Credit Quality of Loans and Allowance for Loan Losses

The loan portfolio consisted of the following (in thousands):



	September 30, 2015			December 31, 2014
Commercial, financial and agricultural	$	482,452		$	467,147
Real estate - construction	74,279			68,577
Real estate – commercial	473,319			467,172
Real estate – residential	151,667			154,602
Installment loans to individuals	113,199			119,328
Lease financing receivable	4,790			4,857
Other	1,746			2,748
	1,301,452			1,284,431
Less allowance for loan losses	(18,939		)	(11,226		)
	$	1,282,513		$	1,273,205

The Company monitors loan concentrations and evaluates individual customer and aggregate industry leverage, profitability, risk rating distributions, and liquidity for each major standard industry classification segment. At September 30, 2015, one industry segment concentration, the oil and gas industry, constituted more than 10% of the loan portfolio. The Company’s exposure in the oil and gas industry, including related service and manufacturing industries, totaled approximately $295.6 million, or 22.7% of total loans. Additionally, the Company’s exposure to loans secured by commercial real estate is monitored. At September 30, 2015, loans secured by commercial real estate (including commercial construction, farmland and multifamily loans) totaled approximately $529.0 million. Of the $529.0 million, $473.3 million represent CRE loans, 53% of which are secured by owner-occupied commercial properties. Of the $529.0 million in loans secured by commercial real estate, $20.0 million, or 3.8%, were on nonaccrual status at September 30, 2015.

Allowance for Loan Losses

The allowance for loan losses is a valuation account available to absorb probable losses on loans. All losses are charged to the allowance for loan losses when the loss actually occurs or when a determination is made that a loss is likely to occur. Recoveries are credited to the allowance for loan losses at the time of recovery. Quarterly, the probable level of losses in the existing portfolio is estimated through consideration of various factors. Based on these estimates, the allowance for loan losses is increased by charges to earnings and decreased by charge‑offs (net of recoveries).

The allowance is composed of general reserves and specific reserves. General reserves are determined by applying loss percentages to segments of the portfolio. The loss percentages are based on each segment’s historical loss experience, generally over the past twelve to eighteen months, and adjustment factors derived from conditions in the Company’s internal and external environment. All loans considered to be impaired are evaluated on an individual basis to determine specific reserve allocations in accordance with GAAP. Loans for which specific reserves are provided are excluded from the calculation of general reserves.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance and then compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining unaccreted purchase discount, an allowance is recorded for such difference.

The Company has an internal loan review department that is independent of the lending function to challenge and corroborate the loan grade assigned by the lender and to provide additional analysis in determining the adequacy of the allowance for loan losses.

A rollforward of the activity within the allowance for loan losses by loan type and recorded investment in loans for the nine months ended September 30, 2015 and 2014 is as follows (in thousands):



	September 30, 2015
				Real Estate
	Coml, Fin, and Agric			Constru-ction			Commercial			Residential			Installment loans to individuals			Lease financing receivable		Other		Total
Allowance for loan losses:
Beginning balance	$	5,729		$	954		$	2,402		$	810		$	1,311		$	16	$	4	$	11,226
Charge-offs	(2,310		)	(76		)	(169		)	(45		)	(883		)	—		—		(3,483		)
Recoveries	185			1			20			10			80			—		—		296
Provision	8,016			(62		)	2,107			(104		)	923			13		7		10,900
Ending balance	$	11,620		$	817		$	4,360		$	671		$	1,431		$	29	$	11	$	18,939
Ending balance: individually evaluated for impairment	$	2,569		$	26		$	1,739		$	147		$	216		$	—	$	—	$	4,697
Ending balance: collectively evaluated for impairment	$	9,051		$	791		$	2,621		$	524		$	1,215		$	29	$	11	$	14,242

Loans:
Ending balance	$	482,452		$	74,279		$	473,319		$	151,667		$	113,199		$	4,790	$	1,746	$	1,301,452
Ending balance: individually evaluated for impairment	$	29,185		$	212		$	19,928		$	1,796		$	386		$	—	$	—	$	51,507
Ending balance: collectively evaluated for impairment	$	453,267		$	74,067		$	452,758		$	149,788		$	112,813		$	4,790	$	1,746	$	1,249,229
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	633		$	83		$	—		$	—	$	—	$	716



	September 30, 2014
				Real Estate
	Coml, Fin, and Agric			Constr-uction			Commercial			Residential			Installment loans to individuals			Lease financing receivable			Other		Total
Allowance for loan losses:
Beginning balance	$	3,906		$	1,046		$	1,389		$	1,141		$	1,273		$	21		$	3	$	8,779
Charge-offs	(2,084		)	(1		)	(93		)	(188		)	(566		)	—			—		(2,932		)
Recoveries	101			—			398			44			110			—			—		653
Provision	2,731			103			(345		)	(8		)	450			(6		)	—		2,925
Ending balance	$	4,654		$	1,148		$	1,349		$	989		$	1,267		$	15		$	3	$	9,425
Ending balance: individually evaluated for impairment	$	853		$	3		$	55		$	87		$	140		$	—		$	—	$	1,138
Ending balance: collectively evaluated for impairment	$	3,801		$	1,145		$	1,294		$	902		$	1,127		$	15		$	3	$	8,287

Loans:
Ending balance	$	452,065		$	86,315		$	430,930		$	153,915		$	116,340		$	5,285		$	3,523	$	1,248,373
Ending balance: individually evaluated for impairment	$	2,662		$	106		$	3,312		$	1,073		$	426		$	—		$	—	$	7,579
Ending balance: collectively evaluated for impairment	$	449,403		$	86,209		$	426,942		$	152,742		$	115,914		$	5,285		$	3,523	$	1,240,018
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	676		$	100		$	—		$	—		$	—	$	776

Non-Accrual and Past Due Loans

Loans are considered past due if the required principal and interest payment have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the probability of collection of interest is deemed insufficient to warrant further accrual. For loans placed on non-accrual status, the accrual of interest is discontinued and subsequent payments received are applied to the principal balance. Interest income is recorded after principal has been satisfied and as payments are received. Non-accrual loans may be returned to accrual status if all principal and interest amounts contractually owed are reasonably assured of repayment within a reasonable period and there is a period of at least six months to one year of repayment performance by the borrower depending on the contractual payment terms.

An age analysis of past due loans (including both accruing and non-accruing loans) is as follows (in thousands):



			September 30, 2015
	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 and Accruing
Commercial, financial, and agricultural	$	4,065	$	3,124	$	3,879	$	11,068	$	471,384	$	482,452	$	23
Commercial real estate - construction	93		99		12		204		55,484		55,688		—
Commercial real estate - other	7,252		2,745		16,999		26,996		446,323		473,319		—
Residential - construction	—		—		172		172		18,419		18,591		—
Residential - prime	1,383		264		1,378		3,025		148,642		151,667		—
Consumer - credit card	38		11		27		76		5,683		5,759		27
Consumer - other	1,228		162		329		1,719		105,721		107,440		32
Lease financing receivable	—		—		—		—		4,790		4,790		—
Other loans	148		—		—		148		1,598		1,746		—
	$	14,207	$	6,405	$	22,796	$	43,408	$	1,258,044	$	1,301,452	$	82

	December 31, 2014
	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 and Accruing
Commercial, financial, and agricultural	$	2,179	$	654	$	2,556	$	5,389	$	461,758	$	467,147	$	26
Commercial real estate - construction	15		—		105		120		43,390		43,510		97
Commercial real estate - other	4,989		270		2,464		7,723		459,449		467,172		—
Residential - construction	431		—		—		431		24,636		25,067		—
Residential - prime	1,843		523		704		3,070		151,532		154,602		—
Consumer - credit card	5		19		18		42		5,970		6,012		18
Consumer - other	671		392		107		1,170		112,146		113,316		46
Lease financing receivable	—		—		—		—		4,857		4,857		—
Other loans	134		—		—		134		2,614		2,748		—
	$	10,267	$	1,858	$	5,954	$	18,079	$	1,266,352	$	1,284,431	$	187

Non-accrual loans are as follows (in thousands):



	September 30, 2015		December 31, 2014
Commercial, financial, and agricultural	$	29,171	$	2,642
Commercial real estate – construction	39		54
Commercial real estate - other	19,952		6,429
Residential - construction	172		—
Residential - prime	1,896		1,194
Consumer - credit card	—		—
Consumer - other	386		382
Lease financing receivable	—		—
Other	—		—
	$	51,616	$	10,701

The amount of interest that would have been recorded on non-accrual loans, had the loans not been classified as non-accrual, totaled approximately $1.3 million and $392,000 for the nine months ended September 30, 2015 and 2014, respectively. Interest actually received on non-accrual loans subsequent to their transfer to non-accrual status totaled at September 30, 2015 and 2014 was $19,000 and $93,000, respectively.

Impaired Loans

Loans are considered impaired when, based upon current information, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans classified as special mention, substandard, or doubtful, based on credit risk rating factors, are reviewed to determine whether impairment testing is appropriate. An allowance for each impaired loan is calculated based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collaterally dependent. All impaired loans are reviewed, at a minimum, on a quarterly basis. Existing valuations are reviewed to determine if additional discounts or new appraisals are required. After this review, when comparing the resulting collateral valuation to the outstanding loan balance, if the discounted collateral value exceeds the loan balance no specific allocation is reserved. Acquired impaired loans are generally not subject to individual evaluation for impairment and are not reported with impaired loans or troubled debt restructurings, even if they would otherwise qualify for such treatment.

Loans that are individually evaluated for impairment are as follows (in thousands):



	September 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	22,149	$	22,412	$	—	$	21,863	$	703
Commercial real estate – construction	39		39		—		40		—
Commercial real estate – other	5,440		5,440		—		6,244		47
Residential – prime	1,144		1,164		—		1,211		11
Residential – construction	55		55		—		273		1
Consumer – other	30		30		—		33		—
Subtotal:	28,857		29,140		—		29,664		762
With an allowance recorded:
Commercial, financial, and agricultural	7,036		7,036		2,569		4,604		159
Commercial real estate – other	14,488		14,488		1,739		12,932		33
Residential – prime	652		652		147		599		5
Residential – construction	118		118		26		59		—
Consumer – other	356		371		216		322		4
Subtotal:	22,650		22,665		4,697		18,516		201
Totals:
Commercial	49,152		49,415		4,308		45,683		942
Residential	1,969		1,989		173		2,142		17
Consumer	386		401		216		355		4
Grand total:	$	51,507	$	51,805	$	4,697	$	48,180	$	963



	December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial, and agricultural	$	438	$	521	$	—	$	554	$	—
Commercial real estate – construction	54		54		—		58		—
Commercial real estate – other	1,921		1,921		—		1,885		17
Residential – prime	543		543		—		534		15
Consumer – other	78		78		—		72		—
Subtotal:	3,034		3,117		—		3,103		32
With an allowance recorded:
Commercial, financial, and agricultural	2,218		2,333		1,010		1,394		35
Commercial real estate – construction	—		—		—		19		—
Commercial real estate – other	4,467		4,467		1,484		2,416		220
Residential – prime	529		548		68		452		3
Consumer – other	299		313		179		252		4
Subtotal:	7,513		7,661		2,741		4,533		262
Totals:
Commercial	9,098		9,296		2,494		6,326		272
Residential	1,072		1,091		68		986		18
Consumer	377		391		179		324		4
Grand total:	$	10,547	$	10,778	$	2,741	$	7,636	$	294

Credit Quality

The Company manages credit risk by observing written underwriting standards and lending policy established by the Board of Directors and management to govern all lending activities. The risk management program requires that each individual loan officer review his or her portfolio on a quarterly basis and assign recommended credit ratings on each loan. These efforts are supplemented by independent reviews performed by a loan review officer and other validations performed by the internal audit department. The results of the reviews are reported directly to the Audit Committee of the Board of Directors.

Loans can be classified into the following three risk rating grades: pass, special mention, and substandard/doubtful. Factors considered in determining a risk rating grade include debt service capacity, capital structure/liquidity, management, collateral quality, industry risk, company trends/operating performance, repayment source, revenue diversification/customer concentration, quality of financial information, and financing alternatives. Pass grade signifies the highest quality of loans to loans with reasonable credit risk, which may include borrowers with marginally adequate financial performance, but have the ability to repay the debt. Special mention loans have potential weaknesses that warrant extra attention from the loan officer and other management personnel, but still have the ability to repay the debt. Substandard classification includes loans with well-defined weaknesses with risk of potential loss. Loans classified as doubtful are considered to have little recovery value and are charged off.

The following tables present the classes of loans by risk rating (in thousands):



			September 30, 2015
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
			Commercial, financial, and agricultural		Commercial real estate - construction		Commercial real estate - other		Total		% of Total
Pass			$	417,600	$	55,525	$	417,095	$	890,220	88.02	%
Special mention			23,104		34		20,277		43,415		4.29	%
Substandard			41,521		129		35,947		77,597		7.67	%
Doubtful			227		—		—		227		0.02	%
			$	482,452	$	55,688	$	473,319	$	1,011,459	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
					Residential - construction		Residential - prime		Total		% of Total
Pass					$	18,419	$	147,721	$	166,140	97.58	%
Special mention					—		1,326		1,326		0.78	%
Substandard					172		2,620		2,792		1.64	%
					$	18,591	$	151,667	$	170,258	100.00	%

Consumer and Commercial Credit Exposure
Credit Risk Profile Based on Payment Activity
	Consumer - credit card		Consumer - other		Lease financing receivable		Other		Total		% of Total
Performing	$	5,721	$	107,022	$	4,790	$	1,746	$	119,279	99.62	%
Nonperforming	38		418		—		—		456		0.38	%
	$	5,759	$	107,440	$	4,790	$	1,746	$	119,735	100.00	%



	December 31, 2014
Commercial Credit Exposure
Credit Risk Profile by Creditworthiness Category
			Commercial, financial, and agricultural		Commercial real estate - construction		Commercial real estate - other		Total		% of Total
Pass			$	456,221	$	43,320	$	440,281	$	939,822	96.11	%
Special mention			4,861		132		7,120		12,113		1.24	%
Substandard			5,541		58		19,771		25,370		2.60	%
Doubtful			524		—		—		524		0.05	%
			$	467,147	$	43,510	$	467,172	$	977,829	100.00	%

Residential Credit Exposure
Credit Risk Profile by Creditworthiness Category
					Residential - construction		Residential - prime		Total		% of Total
Pass					$	25,067	$	150,664	$	175,731	97.81	%
Special mention					—		1,184		1,184		0.66	%
Substandard					—		2,754		2,754		1.53	%
					$	25,067	$	154,602	$	179,669	100.00	%

Consumer and Commercial Credit Exposure
Credit Risk Profile Based on Payment Activity
	Consumer - credit card		Consumer - other		Lease financing receivable		Other		Total		% of Total
Performing	$	5,995	$	112,893	$	4,857	$	2,748	$	126,493	99.65	%
Nonperforming	17		423		—		—		440		0.35	%
	$	6,012	$	113,316	$	4,857	$	2,748	$	126,933	100.00	%

Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a restructuring of a debt made by the Company to a debtor for economic or legal reasons related to the debtor’s financial difficulties that it would not otherwise consider. The Company grants the concession in an attempt to protect as much of its investment as possible.

Information about the Company’s TDRs is as follows (in thousands):



	September 30, 2015
	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs
Commercial, financial and agricultural	$	18	$	—	$	21,324	$	21,342
Real estate - commercial	—		150		—		150
	$	18	$	150	$	21,324	$	21,492

	December 31, 2014
	Current		Past Due Greater Than 30 Days		Nonaccrual TDRs		Total TDRs
Commercial, financial and agricultural	$	21	$	—	$	234	$	255
Real estate - commercial	155		—		—		155
	$	176	$	—	$	234	$	410

During the three months ended September 30, 2015, there were no loans identified as a TDR. There was one TDR totaling $21.1 million that defaulted on the modified terms during the three months ended September 31, 2015. During the three months ended September 30, 2014, there were no loans identified as a TDR, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months. During the nine months ended September 30, 2015, there was one loan relationship with a pre-modification balance of $21.4 million identified as a TDR after conversion of the loans to interest only for a limited amount of time. There was one TDR totaling $21.1 million that defaulted on the modified terms during the nine months ended September 31, 2015. During the nine months ended September 30, 2014, there was one loan relationship with a pre-modification balance of $1.2 million identified as a TDR through a modification of the original loan terms, and there were no defaults on any loans that were modified as TDRs during the preceding twelve months. For purposes of the determination of an allowance for loan losses on these TDRs, as an identified TDR, the Company considers a loss probable on the loan and, as a result is reviewed for specific impairment in accordance with the Company’s allowance for loan loss methodology. If it is determined losses are probable on such TDRs, either because of delinquency or other credit quality indicator, the Company establishes specific reserves for these loans. As of September 30, 2015, there were no commitments to lend additional funds to debtors owing sums to the Company whose terms have been modified in TDRs.