Allowance for Loan Losses | Note 6: Allowance for Loan Losses The allowance for loan losses (“ALL”) reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter. To determine the total ALL, the Company estimates the reserves needed for each homogenous segment and class of the portfolio, and any loans analyzed individually for impairment. Depending on the nature of each segment and class, considerations include historical loss experience, adverse situations that may affect a borrower’s ability to repay, credit scores, past due history, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures, including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as conditions change. The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating each one to calculate the amount of impairment. Impaired loans measured for impairment generally include (1) any loan risk rated Special Mention or worse where the borrower has filed for bankruptcy; and (2) all loans risk rated Substandard or worse with balances of $400 thousand or more; and (3) all loans classified as a troubled debt restructuring (“TDR”). A specific allowance arises when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component of the ALL collectively evaluates any loans not identified as impaired or evaluated as impaired and are grouped into segments and classes. Historical loss experience is calculated and applied to each segment or class, then adjusted for qualitative factors. Qualitative factors include changes in local and national economic indicators, such as unemployment rates, interest rates, gross domestic product growth, and real estate market trends; the level of past due and nonaccrual loans; risk ratings on individual loans; strength of credit policies and procedures; loan officer experience; borrower credit scores; and other intrinsic risks related to the types and geographic locations of loans. These qualitative adjustments reflect management’s judgment of risks inherent in the segments. An unallocated component is maintained if needed to cover uncertainties that could affect management’s estimate of probable losses. Changes in the allowance for loan losses and the related provision expense can materially affect net income. Loans Evaluated for Impairment The following tables show loans evaluated for impairment individually and collectively by segment as of the dates stated. June 30, 2018 Mortgage Loans on Real Estate Commercial and Industrial Consumer and Other Total Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 1,125 $ — $ 131 $ 1,256 Loans collectively evaluated for impairment 3,119 944 1,794 5,857 Purchased credit impaired loans — — — — Total allowance on loan losses $ 4,244 $ 944 $ 1,925 $ 7,113 Loan balances applicable to: Loans individually evaluated for impairment $ 8,037 $ — $ 131 $ 8,168 Loans collectively evaluated for impairment 630,587 124,563 32,576 787,726 Purchased credit impaired loans 5,578 — 60 5,638 Total loans $ 644,202 $ 124,563 $ 32,767 $ 801,532 December 31, 2017 Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 861 $ 92 $ 141 $ 1,094 Loans collectively evaluated for impairment 3,003 786 2,887 6,676 Purchased credit impaired loans — — — — Total allowance on loan losses $ 3,864 $ 878 $ 3,028 $ 7,770 Loan balances applicable to: Loans individually evaluated for impairment $ 8,874 $ 92 $ 141 $ 9,107 Loans collectively evaluated for impairment 595,007 114,001 42,356 751,364 Purchased credit impaired loans 5,756 — 69 5,825 Total loans $ 609,637 $ 114,093 $ 42,566 $ 766,296 The following tables show an analysis of the change in the ALL by segment for the periods presented. Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Three Months Ended June 30, 2018 Beginning Balance $ 4,190 $ 1,043 $ 2,690 $ 7,923 (Charge-offs) (83 ) (101 ) (335 ) (519 ) Recoveries 16 — 41 57 Provision (recovery) 121 2 (471 ) (348 ) Ending Balance $ 4,244 $ 944 $ 1,925 $ 7,113 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Three Months Ended June 30, 2017 Beginning Balance $ 3,421 $ 528 $ 44 $ 3,993 (Charge-offs) (141 ) — (193 ) (334 ) Recoveries 10 1 3 14 Provision (recovery) 396 (73 ) 245 568 Ending Balance $ 3,686 $ 456 $ 99 $ 4,241 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Six Months Ended June 30, 2018 Beginning Balance $ 3,864 $ 878 $ 3,028 $ 7,770 (Charge-offs) (114 ) (116 ) (677 ) (907 ) Recoveries 43 — 235 278 Provision (recovery) 451 182 (661 ) (28 ) Ending Balance $ 4,244 $ 944 $ 1,925 $ 7,113 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Six Months Ended June 30, 2017 Beginning Balance $ 3,318 $ 493 $ 52 $ 3,863 (Charge-offs) (273 ) — (201 ) (474 ) Recoveries 88 1 5 94 Provision (recovery) 553 (38 ) 243 758 Ending Balance $ 3,686 $ 456 $ 99 $ 4,241 Purchased Credit Impaired Loans The following table presents the changes in the accretable yield for PCI loans for the period presented. For the Six Months Ended June 30, 2018 Balance as of December 31, 2017 $ 1,087 Accretion of acquisition accounting adjustment (171 ) Reclassifications from nonaccretable balance, net 69 Other changes, net 175 Balance as of June 30, 2018 $ 1,160 Internal Risk Rating Grades All loans in the Company’s loan portfolio, with the exception of purchased consumer loans, are risk graded using loan risk grading software that employs a variety of algorithms based on detailed account characteristics to include borrower’s payment history on a total relationship basis as well as loan to value exposure. For non-homogenous loans, management reviews these resulting grade assignments and makes adjustments to the final grade where appropriate based on an assessment of additional external information that may affect a particular loan. For purchased consumer loans, a loan is graded “substandard” when it is 90 days or more past due; otherwise, the loan is graded “pass”. Risk rating categories are as follows: Pass Watch Special Mention Substandard Doubtful Loss The tables below show the risk ranking of loans as of the dates stated. June 30, 2018 Construction, Land and Land Development Farmland Residential First Mortgages Residential Revolving and Junior Mortgages Commercial Mortgages (Non-Owner Occupied) Commercial Mortgages (Owner Occupied) Commercial and Industrial Consumer Total Loans Grade: Pass $ 72,229 $ 770 $ 273,382 $ 37,869 $ 151,342 $ 73,781 $ 121,571 $ 11,225 $ 742,169 Watch 6,673 — 7,779 1,165 4,946 4,798 1,691 21,264 48,316 Special mention — — 2,503 — — 557 — 131 3,191 Substandard 2,157 — 1,813 713 603 1,122 1,301 142 7,851 Doubtful — — — — — — — 5 5 Total loans $ 81,059 $ 770 $ 285,477 $ 39,747 $ 156,891 $ 80,258 $ 124,563 $ 32,767 $ 801,532 December 31, 2017 Construction, Land and Land Development Farmland Residential First Mortgages Residential Revolving and Junior Mortgages Commercial Mortgages (Non-Owner Occupied) Commercial Mortgages (Owner Occupied) Commercial and Industrial Consumer Total Loans Grade: Pass $ 55,949 $ 923 $ 256,614 $ 43,659 $ 140,625 $ 67,732 $ 110,281 $ 12,431 $ 688,214 Watch 6,690 — 8,624 1,376 5,931 10,076 2,373 29,917 64,987 Special mention 172 — 205 — — — 1,347 — 1,724 Substandard 3,231 — 3,922 1,463 201 2,244 92 218 11,371 Doubtful — — — — — — — — — Total loans $ 66,042 $ 923 $ 269,365 $ 46,498 $ 146,757 $ 80,052 $ 114,093 $ 42,566 $ 766,296 Impaired Loans The following tables show the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, as of the dates stated. As of June 30, 2018 As of December 31, 2017 Recorded Investment Borrowers’ Unpaid Principal Balance Related Allowance Recorded Investment Borrowers’ Unpaid Principal Balance Related Allowance With no related allowance: Construction, Land and Land Development $ 93 $ 164 $ — $ 900 $ 1,378 $ — Residential First Mortgages 1,598 1,852 — 1,488 1,488 — Residential Revolving and Junior Mortgages 416 416 — 414 414 — Commercial Mortgages (Non-owner occupied) — — — — — — Commercial Mortgages (Owner occupied) 1,404 1,404 — 1,721 1,971 — Commercial and Industrial — — — — — — Consumer-Other — — — — — — Total impaired loans with no related allowance 3,511 3,836 — 4,523 5,251 — With an allowance recorded: Construction, Land and Land Development 571 571 257 550 621 137 Residential First Mortgages 2,842 2,842 594 1,914 1,914 367 Residential Revolving and Junior Mortgages 130 527 67 1,340 1,340 162 Commercial Mortgages (Non-owner occupied) 448 448 46 — — — Commercial Mortgages (Owner occupied) 535 535 161 547 586 195 Commercial and Industrial — — — 92 92 92 Consumer-Other 131 131 131 141 141 141 Total impaired loans with allowance recorded 4,657 5,054 1,256 4,584 4,694 1,094 Total Impaired Loans: Construction, Land and Land Development 664 735 257 1,450 1,999 137 Residential First Mortgages 4,440 4,694 594 3,402 3,402 367 Residential Revolving and Junior Mortgages 546 943 67 1,754 1,754 162 Commercial Mortgages (Non-owner occupied) 448 448 46 — — — Commercial Mortgages (Owner occupied) 1,939 1,939 161 2,268 2,557 195 Commercial and Industrial — — — 92 92 92 Consumer-Other 131 131 131 141 141 141 Total Impaired Loans $ 8,168 $ 8,890 $ 1,256 $ 9,107 $ 9,945 $ 1,094 The following table shows the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, for the periods presented. For the Three Months Ended For the Six Months Ended June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance: Construction, land and land development $ 84 $ — $ 1,453 $ 14 $ 165 $ 1 $ 1,479 $ 27 Residential First Mortgages 1,513 24 1,769 2 1,471 41 1,774 7 Residential Revolving and Junior Mortgages 415 1 162 — 415 3 162 1 Commercial Mortgages (Non-owner occupied) — — 247 5 — — 248 8 Commercial Mortgages (Owner occupied) 1,385 20 1,689 4 1,380 32 1,777 11 Commercial and Industrial — — — — — — — — Consumer - Other — 3 — — — — — — Total impaired loans with no allowance 3,397 48 5,320 25 3,431 77 5,440 54 With an allowance recorded: Construction, land and land development 571 8 236 1 553 17 238 2 Residential First Mortgages 2,623 36 1,938 23 2,386 67 1,942 47 Residential Revolving and Junior Mortgages 131 2 1,300 5 123 4 1,301 18 Commercial Mortgages (Non-owner occupied) 224 — — — 149 — — — Commercial Mortgages (Owner occupied) 538 8 737 — 541 15 739 — Commercial and Industrial — — 92 — — — 92 — Consumer - Other — — — — — 5 — — Total impaired loans with allowance recorded 4,087 54 4,303 29 3,752 108 4,312 67 Total Impaired Loans: Construction, land and land development 655 8 1,689 15 718 18 1,717 29 Residential First Mortgages 4,136 60 3,707 25 3,857 108 3,716 54 Residential Revolving and Junior Mortgages 546 3 1,462 5 538 7 1,463 19 Commercial Mortgages (Non-owner occupied) 224 — 247 5 149 — 248 8 Commercial Mortgages (Owner occupied) 1,923 28 2,426 4 1,921 47 2,516 11 Commercial and Industrial — — 92 — — — 92 — Consumer - Other — 3 — — — 5 — — Total impaired loans $ 7,484 $ 102 $ 9,623 $ 54 $ 7,183 $ 185 $ 9,752 $ 121 The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated. June 30, 2018 December 31, 2017 Nonaccrual loans $ 3,474 $ 6,496 Nonaccrual loans not individually evaluated for impairment (1,279 ) (854 ) Nonaccrual impaired loans 2,195 5,642 TDRs on accrual 3,803 2,214 Other impaired loans on accrual 2,170 1,251 Total impaired loans $ 8,168 $ 9,107 Troubled Debt Restructuring In some situations, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to a borrower that it would not otherwise consider. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risks, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. Management measures all TDRs for impairment as noted below for impaired loans. Loans modified as TDRs are considered impaired and are individually evaluated for impairment for the ALL. The following table presents, by segment, information related to loans modified as TDRs for the periods presented. For the Three Months Ended For the Three Months Ended June 30, 2018 June 30, 2017 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Residential first mortgages (1) 1 $ 30 $ 30 — $ — $ — (1) Modifications were an extension of the loan terms. For the Six Months Ended For the Six Months Ended June 30, 2018 June 30, 2017 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Residential first mortgages (1) 4 $ 590 $ 594 — $ — $ — (1) Modification were an extension of the loan terms. No loans designated as TDRs subsequently defaulted in the first six months 2018 or 2017. The following table presents a roll forward of accruing and nonaccruing TDRs for the period presented. Accruing Nonaccruing Total Balance as of December 31, 2017 $ 1,452 $ 2,612 $ 4,064 Charge-offs — (92 ) (92 ) Payments and other adjustments (41 ) 7 (34 ) New TDR designation 557 30 587 Release TDR designation — — — Transfer 1,835 (1,729 ) 106 Balance as of June 30, 2018 $ 3,803 $ 828 $ 4,631 |