Allowance for Loan Losses | Note 5: Allowance for Loan Losses The allowance for loan losses (“ALL”) reflects management’s judgment of probable loan losses inherent in the loan portfolio as of the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter-end. To determine the total ALL, the Company estimates the reserves needed for each homogenous type of the loan portfolio, in addition to loans analyzed individually for impairment. Depending on the nature of each loan type, 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 individually to calculate the amount of impairment. Impaired loans measured individually for impairment generally include (1) any loan risk rated Special Mention or worse where the borrower has filed for bankruptcy; (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”). For the general component of the ALL, the Company collectively evaluates any loans not evaluated individually for a specific reserve, including impaired loans risk rated Substandard or worse with balances less than $400 thousand. All loans evaluated collectively are grouped into types, and historical loss experience is calculated and applied to each loan type and the resultant reserve is 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 loan types. An unallocated component is maintained, if needed, to cover uncertainties that could affect management’s estimate of probable losses. Loans Evaluated for Impairment The following table presents the ALL by loans evaluated for impairment individually and collectively by loan type as of the dates stated. June 30, 2019 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 987 $ — $ 119 $ 1,106 Loans collectively evaluated for impairment 4,065 1,537 771 6,373 Purchased credit-impaired loans — — — — Total allowance for loan losses $ 5,052 $ 1,537 $ 890 $ 7,479 Loan balances applicable to: Loans individually evaluated for impairment $ 7,358 $ — $ 119 $ 7,477 Loans collectively evaluated for impairment 700,837 187,531 16,724 905,092 Purchased credit-impaired loans 5,052 — 46 5,098 Total loans $ 713,247 $ 187,531 $ 16,889 $ 917,667 December 31, 2018 Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 1,036 $ — $ 121 $ 1,157 Loans collectively evaluated for impairment 3,931 1,374 1,440 6,745 Purchased credit-impaired loans — — — — Total allowance for loan losses $ 4,967 $ 1,374 $ 1,561 $ 7,902 Loan balances applicable to: Loans individually evaluated for impairment $ 7,485 $ — $ 121 $ 7,606 Loans collectively evaluated for impairment 701,235 164,608 23,573 889,416 Purchased credit-impaired loans 5,277 — 46 5,323 Total loans $ 713,997 $ 164,608 $ 23,740 $ 902,345 The following tables present an analysis of the change in the ALL by loan type for the periods presented. For the Three Months Ended June 30, 2019 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning Balance $ 5,259 $ 1,406 $ 1,193 $ 7,858 Charge-offs (105 ) — (411 ) (516 ) Recoveries 18 — 57 75 Provision (recovery of) (120 ) 131 51 62 Ending Balance $ 5,052 $ 1,537 $ 890 $ 7,479 For the Three Months Ended June 30, 2018 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning Balance $ 4,190 $ 1,043 $ 2,690 $ 7,923 Charge-offs (83 ) (101 ) (335 ) (519 ) Recoveries 16 — 41 57 Provision (recovery of) 121 2 (471 ) (348 ) Ending Balance $ 4,244 $ 944 $ 1,925 $ 7,113 For the Six Months Ended June 30, 2019 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning Balance $ 4,967 $ 1,374 $ 1,561 $ 7,902 Charge-offs (159 ) - (819 ) (978 ) Recoveries 43 1 135 179 Provision 201 162 13 376 Ending Balance $ 5,052 $ 1,537 $ 890 $ 7,479 For the Six Months Ended June 30, 2018 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning Balance $ 3,864 $ 878 $ 3,028 $ 7,770 Charge-offs (114 ) (116 ) (677 ) (907 ) Recoveries 43 — 235 278 Provision (recovery of) 451 182 (661 ) (28 ) Ending Balance $ 4,244 $ 944 $ 1,925 $ 7,113 Impaired Loans The following table presents the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, by loan type as of the dates stated. As of June 30, 2019 As of December 31, 2018 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 $ 328 $ 399 $ — $ 335 $ 406 $ — Commercial mortgages (non-owner occupied) — — — 386 386 — Commercial mortgages (owner occupied) 429 429 — — — — Residential first mortgages 1,385 1,385 — — — — Residential revolving and junior mortgages — — — 1,028 1,028 — Commercial and industrial — — — — — — Consumer — — — — — — Total impaired loans with no related allowance 2,142 2,213 — 1,749 1,820 — With an allowance recorded: Construction, land and land development 176 176 39 275 275 132 Commercial mortgages (non-owner occupied) 434 434 34 443 443 18 Commercial mortgages (owner occupied) 1,058 1,058 54 1,069 1,069 57 Residential first mortgages 3,048 3,048 644 3,447 3,447 565 Residential revolving and junior mortgages 500 500 216 502 502 264 Commercial and industrial — — — — — — Consumer 119 119 119 121 121 121 Total impaired loans with allowance recorded 5,335 5,335 1,106 5,857 5,857 1,157 Total impaired loans: Construction, land and land development 504 575 39 610 681 132 Commercial mortgages (non-owner occupied) 434 434 34 829 829 18 Commercial mortgages (owner occupied) 1,487 1,487 54 1,069 1,069 57 Residential first mortgages 4,433 4,433 644 3,447 3,447 565 Residential revolving and junior mortgages 500 500 216 1,530 1,530 264 Commercial and industrial — — — — — — Consumer 119 119 119 121 121 121 Total impaired loans $ 7,477 $ 7,548 $ 1,106 $ 7,606 $ 7,677 $ 1,157 The following table presents the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, by loan type for the periods presented. For the Three Months Ended For the Six Months Ended June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018 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 $ 330 $ 4 $ 84 $ — $ 332 $ 9 $ 165 $ 1 Commercial mortgages (non-owner occupied) — — — — — — — — Commercial mortgages (owner occupied) 405 7 1,385 20 399 13 1,380 32 Residential first mortgages 1,389 18 1,513 24 1,391 36 1,471 41 Residential revolving and junior mortgages — — 415 1 — — 415 3 Commercial and industrial — — — — — — — — Consumer — — — 3 — — — — Total impaired loans with no allowance 2,124 29 3,397 48 2,122 58 3,431 77 With an allowance recorded: Construction, land and land development 225 10 571 8 241 15 553 17 Commercial mortgages (non-owner occupied) 435 4 224 — 437 27 149 — Commercial mortgages (owner occupied) 1,061 14 538 8 1,063 28 541 15 Residential first mortgages 3,055 34 2,623 36 3,065 65 2,386 67 Residential revolving and junior mortgages 501 3 131 2 501 6 123 4 Commercial and industrial — — — — — — — — Consumer 120 2 — — 120 5 — 5 Total impaired loans with allowance recorded 5,397 67 4,087 54 5,427 146 3,752 108 Total impaired loans: Construction, land and land development 555 14 655 8 573 24 718 18 Commercial mortgages (non-owner occupied) 435 4 224 — 437 27 149 — Commercial mortgages (owner occupied) 1,466 21 1,923 28 1,462 41 1,921 47 Residential first mortgages 4,444 52 4,136 60 4,456 101 3,857 108 Residential revolving and junior mortgages 501 3 546 3 501 6 538 7 Commercial and industrial — — — — — — — — Consumer 120 2 — 3 120 5 — 5 Total impaired loans $ 7,521 $ 96 $ 7,484 $ 102 $ 7,549 $ 204 $ 7,183 $ 185 The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated. June 30, 2019 December 31, 2018 Nonaccrual loans $ 4,577 $ 5,206 Nonaccrual loans collectively evaluated for impairment (1,470 ) (2,040 ) Nonaccrual impaired loans 3,107 3,166 TDRs on accrual 4,046 4,115 Other impaired loans on accrual 324 325 Total impaired loans $ 7,477 $ 7,606 Troubled Debt Restructurings 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 experiencing financial difficulties and 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(s) 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 and are classified as TDRs. TDRs are considered impaired and are individually evaluated for impairment for the ALL. The following tables present by loan type information related to loans modified as TDRs for the periods presented. For the Three Months Ended For the Three Months Ended June 30, 2019 June 30, 2018 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 Commercial Mortgages (Owner Occupied) (1) 1 $ 48 $ 52 — $ — $ — Residential first mortgages (1) — $ — $ — 1 $ 30 $ 30 (1) Modifications were an extension of the loan term. For the Six Months Ended For the Six Months Ended June 30, 2019 June 30, 2018 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 Commercial Mortgages (Owner Occupied) (1) 1 $ 48 $ 52 — $ — $ — Residential first mortgages (1) — $ — $ — 4 $ 590 $ 594 (1) Modifications were an extension of the loan term. No loans designated as TDRs subsequently defaulted in the first three or six months of 2019 or 2018. The following table presents a roll-forward of accruing and nonaccrual TDRs for the period presented. Accruing Nonaccrual Total Balance as of December 31, 2018 $ 4,115 $ 1,477 $ 5,592 Charge-offs — — — Payments and other adjustments (52 ) (106 ) (158 ) New TDR designation 52 — 52 Release TDR designation — — — Transfer (69 ) 69 — Balance as of June 30, 2019 $ 4,046 $ 1,440 $ 5,486 |