ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

3 Months Ended

Mar. 31, 2018

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, 2018 and 2017:

			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

			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)		84		(77)		37		315		200
Loans charged-off		(375)		(48)		0		0		(7)		(73)		0		(503)
Recoveries		223		57		4		0		47		28		0		359
Net loans charged-off		(152)		9		4		0		40		(45)		0		(144)
Ending balance	$	19,781	$	13,718	$	3,459	$	545	$	2,790	$	379	$	3,102	$	43,774

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, 2018 and December 31, 2017:

			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, 2018
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,850	$	526	$	0	$	0	$	269	$	26	$	0	$	2,671
Collectively evaluated for impairment		18,875		13,912		4,848		510		1,749		219		2,843		42,956
Total ending allowance balance	$	20,725	$	14,438	$	4,848	$	510	$	2,018	$	245	$	2,843	$	45,627

Loans:
Loans individually evaluated for impairment	$	8,820	$	4,873	$	283	$	0	$	1,799	$	49	$	0	$	15,824
Loans collectively evaluated for impairment		1,476,113		1,475,135		316,772		116,507		372,266		73,051		0		3,829,844
Total ending loans balance	$	1,484,933	$	1,480,008	$	317,055	$	116,507	$	374,065	$	73,100	$	0	$	3,845,668

			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, 2017
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,067	$	795	$	0	$	0	$	310	$	44	$	0	$	3,216
Collectively evaluated for impairment		19,030		13,919		4,920		577		2,458		335		2,666		43,905
Total ending allowance balance	$	21,097	$	14,714	$	4,920	$	577	$	2,768	$	379	$	2,666	$	47,121

Loans:
Loans individually evaluated for impairment	$	6,979	$	4,802	$	283	$	0	$	1,756	$	50	$	0	$	13,870
Loans collectively evaluated for impairment		1,411,648		1,438,219		382,643		123,922		374,013		74,144		0		3,804,589
Total ending loans balance	$	1,418,627	$	1,443,021	$	382,926	$	123,922	$	375,769	$	74,194	$	0	$	3,818,459

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

	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	$	5,342	$	2,050	$	0
Non-working capital loans		4,389		2,045		0
Commercial real estate and multi-family residential loans:
Construction and land development loans		88		88		0
Owner occupied loans		3,876		3,139		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Consumer 1-4 family loans:
Closed end first mortgage loans		618		537		0
Open end and junior lien loans		250		250		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		1,597		1,597		577
Non-working capital loans		3,128		3,128		1,273
Commercial real estate and multi-family residential loans:
Construction and land development loans		824		824		123
Owner occupied loans		822		822		403
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,012		1,012		269
Other consumer loans		49		49		26
Total	$	22,598	$	15,824	$	2,671

The following table presents loans individually evaluated for impairment by class of loans as of December 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	$	491	$	491	$	0
Non-working capital loans		2,973		1,579		0
Commercial real estate and multi-family residential loans:
Construction and land development loans		88		88		0
Owner occupied loans		2,558		2,310		0
Agri-business and agricultural loans:
Loans secured by farmland		602		283		0
Consumer 1-4 family loans:
Closed end first mortgage loans		636		570		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		1,617		1,617		667
Non-working capital loans		3,292		3,292		1,400
Commercial real estate and multi-family residential loans:
Construction and land development loans		827		827		350
Owner occupied loans		1,577		1,577		445
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		950		950		269
Open end and junior lien loans		236		236		41
Other consumer loans		50		50		44
Total	$	15,897	$	13,870	$	3,216

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 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		5
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		72
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		191		1		0
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		8
Non-working capital loans		6,699		49		39
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,665		5		4
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,071		7		4
Other consumer loans		54		1		0
Total	$	20,742	$	175	$	141

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

			30-89		Greater than					Total Past
	Loans Not		Days		90 Days				Due and
(dollars in thousands)	Past Due		Past Due		Past Due		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	775,855	$	0	$	0	$	2,998	$	2,998	$	778,853
Non-working capital loans		702,304		0		0		3,776		3,776		706,080
Commercial real estate and multi-family
residential loans:
Construction and land development loans		236,060		881		0		0		881		236,941
Owner occupied loans		539,547		0		0		3,314		3,314		542,861
Nonowner occupied loans		506,476		155		0		0		155		506,631
Multifamily loans		193,575		0		0		0		0		193,575
Agri-business and agricultural loans:
Loans secured by farmland		145,083		0		0		283		283		145,366
Loans for agricultural production		171,689		0		0		0		0		171,689
Other commercial loans		116,507		0		0		0		0		116,507
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		179,003		767		26		382		1,175		180,178
Open end and junior lien loans		180,042		287		0		250		537		180,579
Residential construction loans		13,308		0		0		0		0		13,308
Other consumer loans		73,015		85		0		0		85		73,100
Total	$	3,832,464	$	2,175	$	26	$	11,003	$	13,204	$	3,845,668

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

			30-89		Greater than					Total Past
	Loans Not		Days		90 Days				Due and
(dollars in thousands)	Past Due		Past Due		Past Due		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	742,205	$	11	$	0	$	1,459	$	1,470	$	743,675
Non-working capital loans		671,490		0		0		3,462		3,462		674,952
Commercial real estate and multi-family
residential loans:
Construction and land development loans		215,713		8,000		0		0		8,000		223,713
Owner occupied loans		534,648		0		0		3,620		3,620		538,268
Nonowner occupied loans		507,696		0		0		0		0		507,696
Multifamily loans		173,100		244		0		0		244		173,344
Agri-business and agricultural loans:
Loans secured by farmland		186,160		0		0		283		283		186,443
Loans for agricultural production		196,483		0		0		0		0		196,483
Other commercial loans		123,922		0		0		0		0		123,922
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		177,410		1,183		6		342		1,531		178,941
Open end and junior lien loans		183,056		89		0		236		325		183,381
Residential construction loans		13,447		0		0		0		0		13,447
Other consumer loans		74,102		92		0		0		92		74,194
Total	$	3,799,432	$	9,619	$	6	$	9,402	$	19,027	$	3,818,459

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $2.3 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2018 and December 31, 2017, 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)	2018		2017
Accruing troubled debt restructured loans	$	4,085	$	2,893
Nonaccrual troubled debt restructured loans		7,945		7,750
Total troubled debt restructured loans	$	12,030	$	10,643

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 table below.

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

	All Modifications					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.

During the three months ended 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 three months ended March 31, 2017. 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.

There were no troubled debt restructurings that had payment defaults within the twelve months following modification during the three-month periods ended March 31, 2018 and 2017.

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, 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	$	712,842	$	42,204	$	23,510	$	0	$	297	$	778,853
Non-working capital loans		654,352		22,189		24,707		0		4,832		706,080
Commercial real estate and multi-
family residential loans:
Construction and land development loans		235,676		441		824		0		0		236,941
Owner occupied loans		501,679		19,028		22,154		0		0		542,861
Nonowner occupied loans		504,275		1,676		680		0		0		506,631
Multifamily loans		193,338		237		0		0		0		193,575
Agri-business and agricultural loans:
Loans secured by farmland		132,475		8,580		4,311		0		0		145,366
Loans for agricultural production		162,007		8,482		1,200		0		0		171,689
Other commercial loans		116,502		0		0		0		5		116,507
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		55,130		0		1,551		0		123,497		180,178
Open end and junior lien loans		9,855		0		250		0		170,474		180,579
Residential construction loans		0		0		0		0		13,308		13,308
Other consumer loans		14,282		0		49		0		58,769		73,100
Total	$	3,292,413	$	102,837	$	79,236	$	0	$	371,182	$	3,845,668

As of December 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	$	688,748	$	33,337	$	21,350	$	0	$	240	$	743,675
Non-working capital loans		624,275		20,171		25,834		0		4,672		674,952
Commercial real estate and multi-
family residential loans:
Construction and land development loans		222,445		441		827		0		0		223,713
Owner occupied loans		496,231		19,361		22,676		0		0		538,268
Nonowner occupied loans		505,033		1,970		693		0		0		507,696
Multifamily loans		173,100		244		0		0		0		173,344
Agri-business and agricultural loans:
Loans secured by farmland		174,118		7,988		4,337		0		0		186,443
Loans for agricultural production		185,772		9,716		995		0		0		196,483
Other commercial loans		123,917		0		0		0		5		123,922
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		52,301		0		1,520		0		125,120		178,941
Open end and junior lien loans		8,259		0		236		0		174,886		183,381
Residential construction loans		0		0		0		0		13,447		13,447
Other consumer loans		18,642		0		50		0		55,502		74,194
Total	$	3,272,841	$	93,228	$	78,518	$	0	$	373,872	$	3,818,459