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ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

9 Months Ended

Sep. 30, 2020

ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

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 September 30, 2020 and 2019:

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 September 30, 2020

Beginning balance, July 1

26,744

21,063

3,408

542

3,434

774

3,054

59,019

Provision for loan losses

1,574

175

(314)

(50)

237

1,750

Loans charged-off

(6)

(70)

(229)

(305)

Recoveries

177

283

Net loans charged-off

177

(66)

(181)

(22)

Ending balance

28,363

21,415

3,097

572

3,318

830

3,152

60,747


			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 September 30, 2019
Beginning balance, July 1	$	25,024	$	15,492	$	3,906	$	355	$	2,153	$	289	$	3,345	$	50,564
Provision for loan losses		943		474		(4)		28		(93)		67		(415)		1,000
Loans charged-off		(1,123)		0		0		0		(23)		(75)		0		(1,221)
Recoveries		133		44		2		0		83		23		0		285
Net loans charged-off		(990)		44		2		0		60		(52)		0		(936)
Ending balance	$	24,977	$	16,010	$	3,904	$	383	$	2,120	$	304	$	2,930	$	50,628

The following tables present the activity in the allowance for loan losses by portfolio segment for the nine-month periods ended September 30, 2020 and 2019:

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

Nine Months Ended September 30, 2020

Beginning balance, January 1

25,789

15,796

3,869

447

2,086

345

2,320

50,652

Provision for loan losses

6,264

5,312

(780)

125

1,298

799

832

13,850

Loans charged-off

(4,037)

(83)

(445)

(4,565)

Recoveries

347

307

131

810

Net loans charged-off

(3,690)

307

(66)

(314)

(3,755)

Ending balance

28,363

21,415

3,097

572

3,318

830

3,152

60,747


			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
Nine Months Ended September 30, 2019
Beginning balance, January 1	$	22,518	$	15,393	$	4,305	$	368	$	2,292	$	283	$	3,294	$	48,453
Provision for loan losses		3,260		461		(407)		15		(172)		192		(364)		2,985
Loans charged-off		(1,223)		0		0		0		(110)		(256)		0		(1,589)
Recoveries		422		156		6		0		110		85		0		779
Net loans charged-off		(801)		156		6		0		0		(171)		0		(810)
Ending balance	$	24,977	$	16,010	$	3,904	$	383	$	2,120	$	304	$	2,930	$	50,628

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 September 30, 2020 and December 31, 2019:

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

September 30, 2020

Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment

6,345

1,313

328

8,050

Collectively evaluated for impairment

22,018

20,102

3,033

572

2,990

830

3,152

52,697

Total ending allowance balance

28,363

21,415

3,097

572

3,318

830

3,152

60,747

Loans:

Loans individually evaluated for impairment

13,591

6,030

428

2,437

22,486

Loans collectively evaluated for impairment

1,824,156

1,851,790

337,736

97,428

351,287

105,041

4,567,438

Total ending loans balance

1,837,747

1,857,820

338,164

97,428

353,724

105,041

4,589,924


			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, 2019
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,324	$	538	$	90	$	0	$	426	$	6	$	0	$	10,384
Collectively evaluated for impairment		16,465		15,258		3,779		447		1,660		339		2,320		40,268
Total ending allowance balance	$	25,789	$	15,796	$	3,869	$	447	$	2,086	$	345	$	2,320	$	50,652

Loans:
Loans individually evaluated for impairment	$	19,580	$	4,998	$	445	$	0	$	2,789	$	17	$	0	$	27,829
Loans collectively evaluated for impairment		1,407,246		1,665,842		379,186		112,166		375,210		98,349		0		4,037,999
Total ending loans balance	$	1,426,826	$	1,670,840	$	379,631	$	112,166	$	377,999	$	98,366	$	0	$	4,065,828

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2020:


	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	$	2,053	$	174	$	0
Non-working capital loans		3,070		974		0
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,039		2,039		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		339		258		0
Open end and junior lien loans		91		64		0
Residential construction loans		25		25		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		877		876		444
Non-working capital loans		12,252		11,567		5,901
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,990		3,991		1,313
Agri-business and agricultural loans:
Loans secured by farmland		145		145		64
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,468		1,470		293
Open end and junior lien loans		621		620		35
Total	$	27,573	$	22,486	$	8,050

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 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	$	22	$	22	$	0
Non-working capital loans		2,130		735		0
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,189		3,010		0
Agri-business and agricultural loans:
Loans secured by farmland		603		283		0
Loans for ag production		15		15		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		411		330		0
Open end and junior lien loans		121		121		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,214		6,214		3,089
Non-working capital loans		13,230		12,609		6,235
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,988		1,988		538
Agri-business and agricultural loans:
Loans secured by farmland		147		147		90
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,643		1,646		363
Open end and junior lien loans		641		640		53
Residential construction loans		51		52		10
Other consumer loans		17		17		6
Total	$	30,422	$	27,829	$	10,384

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 30, 2020:


					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	$	174	$	0	$	0
Non-working capital loans		995		5		5
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,054		4		4
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		274		0		0
Open end and junior lien loans		54		0		0
Residential construction loans		8		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		1,546		0		0
Non-working capital loans		11,970		63		63
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,994		0		0
Agri-business and agricultural loans:
Loans secured by farmland		146		0		0
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,520		9		9
Open end and junior lien loans		648		0		0
Residential construction loans		35		0		0
Total	$	23,701	$	81	$	81

The following table presents loans individually evaluated for impairment by class of loans as of and for the three-month period ended September 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	$	165	$	2	$	2
Non-working capital loans		1,394		1		1
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,266		7		7
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1‑4 family loans:
Closed end first mortgage loans		211		0		0
Open end and junior lien loans		137		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,313		0		0
Non-working capital loans		12,088		96		96
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,676		8		8
Agri-business and agricultural loans:
Loans secured by farmland		147		0		0
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		1,625		10		9
Open end and junior lien loans		433		0		0
Total	$	27,738	$	124	$	123

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 30, 2020:


					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	$	442	$	0	$	0
Non-working capital loans		766		16		16
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,101		13		13
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		304		2		2
Open end and junior lien loans		63		0		0
Residential construction loans		3		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		3,001		0		0
Non-working capital loans		11,763		216		216
Commercial real estate and multi-family residential loans:
Owner occupied loans		3,034		30		30
Agri-business and agricultural loans:
Loans secured by farmland		147		0		0
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,589		28		28
Open end and junior lien loans		642		0		0
Residential construction loans		46		0		0
Total	$	24,184	$	305	$	305

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine-month period ended September 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	$	203	$	7	$	8
Non-working capital loans		1,292		39		29
Commercial real estate and multi-family residential loans:
Owner occupied loans		2,112		28		28
Agri-business and agricultural loans:
Loans secured by farmland		283		0		0
Consumer 1-4 family loans:
Closed end first mortgage loans		251		2		3
Open end and junior lien loans		141		0		0
With an allowance recorded:
Commercial and industrial loans:
Working capital lines of credit loans		6,375		143		81
Non-working capital loans		11,536		355		326
Commercial real estate and multi-family residential loans:
Owner occupied loans		1,840		37		31
Agri-business and agricultural loans:
Loans secured by farmland		147		3		1
Consumer 1-4 family mortgage loans:
Closed end first mortgage loans		1,634		35		34
Open end and junior lien loans		145		0		0
Other consumer loans		24		2		1
Total	$	25,983	$	651	$	542

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020 by class of loans:

Greater than

30‑89

90 Days

Total Past

Loans Not

Days

Past

Due and

(dollars in thousands)

Past Due

Due

Nonaccrual

Total

Commercial and industrial loans:

Working capital lines of credit loans

591,549

1,050

1,091

592,640

Non-working capital loans

1,239,596

5,508

5,511

1,245,107

Commercial real estate and multi-family residential loans:

Construction and land development loans

392,078

Owner occupied loans

614,264

5,143

619,407

Nonowner occupied loans

567,009

567,027

Multifamily loans

279,308

Agri-business and agricultural loans:

Loans secured by farmland

150,020

428

150,448

Loans for agricultural production

187,716

Other commercial loans

97,428

Consumer 1‑4 family mortgage loans:

Closed end first mortgage loans

168,835

813

640

1,472

170,307

Open end and junior lien loans

171,669

684

783

172,452

Residential construction loans

10,940

10,965

Other consumer loans

104,905

136

105,041

Total

4,575,317

1,110

13,478

14,607

4,589,924

The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:


					Greater than
			30‑89		90 Days				Total Past
	Loans Not		Days		Past				Due and
(dollars in thousands)	Past Due		Past Due		Due		Nonaccrual		Nonaccrual		Total
Commercial and industrial loans:
Working capital lines of credit loans	$	703,737	$	10	$	0	$	6,236	$	6,246	$	709,983
Non-working capital loans		710,557		4		0		6,282		6,286		716,843
Commercial real estate and multi-family residential loans:
Construction and land development loans		286,534		0		0		0		0		286,534
Owner occupied loans		569,303		0		0		4,056		4,056		573,359
Nonowner occupied loans		570,687		0		0		0		0		570,687
Multifamily loans		240,260		0		0		0		0		240,260
Agri-business and agricultural loans:
Loans secured by farmland		173,959		0		0		430		430		174,389
Loans for agricultural production		205,228		0		0		14		14		205,242
Other commercial loans		112,166		0		0		0		0		112,166
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		174,902		1,099		45		827		1,971		176,873
Open end and junior lien loans		187,255		188		0		761		949		188,204
Residential construction loans		12,870		0		0		52		52		12,922
Other consumer loans		98,176		173		0		17		190		98,366
Total	$	4,045,634	$	1,474	$	45	$	18,675	$	20,194	$	4,065,828

Troubled Debt Restructurings:

Troubled debt restructured loans are included in the totals for impaired loans. The Company has allocated $4.7 million and $2.5 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2020 and December 31, 2019, respectively. The Company is not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring.


	September 30		December 31
(dollars in thousands)	2020		2019
Accruing troubled debt restructured loans	$	5,658	$	5,909
Nonaccrual troubled debt restructured loans		6,547		3,188
Total troubled debt restructured loans	$	12,205	$	9,097

During the three months ended September 30, 2020, no loans were modified as troubled debt restructurings.

During the nine months ended September 30, 2020, 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.

The following table presents loans by class modified as new troubled debt restructurings that occurred during the nine months ended September 30, 2020:


						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	$	250	$	315	1	0
Non-working capital loans	2		4,288		3,691	2	0
Commercial real estate and multi-family residential loans:
Owner occupied loans	1		1,528		1,527	1	0
Total	4	$	6,066	$	5,533	4	0

For the three-month period ending September 30, 2020, the commercial and industrial loans and the commercial real estate and multi-family residential loan troubled debt restructurings described above increased the allowance for loan losses by $63,000, and no charge-offs were recorded.

For the nine-month period ended September 30, 2020, the troubled debt restructurings described above increased the allowance for loan losses by $2.4 million, and charge-offs of $666,000 were recorded.

As of September 30, 2020, total deferrals attributed to COVID-19 were $158.4 million representing 102 borrowers. This represented 3.4% of the total loan portfolio. Of that total 71 were commercial loan borrowers representing $155.2 million in loans, or 3.7%, of commercial loans and 31 were retail loan borrowers representing $3.3 million, or 0.9%, of total retail loans. The majority of all loan deferrals were for a period of 90 days. Of the total commercial deferrals attributed to COVID-19, $15.3 million represented a first deferral action, $116.2 million represented a second deferral action and $23.7 million represented a third deferral action. Two borrowers represented 84% of the third deferral population and were commercial real estate nonowner occupied loans supported by adequate collateral and personal guarantors and consist of loans to the hotel and accommodation industry. All COVID-19 related loan deferrals remain on accrual status, as each deferral is evaluated individually, and management has determined that all contractual cashflows are collectable at this time. In accordance with Section 4013 of the CARES Act and the March 22, 2020 Joint Interagency Regulatory Guidance, these were not considered to be troubled debt restructurings and were excluded from the table above.

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

During the nine months ending September 30, 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 nine months ended September 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 nine-month periods ending September 30, 2019, the troubled debt restructurings described above did not impact the allowance for loan losses and no charge-offs were recorded.

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 September 30, 2020, $557.9 million in PPP loans were included in the "Pass" category of loans. These loans were included in this risk rating category because they are fully guaranteed by the SBA.

As of September 30, 2020, 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

526,206

47,016

19,159

259

592,640

Non-working capital loans

1,195,861

25,294

18,747

5,205

1,245,107

Commercial real estate and multi-family residential loans:

Construction and land development loans

392,078

Owner occupied loans

579,800

27,945

11,662

619,407

Nonowner occupied loans

560,424

6,603

567,027

Multifamily loans

279,308

Agri-business and agricultural loans:

Loans secured by farmland

139,013

10,778

657

150,448

Loans for agricultural production

136,682

51,034

187,716

Other commercial loans

97,428

Consumer 1‑4 family mortgage loans:

Closed end first mortgage loans

42,213

1,728

126,366

170,307

Open end and junior lien loans

9,058

684

162,710

172,452

Residential construction loans

10,940

10,965

Other consumer loans

37,042

67,999

105,041

Total

3,995,113

168,670

52,662

373,479

4,589,924

As of December 31, 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	$	631,728	$	40,551	$	37,278	$	0	$	426	$	709,983
Non-working capital loans		673,370		18,782		19,381		0		5,310		716,843
Commercial real estate and multi-family residential loans:
Construction and land development loans		286,534		0		0		0		0		286,534
Owner occupied loans		535,496		14,804		23,059		0		0		573,359
Nonowner occupied loans		569,315		781		591		0		0		570,687
Multifamily loans		240,260		0		0		0		0		240,260
Agri-business and agricultural loans:
Loans secured by farmland		165,005		7,952		1,432		0		0		174,389
Loans for agricultural production		191,489		13,738		15		0		0		205,242
Other commercial loans		112,166		0		0		0		0		112,166
Consumer 1‑4 family mortgage loans:
Closed end first mortgage loans		47,405		0		1,976		0		127,492		176,873
Open end and junior lien loans		10,845		0		762		0		176,597		188,204
Residential construction loans		0		0		51		0		12,871		12,922
Other consumer loans		27,250		0		17		0		71,099		98,366
Total	$	3,490,863	$	96,608	$	84,562	$	0	$	393,795	$	4,065,828