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, 2017 and 2016:

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, 2017

Beginning balance, January 1

$20,272

$13,452

$3,532

$461

$2,827

$387

$2,787

$43,718

Provision for loan losses

(339)

257

(77)

315

200

Loans charged-off

(375)

(48)

(7)

(73)

(503)

Recoveries

223

359

Net loans charged-off

(152)

(45)

(144)

Ending balance

$19,781

$13,718

$3,459

$545

$2,790

$379

$3,102

$43,774

		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, 2016
Beginning balance, January 1	$21,564	$12,473	$2,445	$574	$3,395	$319	$2,840	$43,610
Provision for loan losses	(947)	436	4	(15)	196	42	284	0
Loans charged-off	(214)	(168)	0	0	(38)	(45)	0	(465)
Recoveries	62	11	5	0	33	28	0	139
Net loans charged-off	(152)	(157)	5	0	(5)	(17)	0	(326)
Ending balance	$20,465	$12,752	$2,454	$559	$3,586	$344	$3,124	$43,284

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, 2017 and December 31, 2016:

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, 2017

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

$3,897

$598

$290

$46

$4,831

Collectively evaluated for impairment

15,884

13,120

3,459

545

2,500

333

3,102

38,943

Total ending allowance balance

$19,781

$13,718

$3,459

$545

$2,790

$379

$3,102

$43,774

Loans:

Loans individually evaluated for impairment

$11,042

$8,877

$283

$1,410

$54

$21,666

Loans collectively evaluated for impairment

1,312,912

1,360,487

327,363

105,681

343,545

60,625

3,510,613

Total ending loans balance

$1,323,954

$1,369,364

$327,646

$105,681

$344,955

$60,679

$3,532,279

		Commercial
		Real Estate
	Commercial	and	Agri-business		Consumer
	and	Multi-family	and	Other	1-4 Family	Other
(dollars in thousands)	Industrial	Residential	Agricultural	Commercial	Mortgage	Consumer	Unallocated	Total
December 31, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$3,191	$576	$0	$0	$296	$51	$0	$4,114
Collectively evaluated for impairment	17,081	12,876	3,532	461	2,531	336	2,787	39,604
Total ending allowance balance	$20,272	$13,452	$3,532	$461	$2,827	$387	$2,787	$43,718

Loans:
Loans individually evaluated for impairment	$9,776	$9,151	$283	$0	$1,427	$55	$0	$20,692
Loans collectively evaluated for impairment	1,258,682	1,290,131	394,621	98,265	347,408	61,128	0	3,450,235
Total ending loans balance	$1,268,458	$1,299,282	$394,904	$98,265	$348,835	$61,183	$0	$3,470,927

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017:

	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	$783	$481	$0
Non-working capital loans	3,221	1,472	0
Commercial real estate and multi-family residential loans:
Construction and land development loans	126	126	0
Owner occupied loans	2,911	2,663	0
Nonowner occupied loans	4,587	4,588	0
Agri-business and agricultural loans:
Loans secured by farmland	603	283	0
Consumer 1-4 family loans:
Closed end first mortgage loans	204	191	0
Open end and junior lien loans	369	156	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	2,373	2,372	1,072
Non-working capital loans	6,719	6,717	2,825
Commercial real estate and multi-family residential loans:
Owner occupied loans	1,501	1,500	598
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,130	1,063	290
Other consumer loans	54	54	46
Total	$24,581	$21,666	$4,831

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:

	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	$951	$494	$0
Non-working capital loans	3,007	1,358	0
Commercial real estate and multi-family residential loans:
Construction and land development loans	126	126	0
Owner occupied loans	2,868	2,620	0
Nonowner occupied loans	4,632	4,633	0
Agri-business and agricultural loans:
Loans secured by farmland	603	283	0
Consumer 1-4 family loans:
Closed end first mortgage loans	161	147	0
Open end and junior lien loans	408	195	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	1,100	1,099	465
Non-working capital loans	6,827	6,825	2,726
Commercial real estate and multi-family residential loans:
Owner occupied loans	1,773	1,772	576
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,152	1,085	296
Other consumer loans	55	55	51
Total	$23,663	$20,692	$4,114

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 2017:

			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	$577	$7	$7
Non-working capital loans	1,381	8	8
Commercial real estate and multi-family residential loans:
Construction and land development loans	126	1	1
Owner occupied loans	2,572	1	1
Nonowner occupied loans	4,604	84	84
Agri-business and agricultural loans:
Loans secured by farmland	283	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	191	1	1
Open end and junior lien loans	156	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	1,363	11	13
Non-working capital loans	6,699	49	51
Commercial real estate and multi-family residential loans:
Owner occupied loans	1,665	5	5
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,071	7	7
Other consumer loans	54	1	1
Total	$20,742	$175	$179

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended March 31, 2016:

			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	$20	$0	$0
Non-working capital loans	673	0	0
Commercial real estate and multi-family residential loans:
Owner occupied loans	2,724	0	0
Nonowner occupied loans	4,808	29	23
Agri-business and agricultural loans:
Loans secured by farmland	471	0	0
Consumer 1-4 family loans:
Closed end first mortgage loans	47	0	0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans	1,352	5	5
Non-working capital loans	4,635	34	34
Commercial real estate and multi-family residential loans:
Construction and land development loans	339	3	3
Owner occupied loans	942	0	0
Nonowner occupied loans	77	0	0
Multifamily loans	385	5	5
Other commercial loans	12	0	0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	1,627	15	11
Open end and junior lien loans	251	0	0
Other consumer loans	59	1	1
Total	$18,422	$92	$82

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 by class of loans:

		30-89	Greater than
	Loans Not	Days	90 Days		Total
(dollars in thousands)	Past Due	Past Due	Past Due	Nonaccrual	Past Due	Total
Commercial and industrial loans:
Working capital lines of credit loans	$649,021	$60	$0	$1,598	$1,658	$650,679
Non-working capital loans	669,325	9	0	3,941	3,950	673,275
Commercial real estate and multi-family
residential loans:
Construction and land development loans	237,365	0	0	0	0	237,365
Owner occupied loans	462,792	0	1,633	3,888	5,521	468,313
Nonowner occupied loans	462,282	399	0	114	513	462,795
Multifamily loans	200,891	0	0	0	0	200,891
Agri-business and agricultural loans:
Loans secured by farmland	137,790	0	0	283	283	138,073
Loans for agricultural production	189,573	0	0	0	0	189,573
Other commercial loans	105,681	0	0	0	0	105,681
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	164,891	740	0	205	945	165,836
Open end and junior lien loans	168,488	232	0	156	388	168,876
Residential construction loans	10,243	0	0	0	0	10,243
Other consumer loans	60,626	53	0	0	53	60,679
Total	$3,518,968	$1,493	$1,633	$10,185	$13,311	$3,532,279

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 by class of loans:

		30-89	Greater than
	Loans Not	Days	90 Days		Total
(dollars in thousands)	Past Due	Past Due	Past Due	Nonaccrual	Past Due	Total
Commercial and industrial loans:
Working capital lines of credit loans	$624,213	$9	$0	$140	$149	$624,362
Non-working capital loans	642,014	0	0	2,082	2,082	644,096
Commercial real estate and multi-family
residential loans:
Construction and land development loans	244,411	0	0	0	0	244,411
Owner occupied loans	465,789	0	0	3,598	3,598	469,387
Nonowner occupied loans	457,880	0	0	122	122	458,002
Multi-family loans	127,482	0	0	0	0	127,482
Agri-business and agricultural loans:
Loans secured by farmland	172,349	0	0	283	283	172,632
Loans for agricultural production	222,272	0	0	0	0	222,272
Other commercial loans	98,265	0	0	0	0	98,265
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	161,499	1,072	53	213	1,338	162,837
Open end and junior lien loans	170,372	448	0	195	643	171,015
Residential construction loans	14,983	0	0	0	0	14,983
Other consumer loans	61,119	64	0	0	64	61,183
Total	$3,462,648	$1,593	$53	$6,633	$8,279	$3,470,927

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $3.1 million and $2.7 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2017 and December 31, 2016. 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)	2017	2016
Accruing troubled debt restructured loans	$10,234	$10,351
Nonaccrual troubled debt restructured loans	7,180	5,633
Total troubled debt restructured loans	$17,414	$15,984

During the period ending March 31, 2017, 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 loans to two of the borrowers are for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $500,000. The loans to two other borrowers are for commercial and industrial non-working capital loans with recorded investments of $690,000. 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, 2017:

				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:
Non-working capital loans	2	1,712	1,712	2	6
Commercial real estate and multi-
family residential loans:
Owner occupied loans	1	486	486	1	6
Consumer 1-4 family loans:
Closed end first mortgage loans	1	44	46	1	350
Total	4	$2,242	$2,244	4	6-350

For the period ended March 31, 2017, the commercial and industrial troubled debt restructurings described above increased the allowance for loan losses by $34,000 and the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $49,000.

No charge-offs resulted from any troubled debt restructurings described above during the three-month period ended March 31, 2017.

During the quarter ended March 31, 2016, 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 loans to two of the borrowers are for commercial real estate buildings where the collateral value and cash flows from the companies occupying the buildings do not support the loans with recorded investments of $542,000. The other loans were to a borrower engaged in land development, where the aggregate recorded investment totaled $484,000. 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, 2016:

				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 real estate and multi-
family residential loans:
Owner occupied loans	1	$335	$335	1	15
Total	1	$335	$335	1	15

For the three-month period ended March 31, 2016, the commercial real estate and multi-family residential loan troubled debt restructuring described above increased the allowance for loan losses by $11,000.

No charge-offs resulted from any troubled debt restructurings described above during the three-month period ended March 31, 2016.

There were no troubled debt restructurings that had payment defaults within the twelve months following modification during the three-month periods ended March 31, 2017 and 2016.

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 $150,000.

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, 2017, 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	$594,221	$30,356	$25,927	$0	$175	$650,679
Non-working capital loans	621,384	24,188	23,912	0	3,791	673,275
Commercial real estate and multi-
family residential loans:
Construction and land development loans	236,071	1,294	0	0	0	237,365
Owner occupied loans	440,213	11,633	16,467	0	0	468,313
Nonowner occupied loans	456,944	4,507	1,344	0	0	462,795
Multifamily loans	200,633	258	0	0	0	200,891
Agri-business and agricultural loans:
Loans secured by farmland	133,300	3,052	1,721	0	0	138,073
Loans for agricultural production	185,248	3,627	698	0	0	189,573
Other commercial loans	105,677	0	0	0	4	105,681
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	44,657	0	1,254	0	119,925	165,836
Open end and junior lien loans	7,235	0	0	0	161,641	168,876
Residential construction loans	0	0	0	0	10,243	10,243
Other consumer loans	16,264	0	54	0	44,361	60,679
Total	$3,041,847	$78,915	$71,377	$0	$340,140	$3,532,279

As of December 31, 2016, 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	$577,208	$17,636	$29,396	$0	$122	$624,362
Non-working capital loans	583,135	32,587	24,405	0	3,969	644,096
Commercial real estate and multi-
family residential loans:
Construction and land
development loans	242,964	1,447	0	0	0	244,411
Owner occupied loans	444,143	10,285	14,959	0	0	469,387
Nonowner occupied loans	451,390	4,550	2,062	0	0	458,002
Multi-family loans	127,219	263	0	0	0	127,482
Agri-business and agricultural loans:
Loans secured by farmland	168,660	3,689	283	0	0	172,632
Loans for agricultural production	218,581	3,691	0	0	0	222,272
Other commercial loans	98,261	0	0	0	4	98,265
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans	44,687	126	1,232	0	116,792	162,837
Open end and junior lien loans	7,028	0	0	0	163,987	171,015
Residential construction loans	0	0	0	0	14,983	14,983
Other consumer loans	17,717	0	55	0	43,411	61,183
Total	$2,980,993	$74,274	$72,392	$0	$343,268	$3,470,927