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 loan portfolio, and for 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 those meeting certain criteria 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 is held 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 is the result of the collective evaluation of 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, as well as adjustments 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 table shows loans evaluated for impairment individually and collectively by segment as of the dates stated. September 30, 2018 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 922 $ — $ 131 $ 1,053 Loans collectively evaluated for impairment 3,485 1,130 1,619 6,234 Purchased credit-impaired loans — — — — Total allowance on loan losses $ 4,407 $ 1,130 $ 1,750 $ 7,287 Loan balances applicable to: Loans individually evaluated for impairment $ 7,463 $ — $ 131 $ 7,594 Loans collectively evaluated for impairment 669,459 144,118 27,732 841,309 Purchased credit-impaired loans 5,399 — 57 5,456 Total loans $ 682,321 $ 144,118 $ 27,920 $ 854,359 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 September 30, 2018 Beginning Balance $ 4,244 $ 944 $ 1,925 $ 7,113 Charge-offs (54 ) — (418 ) (472 ) Recoveries 60 — 77 137 Provision 157 186 166 509 Ending Balance $ 4,407 $ 1,130 $ 1,750 $ 7,287 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Three Months Ended September 30, 2017 Beginning Balance $ 3,686 $ 456 $ 99 $ 4,241 Charge-offs (75 ) — (366 ) (441 ) Recoveries 10 1 34 45 Provision 216 56 803 1,075 Ending Balance $ 3,837 $ 513 $ 570 $ 4,920 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Nine Months Ended September 30, 2018 Beginning Balance $ 3,864 $ 878 $ 3,028 $ 7,770 Charge-offs (168 ) (116 ) (1,095 ) (1,379 ) Recoveries 103 1 311 415 Provision (recovery) 608 367 (494 ) 481 Ending Balance $ 4,407 $ 1,130 $ 1,750 $ 7,287 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total For the Nine Months Ended September 30, 2017 Beginning Balance $ 3,318 $ 493 $ 52 $ 3,863 Charge-offs (348 ) — (567 ) (915 ) Recoveries 98 2 39 139 Provision 769 18 1,046 1,833 Ending Balance $ 3,837 $ 513 $ 570 $ 4,920 Purchased Credit-Impaired Loans The following table presents the changes in the accretable yield for PCI loans for the period presented. For the Nine Months Ended September 30, 2018 Balance as of December 31, 2017 $ 1,087 Accretion of acquisition accounting adjustment (261 ) Reclassifications from nonaccretable balance, net (56 ) Other changes, net 343 Balance as of September 30, 2018 $ 1,113 Internal Risk Rating Grades All loans in the Company’s loan portfolio, with the exception of purchased consumer loans, are risk rated 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 rated “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 following tables show the risk rating of loans as of the dates stated. September 30, 2018 Construction, Land and Land Development Farmland Commercial Mortgages (Non-Owner Occupied) Commercial Mortgages (Owner Occupied) Residential First Mortgages Residential Revolving and Junior Mortgages Commercial and Industrial Consumer Total Loans Grade: Pass $ 86,066 $ 748 $ 166,537 $ 75,984 $ 281,677 $ 37,298 $ 137,964 $ 9,605 $ 795,879 Watch 6,504 — 4,307 4,712 7,809 1,159 4,873 18,105 47,469 Special mention 127 — — 551 2,048 — — 133 2,859 Substandard 2,053 — 1,152 1,144 1,732 713 1,281 72 8,147 Doubtful — — — — — — — 5 5 Total loans $ 94,750 $ 748 $ 171,996 $ 82,391 $ 293,266 $ 39,170 $ 144,118 $ 27,920 $ 854,359 December 31, 2017 Construction, Land and Land Development Farmland Commercial Mortgages (Non-Owner Occupied) Commercial Mortgages (Owner Occupied) Residential First Mortgages Residential Revolving and Junior Mortgages Commercial and Industrial Consumer Total Loans Grade: Pass $ 55,949 $ 923 $ 140,625 $ 67,732 $ 256,614 $ 43,659 $ 110,281 $ 12,431 $ 688,214 Watch 6,690 — 5,931 10,076 8,624 1,376 2,373 29,917 64,987 Special mention 172 — — — 205 — 1,347 — 1,724 Substandard 3,231 — 201 2,244 3,922 1,463 92 218 11,371 Doubtful — — — — — — — — — Total loans $ 66,042 $ 923 $ 146,757 $ 80,052 $ 269,365 $ 46,498 $ 114,093 $ 42,566 $ 766,296 Impaired Loans The following table shows 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 September 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 $ 92 $ 163 $ — $ 900 $ 1,378 $ — Commercial mortgages (non-owner occupied) — — — — — — Commercial mortgages (owner occupied) 1,026 1,026 — 1,721 1,971 — Residential first mortgages 1,507 1,507 — 1,488 1,488 — Residential revolving and junior mortgages 416 416 — 414 414 — Commercial and industrial — — — — — — Consumer — — — — — — Total impaired loans with no related allowance 3,041 3,112 — 4,523 5,251 — With an allowance recorded: Construction, land and land development 523 523 290 550 621 137 Commercial mortgages (non-owner occupied) 443 443 18 — — — Commercial mortgages (owner occupied) 931 931 156 547 586 195 Residential first mortgages 2,395 2,395 374 1,914 1,914 367 Residential revolving and junior mortgages 130 130 84 1,340 1,340 162 Commercial and industrial — — — 92 92 92 Consumer 131 131 131 141 141 141 Total impaired loans with allowance recorded 4,553 4,553 1,053 4,584 4,694 1,094 Total impaired loans: Construction, land and land development 615 686 290 1,450 1,999 137 Commercial mortgages (non-owner occupied) 443 443 18 — — — Commercial mortgages (owner occupied) 1,957 1,957 156 2,268 2,557 195 Residential first mortgages 3,902 3,902 374 3,402 3,402 367 Residential revolving and junior mortgages 546 546 84 1,754 1,754 162 Commercial and industrial — — — 92 92 92 Consumer 131 131 131 141 141 141 Total impaired loans $ 7,594 $ 7,665 $ 1,053 $ 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 Nine Months Ended September 30, 2018 September 30, 2017 September 30, 2018 September 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 $ 93 $ — $ 367 $ — $ 147 $ 1 $ 385 $ — Commercial mortgages (non-owner occupied) — — 248 4 — — 248 11 Commercial mortgages (owner occupied) 1,013 8 1,030 5 985 29 1,102 16 Residential first mortgages 1,472 21 1,425 4 1,282 62 1,439 15 Residential revolving and junior mortgages 416 1 482 5 415 4 485 7 Commercial and industrial — — — — — — — — Consumer — 3 — — — — — — Total impaired loans with no allowance 2,994 33 3,552 18 2,829 96 3,659 49 With an allowance recorded: Construction, land and land development 524 8 1,315 15 512 24 1,323 44 Commercial mortgages (non-owner occupied) 445 11 — — 223 11 — — Commercial mortgages (owner occupied) 935 13 1,372 4 945 39 1,381 19 Residential first mortgages 2,394 32 1,928 23 2,277 94 1,937 71 Residential revolving and junior mortgages 130 2 1,389 11 125 7 1,345 38 Commercial and industrial — — 92 — — — 92 — Consumer — — — — — 8 — — Total impaired loans with allowance recorded 4,428 66 6,096 53 4,082 183 6,078 172 Total impaired loans: Construction, land and land development 617 8 1,682 15 659 25 1,708 44 Commercial mortgages (non-owner occupied) 445 11 248 4 223 11 248 11 Commercial mortgages (owner occupied) 1,948 21 2,402 9 1,930 68 2,483 35 Residential first mortgages 3,866 53 3,353 27 3,559 156 3,376 86 Residential revolving and junior mortgages 546 3 1,871 16 540 11 1,830 45 Commercial and industrial — — 92 — — — 92 — Consumer — 3 — — — 8 — — Total impaired loans $ 7,422 $ 99 $ 9,648 $ 71 $ 6,911 $ 279 $ 9,737 $ 221 The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated. September 30, 2018 December 31, 2017 Nonaccrual loans $ 4,204 $ 6,496 Nonaccrual loans not individually evaluated for impairment (2,196 ) (854 ) Nonaccrual impaired loans 2,008 5,642 TDRs on accrual 4,415 2,214 Other impaired loans on accrual 1,171 1,251 Total impaired loans $ 7,594 $ 9,107 Troubled Debt Restructuring 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 may 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 to the Company. 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 September 30, 2018 September 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 $ 1,272 $ 1,303 — $ — $ — (1) Modifications were an extension of the loan terms. For the Nine Months Ended For the Nine Months Ended September 30, 2018 September 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) 8 $ 1,862 $ 1,894 — $ — $ — (1) Modifications were an extension of the loan terms. No loans designated as TDRs subsequently defaulted in the first nine months of 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 (64 ) 65 1 New TDR designation 1,192 702 1,894 Release TDR designation — — — Transfer 1,835 (1,835 ) — Balance as of September 30, 2018 $ 4,415 $ 1,452 $ 5,867 |