Loans and Allowance for Credit Losses

Outstanding loans are summarized as follows:



Loan Type (Dollars in thousands)	September 30, 2018			% of Total Loans		December 31, 2017			% of Total Loans
Commercial:
Commercial and industrial	$	102,352		11.2	%	$	100,856		11.2	%
Agricultural production	10,516			1.2	%	14,956			1.7	%
Total commercial	112,868			12.4	%	115,812			12.9	%
Real estate:
Owner occupied	186,997			20.5	%	204,452			22.7	%
Real estate construction and other land loans	95,656			10.5	%	96,460			10.7	%
Commercial real estate	306,778			33.6	%	269,254			29.9	%
Agricultural real estate	70,580			7.7	%	76,081			8.4	%
Other real estate	33,526			3.9	%	31,220			3.5	%
Total real estate	693,537			76.2	%	677,467			75.2	%
Consumer:
Equity loans and lines of credit	70,518			7.7	%	76,404			8.5	%
Consumer and installment	33,512			3.7	%	29,637			3.4	%
Total consumer	104,030			11.4	%	106,041			11.9	%
Net deferred origination costs	1,442					1,359
Total gross loans	911,877			100.0	%	900,679			100.0	%
Allowance for credit losses	(9,025		)			(8,778		)
Total loans	$	902,852				$	891,901

At September 30, 2018 and December 31, 2017, loans originated under Small Business Administration (SBA) programs totaling $26,223,000 and $25,925,000, respectively, were included in the real estate and commercial categories, of which, $19,403,000 or 74% and $19,182,000 or 74%, 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, 2018 and December 31, 2017. The amounts of loans at September 30, 2018 and December 31, 2017 are as follows (in thousands):



	September 30, 2018		December 31, 2017
Commercial	$	291	$	383
Outstanding balance	$	291	$	383
Carrying amount, net of allowance of $0	$	291	$	383

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.

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 (in thousands):



	September 30, 2018		December 31, 2017
Loans acquired during the year	$	—	$	—
Loans at the end of the period	$	291	$	383

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, 2018 and 2017 by portfolio segment (in thousands):



	Commercial			Real Estate			Consumer			Unallocated			Total
Allowance for credit losses:
Beginning balance, July 1, 2018	$	1,938		$	6,155		$	793		$	34		$	8,920
(Reversal) provision charged to operations	(273		)	203			16			54			—
Losses charged to allowance	—			—			(23		)	—			(23		)
Recoveries	29			20			79			—			128
Ending balance, September 30, 2018	$	1,694		$	6,378		$	865		$	88		$	9,025

Allowance for credit losses:
Beginning balance, July 1, 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

The following table shows the summary of activities for the allowance for loan losses as of and for the nine months ended September 30, 2018 and 2017 by portfolio segment of loans (in thousands):



	Commercial			Real Estate			Consumer			Unallocated		Total
Allowance for credit losses:
Beginning balance, January 1, 2018	$	2,071		$	5,795		$	825		$	87	$	8,778
(Reversal) provision charged to operations	(422		)	481			(10		)	1		50
Losses charged to allowance	(87		)	—			(88		)	—		(175		)
Recoveries	132			102			138			—		372
Ending balance, September 30, 2018	$	1,694		$	6,378		$	865		$	88	$	9,025

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

The following is a summary of the Allowance by impairment methodology and portfolio segment as of September 30, 2018 and December 31, 2017 (in thousands):



	Commercial		Real Estate		Consumer		Unallocated		Total
Allowance for credit losses:
Ending balance, September 30, 2018	$	1,694	$	6,378	$	865	$	88	$	9,025
Ending balance: individually evaluated for impairment	$	1	$	163	$	58	$	—	$	222
Ending balance: collectively evaluated for impairment	$	1,693	$	6,215	$	807	$	88	$	8,803

Ending balance, December 31, 2017	$	2,071	$	5,795	$	825	$	87	$	8,778
Ending balance: individually evaluated for impairment	$	1	$	1	$	34	$	—	$	36
Ending balance: collectively evaluated for impairment	$	2,070	$	5,794	$	791	$	87	$	8,742



	Commercial		Real Estate		Consumer		Total
Loans:
Ending balance, September 30, 2018	$	112,868	$	693,537	$	104,030	$	910,435
Ending balance: individually evaluated for impairment	$	342	$	5,768	$	1,363	$	7,473
Ending balance: collectively evaluated for impairment	$	112,526	$	687,769	$	102,667	$	902,962

Loans:
Ending balance, December 31, 2017	$	115,812	$	677,467	$	106,041	$	899,320
Ending balance: individually evaluated for impairment	$	377	$	4,846	$	1,143	$	6,366
Ending balance: collectively evaluated for impairment	$	115,435	$	672,621	$	104,898	$	892,954

The following table shows the loan portfolio by class allocated by management’s internal risk ratings at September 30, 2018 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	90,893	$	10,200	$	1,259	$	—	$	102,352
Agricultural production	6,516		2,636		1,364		—		10,516
Real Estate:
Owner occupied	183,013		3,080		904		—		186,997
Real estate construction and other land loans	91,289		1,325		3,042		—		95,656
Commercial real estate	300,450		2,503		3,825		—		306,778
Agricultural real estate	46,196		688		23,696		—		70,580
Other real estate	32,409		—		1,117		—		33,526
Consumer:
Equity loans and lines of credit	68,329		383		1,806		—		70,518
Consumer and installment	33,510		—		2		—		33,512
Total	$	852,605	$	20,815	$	37,015	$	—	$	910,435

The following table shows the loan portfolio by class allocated by management’s internally assigned risk grade ratings at December 31, 2017 (in thousands):



	Pass		Special Mention		Sub-Standard		Doubtful		Total
Commercial:
Commercial and industrial	$	84,745	$	8,217	$	7,894	$	—	$	100,856
Agricultural production	10,848		206		3,902		—		14,956
Real Estate:
Owner occupied	196,838		4,795		2,819		—		204,452
Real estate construction and other land loans	90,927		1,625		3,908		—		96,460
Commercial real estate	261,746		4,147		3,361		—		269,254
Agricultural real estate	48,274		1,270		26,537		—		76,081
Other real estate	29,867		1,165		188		—		31,220
Consumer:
Equity loans and lines of credit	74,535		483		1,386		—		76,404
Consumer and installment	29,634		—		3		—		29,637
Total	$	827,414	$	21,908	$	49,998	$	—	$	899,320

The following table shows an aging analysis of the loan portfolio by class and the time past due at September 30, 2018 (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	$	—	$	—	$	—	$	—	$	102,352	$	102,352	$	—	$	291
Agricultural production	—		—		—		—		10,516		10,516		—		—
Real estate:	—						—		—		—
Owner occupied	—		—		—		—		186,997		186,997		—		—
Real estate construction and other land loans	—		—		1,439		1,439		94,217		95,656		—		1,439
Commercial real estate	—		—		—		—		306,778		306,778		—		908
Agricultural real estate	—		—		—		—		70,580		70,580		—		—
Other real estate	—		—		1,117		1,117		32,409		33,526		—		1,117
Consumer:							—		—		—
Equity loans and lines of credit	—		—		—		—		70,518		70,518		—		378
Consumer and installment	19		—		—		19		33,493		33,512		—		—
Total	$	19	$	—	$	2,556	$	2,575	$	907,860	$	910,435	$	—	$	4,133

The following table shows an aging analysis of the loan portfolio by class and the time past due at December 31, 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	$	—	$	—	$	—	$	—	$	100,856	$	100,856	$	—	$	356
Agricultural production	—		—		—		—		14,956		14,956		—		—
Real estate:	—
Owner occupied	—		—		—		—		204,452		204,452		—		—
Real estate construction and other land loans	—		—		1,397		1,397		95,063		96,460		—		1,397
Commercial real estate	—		—		—		—		269,254		269,254		—		976
Agricultural real estate	—		—		—		—		76,081		76,081		—		—
Other real estate	—		1,165		—		1,165		30,055		31,220		—		—
Consumer:
Equity loans and lines of credit	149		—		—		149		76,255		76,404		—		146
Consumer and installment	26		—		—		26		29,611		29,637		—		—
Total	$	175	$	1,165	$	1,397	$	2,737	$	896,583	$	899,320	$	—	$	2,875

The following table shows information related to impaired loans by class at September 30, 2018 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	290	$	513	$	—
Real estate:
Real estate construction and other land loans	2,764		2,827		—
Commercial real estate	1,680		1,993		—
Other real estate	1,117		1,180		—
Total real estate	5,561		6,000		—
Consumer:
Equity loans and lines of credit	255		287		—
Total with no related allowance recorded	6,106		6,800		—

With an allowance recorded:
Commercial:
Commercial and industrial	52		52		1
Real estate:
Commercial real estate	163		164		162
Agricultural real estate	44		44		1
Total real estate	207		208		163
Consumer:
Equity loans and lines of credit	1,108		1,111		58
Total with an allowance recorded	1,367		1,371		222
Total	$	7,473	$	8,171	$	222

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, 2017 (in thousands):



	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial:
Commercial and industrial	$	355	$	553	$	—
Real estate:
Real estate construction and other land loans	3,023		3,085		—
Commercial real estate	1,772		2,040		—
Total real estate	4,795		5,125		—
Consumer:
Equity loans and lines of credit	146		206		—
Total with no related allowance recorded	5,296		5,884		—

With an allowance recorded:
Commercial:
Commercial and industrial	22		22		1
Real estate:
Agricultural real estate	51		51		1
Consumer:
Equity loans and lines of credit	997		997		34
Total with an allowance recorded	1,070		1,070		36
Total	$	6,366	$	6,954	$	36

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, 2018 and 2017 (in thousands).



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	298	$	—	$	390	$	—
Real estate:
Real estate construction and other land loans	2,851		21		1,423		—
Commercial real estate	1,695		13		1,822		13
Agricultural real estate	2,288		—		—		—
Other real estate	836		—		—		—
Total real estate	7,670		34		3,245		13
Consumer:
Equity loans and lines of credit	224		—		142		—
Consumer and installment	—		—		15		—
Total consumer	224		—		157		—
Total with no related allowance recorded	8,192		34		3,792		13

With an allowance recorded:
Commercial:
Commercial and industrial	53		1		22		—
Real estate:
Real estate construction and other land loans	—		—		1,859		27
Commercial real estate	164		3		—		—
Agricultural real estate	50		1		57		1
Other real estate	279		—		—		—
Total real estate	493		4		1,916		28
Consumer:
Equity loans and lines of credit	1,111		14		46		—
Consumer and installment	3		—		—		—
Total consumer	1,114		14		46		—
Total with an allowance recorded	1,660		19		1,984		28
Total	$	9,852	$	53	$	5,776	$	41



	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial:
Commercial and industrial	$	324	$	—	$	416	$	—
Real estate:
Owner occupied	—		—		32		—
Real estate construction and other land loans	2,918		66		1,014		—
Commercial real estate	1,648		39		1,325		40
Agricultural real estate	1,525		119		—		—
Other real estate	913		—		—		—
Total real estate	7,004		224		2,371		40
Consumer:
Equity loans and lines of credit	207		—		127		—
Consumer and installment	—		—		8		—
Total consumer	207		—		135		—
Total with no related allowance recorded	7,535		224		2,922		40

With an allowance recorded:
Commercial:
Commercial and industrial	52		3		28		1
Real estate:
Real estate construction and other land loans	—		—		2,025		88
Commercial real estate	211		9		532		—
Agricultural real estate	50		2		40		2
Other real estate	112		—		—		—
Total real estate	373		11		2,597		90
Consumer:
Equity loans and lines of credit	1,040		43		102		—
Consumer and installment	4		—		1		—
Total consumer	1,044		43		103		—
Total with an allowance recorded	1,469		57		2,728		91
Total	$	9,004	$	281	$	5,650	$	131

Foregone interest on nonaccrual loans totaled $293,000 and $159,000 for the nine month periods ended September 30, 2018 and 2017, respectively. Foregone interest on nonaccrual loans totaled $106,000 and $54,000 for the three month periods ended September 30, 2018 and 2017, respectively.

Troubled Debt Restructurings:

As of September 30, 2018 and December 31, 2017, the Company has a recorded investment in troubled debt restructurings of $3,393,000 and $3,551,000, respectively. The Company has allocated $189,000 and $36,000 of specific reserves to loans whose terms have been modified in troubled debt restructurings as of September 30, 2018 and December 31, 2017, respectively. The Company has committed to lend no additional amounts as of September 30, 2018 to customers with outstanding loans that are classified as troubled debt restructurings.

During the nine months month period ended September 30, 2018 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, 2018 (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	1	$	38	$	—	$	38	$	31
Real Estate:
Commercial real estate	1	166		—		166		163
Total	2	$	204	$	—	$	204	$	194


(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, 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

During the quarter ended September 30, 2018 and September 30, 2017 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, 2018 or September 30, 2017.