Allowance for Loan Losses

3 Months Ended

Mar. 31, 2019

Note 5. Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors.

The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.

	Three months ended March 31,
	2019			2018
	(in thousands)
Allowance for loan losses, beginning of period	$	28,543		$	26,255
Loans charged off		(142	)		(87	)
Recoveries on loans previously charged-off		72			77
Net charge-offs		(70	)		(10	)
Provision charged to expense		375			450
Allowance for loan losses, end of period	$	28,848		$	26,695

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2019 follows:

	Construction and Land Development			Commercial and Industrial			Municipal		Commercial Real Estate		Residential Real Estate			Consumer			Home Equity			Unallocated		Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2018	$	1,092		$	10,998		$	1,838	$	10,663	$	2,190		$	365		$	1,111		$	286	$	28,543
Charge-offs		—			(43	)		—		—		—			(99	)		—			—		(142	)
Recoveries		—			18			—		—		—			54			—			—		72
Provision		(81	)		183			160		104		(55	)		22			(10	)		52		375
Ending balance at March 31, 2019	$	1,011		$	11,156		$	1,998	$	10,767	$	2,135		$	342		$	1,101		$	338	$	28,848
Amount of allowance for loan losses for loans deemed to be impaired	$	—		$	6		$	—	$	94	$	—		$	—		$	—		$	—	$	100
Amount of allowance for loan losses for loans not deemed to be impaired	$	1,011		$	11,150		$	1,998	$	10,673	$	2,135		$	342		$	1,101		$	338	$	28,748
Loans:
Ending balance	$	13,305		$	767,436		$	105,288	$	746,703	$	349,966		$	22,123		$	305,839		$	—	$	2,310,660
Loans deemed to be impaired	$	—		$	320		$	—	$	2,946	$	—		$	—		$	—		$	—	$	3,266
Loans not deemed to be impaired	$	13,305		$	767,116		$	105,288	$	743,757	$	349,966		$	22,123		$	305,839		$	—	$	2,307,394

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2018 follows:

	Construction and Land Development			Commercial and Industrial			Municipal		Commercial Real Estate		Residential Real Estate		Consumer			Home Equity		Unallocated			Total
	(in thousands)
Allowance for loan losses:
Balance at December 31, 2107	$	1,645		$	9,651		$	1,720	$	9,728	$	1,873	$	373		$	989	$	276		$	26,255
Charge-offs		—			(5	)		—		—		—		(82	)		—		—			(87	)
Recoveries		—			23			—		—		—		54			—		—			77
Provision		(207	)		(5	)		—		59		586		(24	)		78		(37	)		450
Ending balance at March 31, 2018	$	1,438		$	9,664		$	1,720	$	9,787	$	2,459	$	321		$	1,067	$	239		$	26,695
Amount of allowance for loan losses for loans deemed to be impaired	$	—		$	12		$	—	$	94	$	580	$	—		$	—	$	—		$	686
Amount of allowance for loan losses for loans not deemed to be impaired	$	1,438		$	9,652		$	1,720	$	9,693	$	1,879	$	321		$	1,067	$	239		$	26,009
Loans:
Ending balance	$	17,583		$	758,621		$	104,044	$	726,440	$	300,941	$	19,339		$	260,179	$	—		$	2,187,147
Loans deemed to be impaired	$	—		$	522		$	—	$	2,528	$	2,774	$	—		$	—	$	—		$	5,824
Loans not deemed to be impaired	$	17,583		$	758,099		$	104,044	$	723,912	$	298,167	$	19,339		$	260,179	$	—		$	2,181,323

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated

1-3

(Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of March 31, 2019 and December 31, 2018.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of March 31, 2019 and December 31, 2018.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of March 31, 2019 and December 31, 2018 and are doubtful for full collection.

Impaired:

Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

The following table presents the Company’s loans by risk rating at March 31, 2019.

	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate
	(in thousands)
Grade:
1-3 (Pass)	$	13,305	$	762,991	$	105,288	$	719,367
4 (Monitor)		—		4,125		—		24,390
5 (Substandard)		—		—		—		—
6 (Doubtful)		—		—		—		—
Impaired		—		320		—		2,946
Total	$	13,305	$	767,436	$	105,288	$	746,703

The following table presents the Company’s loans by risk rating at December 31, 2018.

	Construction and Land Development		Commercial and Industrial		Municipal		Commercial Real Estate
	(in thousands)
Grade:
1-3 (Pass)	$	13,628	$	757,089	$	97,290	$	723,170
4 (Monitor)		—		4,135		—		24,542
5 (Substandard)		—		—		—		—
6 (Doubtful)		—		—		—		—
Impaired		—		401		—		2,650
Total	$	13,628	$	761,625	$	97,290	$	750,362

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2019 and are included within the total loan portfolio.

	Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Credit Rating:
Aaa – Aa3	$	482,374	$	62,103	$	41,335	$	585,812
A1 – A3		181,409		7,605		151,031		340,045
Baa1 – Baa3		—		26,970		118,868		145,838
Ba2		—		6,810		—		6,810
Total	$	663,783	$	103,488	$	311,234	$	1,078,505

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2018.

	Commercial and Industrial		Municipal		Commercial Real Estate		Total
	(in thousands)
Credit Rating:
Aaa – Aa3	$	491,247	$	54,105	$	42,790	$	588,142
A1 – A3		172,472		7,605		151,381		331,458
Baa1 – Baa3		—		26,970		118,197		145,167
Ba2		—		6,810		—		6,810
Total	$	663,719	$	95,490	$	312,368	$	1,071,577

The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.

	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	—	$	—	$	—	$	13,305	$	13,305
Commercial and industrial		138		31		—		169		767,267		767,436
Municipal		—		—		—		—		105,288		105,288
Commercial real estate		422		182		—		604		746,099		746,703
Residential real estate		2,202		119		—		2,321		347,645		349,966
Consumer and overdrafts		2		6		—		8		22,115		22,123
Home equity		1,659		1,164		—		2,823		303,016		305,839
Total	$	4,423	$	1,502	$	—	$	5,925	$	2,304,735	$	2,310,660

Further information pertaining to the allowance for loan losses at December 31, 2018 follows:

	Accruing 30-89 Days Past Due		Non Accrual		Accruing Greater than 90 Days		Total Past Due		Current Loans		Total
	(in thousands)
Construction and land development	$	—	$	—	$	—	$	—	$	13,628	$	13,628
Commercial and industrial		187		115		—		302		761,323		761,625
Municipal		—		—		—		—		97,290		97,290
Commercial real estate		774		190		—		964		749,398		750,362
Residential real estate		2,554		569		—		3,123		345,127		348,250
Consumer and overdrafts		24		14		—		38		22,045		22,083
Home equity		1,108		425		—		1,533		290,807		292,340
Total	$	4,647	$	1,313	$	—	$	5,960	$	2,279,618	$	2,285,578

Impaired loans

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2018.

The following is information pertaining to impaired loans for March 31, 2019:

	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 3/31/19		Interest Income Recognized for 3 Months Ending 3/31/19
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		93		306		—		87		2
Municipal		—		—		—		—		—
Commercial real estate		182		206		—		188		—
Residential real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	275	$	512	$	—	$	275	$	2
With required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		227		228		6		262		3
Municipal		—		—		—		—		—
Commercial real estate		2,764		2,881		94		2,694		24
Residential real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	2,991	$	3,109	$	100	$	2,956	$	27
Total:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		320		534		6		349		5
Municipal		—		—		—		—		—
Commercial real estate		2,946		3,087		94		2,882		24
Residential real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	3,266	$	3,621	$	100	$	3,231	$	29

The following is information pertaining to impaired loans for December 31, 2018:

	Carrying Value		Unpaid Principal Balance		Required Reserve		Average Carrying Value for 3 Months Ending 3/31/18		Interest Income Recognized for 3 Months Ending 3/31/18
	(in thousands)
With no required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		87		291		—		49		—
Municipal		—		—		—		—		—
Commercial real estate		189		212		—		265		—
Residential real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	276	$	503	$	—	$	314	$	—
With required reserve recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		314		315		54		388		5
Municipal		—		—		—		—		—
Commercial real estate		2,461		2,575		91		2,278		23
Residential real estate		—		—		—		3,827		6
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	2,775	$	2,890	$	145	$	6,493	$	34
Total:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Commercial and industrial		401		606		54		437		5
Municipal		—		—		—		—		—
Commercial real estate		2,650		2,787		91		2,543		23
Residential real estate		—		—		—		3,827		6
Consumer		—		—		—		—		—
Home equity		—		—		—		—		—
Total	$	3,051	$	3,393	$	145	$	6,807	$	34

Troubled debt restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations.

There was no troubled debt restructuring that occurred during the three month period ended March 31, 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2019.

There was one residential real estate loan and one consumer loan that were modified during the first quarter of 2018. The loans were modified by reducing the interest rates as well as extending the terms on both loans. The pre-modification and post-modification outstanding recorded investment was $2,675,000 for the residential real estate loan that was not accruing interest and had a specific reserve of $575,000. The pre-modification and post-modification outstanding recorded investment was $17,000 for the consumer loan that was accruing and had a specific reserve of $1,000. The financial impact for the modifications was not material. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2018.