000		)
Losses charged to allowance	(494		)	—			(36		)	—			(530		)
Recoveries	803			131			23			—			957
Ending balance, September 30, 2016	$	2,318		$	6,050		$	912		$	19		$	9,299

The following table shows the summary of activities for the allowance for loan losses as of and for the nine months ended September 30, 2017 and 2016 by portfolio segment of loans (in thousands):



	Commercial			Real Estate			Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, January 1, 2017	$	2,180		$	6,200		$	852		$	94		$	9,326
(Reversal) provision charged to operations	(776		)	(554		)	(21		)	201			(1,150		)
Losses charged to allowance	(48		)	(22		)	(162		)	—			(232		)
Recoveries	818			61			93			—			972
Ending balance, September 30, 2017	$	2,174		$	5,685		$	762		$	295		$	8,916

Allowance for credit losses:
Beginning balance, January 1, 2016	$	3,562		$	5,204		$	734		$	110		$	9,610
(Reversal) provision charged to operations	(5,787		)	(136		)	164			(91		)	(5,850		)
Losses charged to allowance	(499		)	—			(148		)	—			(647		)
Recoveries	5,042			982			162			—			6,186
Ending balance, September 30, 2016	$	2,318		$	6,050		$	912		$	19		$	9,299

The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2017 and December 31, 2016 (in thousands):



	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, September 30, 2017	$	2,174	$	5,685	$	762	$	295	$	8,916
Ending balance: individually evaluated for impairment	$	1	$	25	$	30	$	—	$	56
Ending balance: collectively evaluated for impairment	$	2,173	$	5,660	$	732	$	295	$	8,860

Ending balance, December 31, 2016	$	2,180	$	6,200	$	852	$	94	$	9,326
Ending balance: individually evaluated for impairment	$	3	$	241	$	63	$	—	$	307
Ending balance: collectively evaluated for impairment	$	2,177	$	5,959	$	789	$	94	$	9,019



	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, September 30, 2017	$	108,585	$	579,715	$	89,417	$	777,717
Ending balance: individually evaluated for impairment	$	394	$	5,035	$	199	$	5,628
Ending balance: collectively evaluated for impairment	$	108,191	$	574,680	$	89,218	$	772,089

Loans:
Ending balance, December 31, 2016	$	114,161	$	550,796	$	90,404	$	755,361
Ending balance: individually evaluated for impairment	$	487	$	4,238	$	544	$	5,269
Ending balance: collectively evaluated for impairment	$	113,674	$	546,558	$	89,860	$	750,092

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2017 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	74,450	$	8,692	$	7,369	$	—	$	90,511
Agricultural land and production	9,036		1,986		7,052		—		18,074
Real Estate:
Owner occupied	184,377		4,700		2,841		—		191,918
Real estate construction and other land loans	80,504		1,783		1,848		—		84,135
Commercial real estate	207,673		2,438		1,897		—		212,008
Agricultural real estate	43,136		1,290		27,656		—		72,082
Other real estate	19,572		—		—		—		19,572
Consumer:
Equity loans and lines of credit	60,512		507		803		—		61,822
Consumer and installment	27,592		—		3		—		27,595
Total	$	706,852	$	21,396	$	49,469	$	—	$	777,717

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2016 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	75,212	$	907	$	12,533	$	—	$	88,652
Agricultural land and production	16,562		8,681		266		—		25,509
Real Estate:
Owner occupied	184,987		2,865		3,813		—		191,665
Real estate construction and other land loans	62,538		5,259		1,403		—		69,200
Commercial real estate	179,966		1,548		2,711		—		184,225
Agricultural real estate	49,270		10,390		27,101		—		86,761
Other real estate	18,779		166		—		—		18,945
Consumer:
Equity loans and lines of credit	62,782		95		1,617		—		64,494
Consumer and installment	25,890		—		20		—		25,910
Total	$	675,986	$	29,911	$	49,464	$	—	$	755,361

The following table shows an aging analysis of the loan portfolio by class and the time past due at September 30, 2017 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non-accrual
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	90,511	$	90,511	$	—	$	372
Agricultural land and production	—		—		—		—		18,074		18,074		—		—
Real estate:	—						—		—		—
Owner occupied	—		—		—		—		191,918		191,918		—		—
Real estate construction and other land loans	1,397		—		—		1,397		82,738		84,135		—		1,397
Commercial real estate	—		—		—		—		212,008		212,008		—		1,000
Agricultural real estate	—		—		—		—		72,082		72,082		—		—
Other real estate	—		—		—		—		19,572		19,572		—		—
Consumer:							—		—		—
Equity loans and lines of credit	19		—		—		19		61,803		61,822		—		199
Consumer and installment	60		2		—		62		27,533		27,595		—		—
Total	$	1,476	$	2	$	—	$	1,478	$	776,239	$	777,717	$	—	$	2,968

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 2016 (in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Current		Total Loans		Recorded Investment > 90 Days Accruing		Non- accrual
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	88,652	$	88,652	$	—	$	447
Agricultural land and production	—		—		—		—		25,509		25,509		—		—
Real estate:	—
Owner occupied	87		—		—		87		191,578		191,665		—		107
Real estate construction and other land loans	—		—		—		—		69,200		69,200		—		—
Commercial real estate	565		—		—		565		183,660		184,225		—		1,082
Agricultural real estate	—		—		—		—		86,761		86,761		—		—
Other real estate	—		—		—		—		18,945		18,945		—		—
Consumer:
Equity loans and lines of credit	62		48		—		110		64,384		64,494		—		526
Consumer and installment	38		—		—		38		25,872		25,910		—		18
Total	$	752	$	48	$	—	$	800	$	754,561	$	755,361	$	—	$	2,180

The following table shows information related to impaired loans by class at September 30, 2017 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	372	$	562	$	—
Real estate:
Real estate construction and other land loans	1,397		1,460		—
Commercial real estate	1,804		2,058		—
Total real estate	3,201		3,518		—
Consumer:
Equity loans and lines of credit	154		212		—
Total with no related allowance recorded	3,727		4,292		—

With an allowance recorded:
Commercial:
Commercial and industrial	22		22		1
Real estate:
Real estate construction and other land loans	1,783		1,783		24
Agricultural real estate	51		51		1
Total real estate	1,834		1,834		25
Consumer:
Equity loans and lines of credit	45		46		30
Total with an allowance recorded	1,901		1,902		56
Total	$	5,628	$	6,194	$	56

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following table shows information related to impaired loans by class at December 31, 2016 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	447	$	612	$	—
Total commercial	447		612		—
Real estate:
Owner occupied	107		111		—
Commercial real estate	827		967		—
Total real estate	934		1,078		—
Consumer:
Equity loans and lines of credit	167		234		—
Consumer and installment	6		9		—
Total consumer	173		243		—
Total with no related allowance recorded	1,554		1,933		—

With an allowance recorded:
Commercial:
Commercial and industrial	40		40		3
Real estate:
Real estate construction and other land loans	2,222		2,222		79
Commercial real estate	1,082		1,146		162
Total real estate	3,304		3,368		241
Consumer:
Equity loans and lines of credit	359		364		61
Consumer and installment	12		12		2
Total consumer	371		376		63
Total with an allowance recorded	3,715		3,784		307
Total	$	5,269	$	5,717	$	307

The recorded investment in loans excludes accrued interest receivable and net loan origination fees, due to immateriality.

The following tables present by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended September 30, 2017 and 2016.



	Three Months Ended September 30, 2017				Three Months Ended September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	390	$	—	$	—	$	—
Real estate:
Owner occupied	—		—		108		—
Real estate construction and other land loans	1,423		—		2,686		51
Commercial real estate	1,822		13		838		14
Total real estate	3,245		13		3,632		65
Consumer:
Equity loans and lines of credit	142		—		—		—
Consumer and installment	15		—		8		—
Total consumer	157		—		8		—
Total with no related allowance recorded	3,792		13		3,640		65

With an allowance recorded:
Commercial:
Commercial and industrial	22		—		519		1
Real estate:
Owner occupied	—		—		127		—
Real estate construction and other land loans	1,859		27		—		—
Commercial real estate	—		—		540		—
Agricultural real estate	57		1		—		—
Total real estate	1,916		28		667		—
Consumer:
Equity loans and lines of credit	46		—		160		—
Consumer and installment	—		—		15		—
Total consumer	46		—		175		—
Total with an allowance recorded	1,984		28		1,361		1
Total	$	5,776	$	41	$	5,001	$	66



	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	416	$	—	$	104	$	—
Agricultural land and production	—		—		—		—
Total commercial	416		—		104		—
Real estate:
Owner occupied	32		—		189		—
Real estate construction and other land loans	1,014		—		2,884		156
Commercial real estate	1,325		40		997		41
Agricultural real estate	—		—		—		—
Other real estate	—		—		—		—
Total real estate	2,371		40		4,070		197
Consumer:
Equity loans and lines of credit	127		—		745		—
Consumer and installment	8		—		6		—
Total consumer	135		—		751		—
Total with no related allowance recorded	2,922		40		4,925		197

With an allowance recorded:
Commercial:
Commercial and industrial	28		1		559		2
Agricultural land and production	—		—		—		—
Total commercial	28		1		559		2
Real estate:
Owner occupied	—		—		156		—
Real estate construction and other land loans	2,025		88		—		—
Commercial real estate	532		—		552		—
Agricultural real estate	40		2		—		—
Other real estate	—		—		—		—
Total real estate	2,597		90		708		—
Consumer:
Equity loans and lines of credit	102		—		162		—
Consumer and installment	1		—		10		—
Total consumer	103		—		172		—
Total with an allowance recorded	2,728		91		1,439		2
Total	$	5,650	$	131	$	6,364	$	199

Foregone interest on nonaccrual loans totaled $159,000 and $104,000 for the nine month periods ended September 30, 2017 and 2016, respectively. Foregone interest on nonaccrual loans totaled $54,000 and $12,000 for the three month periods ended September 30, 2017 and 2016, respectively.

Troubled Debt Restructurings:

As of September 30, 2017 and December 31, 2016, the Company has a recorded investment in troubled debt restructurings of $2,722,000 and $3,109,000, respectively. The Company has allocated $26,000 and $82,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2017 and December 31, 2016, respectively. The Company has committed to lend no additional amounts as of September 30, 2017 to customers with outstanding loans that are classified as troubled debt restructurings.

During the nine month period ended September 30, 2017 two loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. During the same period, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2017 (in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Real Estate:
Agricultural real estate	1	$	59	$	—	$	59	$	51
Consumer:
Equity loans and lines of credit	1	62		—		66		62
Total	2	$	121	$	—	$	125	$	113


(1)	Amounts represent the recorded investment in loans before recognizing effects of the TDR, if any.


(2)	Principal Modification includes principal forgiveness at the time of modification, contingent principal forgiveness granted over the life of the loan based on borrower performance, and principal that has been legally separated and deferred to the end of the loan, with zero percent contractual interest rate.


(3)	Balance outstanding after principal modification, if any borrower reduction to recorded investment.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ended September 30, 2016 (in thousands):



Troubled Debt Restructurings:	Number of Loans	Pre-Modification Outstanding Recorded Investment (1)		Principal Modification (2)		Post Modification Outstanding Recorded Investment (3)		Outstanding Recorded Investment
Commercial:
Commercial and Industrial	2	$	45	$	—	$	45	$	42

During the quarter ended September 30, 2017 and 2016 no loans were modified as troubled debt restructuring.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the nine months ended September 30, 2017 or September 30, 2016.