Allowance for Loan Losses | Note 5: Allowance for Loan Losses The allowance for loan losses (“ALL”) reflects management’s estimate 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 category and for any 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 substandard or worse with balances of $400 thousand or more, and (2) all loans designated as TDRs. For the general component of the ALL, the Company collectively evaluates loans not evaluated individually for a specific reserve, plus 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 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. PPP loans are included in the commercial and industrial loan balances. September 30, 2020 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 2,036 $ 746 $ 105 $ 2,887 Loans collectively evaluated for impairment 7,551 2,143 318 10,012 Purchased credit-impaired loans — — — — Total allowance for loan losses $ 9,587 $ 2,889 $ 423 $ 12,899 Loan balances applicable to: Loans individually evaluated for impairment $ 12,249 $ 5,754 $ 105 $ 18,108 Loans collectively evaluated for impairment 789,881 238,253 6,301 1,034,435 Purchased credit-impaired loans 4,153 — 37 4,190 Total loans $ 806,283 $ 244,007 $ 6,443 $ 1,056,733 December 31, 2019 Allowance for loan losses applicable to: Loans individually evaluated for impairment $ 878 $ 49 $ 112 $ 1,039 Loans collectively evaluated for impairment 4,494 1,522 507 6,523 Purchased credit-impaired loans — — — — Total allowance for loan losses $ 5,372 $ 1,571 $ 619 $ 7,562 Loan balances applicable to: Loans individually evaluated for impairment $ 5,502 $ 455 $ 112 $ 6,069 Loans collectively evaluated for impairment 720,458 181,275 11,831 913,564 Purchased credit-impaired loans 4,828 — 42 4,870 Total loans $ 730,788 $ 181,730 $ 11,985 $ 924,503 PPP loans are fully guaranteed by the U.S. government; therefore, the Company recorded no allowance for loan losses for these loans as of September 30, 2020. In future periods, the Company may be required to establish an allowance for loan losses for these loans, if, for example, the U.S. government were to eliminate or reduce the guarantee on individual or groups of PPP loans, which would result in a provision for loan losses charged to earnings. The following tables present an analysis of the change in the ALL by loan type for the periods presented. For the Three Months Ended September 30, 2020 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning of period $ 8,863 $ 2,626 $ 518 $ 12,007 Charge-offs (64 ) — (47 ) (111 ) Recoveries 72 — 62 134 Provision (recovery of) 716 263 (110 ) 869 Ending of period $ 9,587 $ 2,889 $ 423 $ 12,899 For the Three Months Ended September 30, 2019 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning of period $ 5,052 $ 1,537 $ 890 $ 7,479 Charge-offs (209 ) — (345 ) (554 ) Recoveries 24 1 50 75 Provision 214 114 167 495 Ending of period $ 5,081 $ 1,652 $ 762 $ 7,495 For the Nine Months Ended September 30, 2020 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning of period $ 5,372 $ 1,571 $ 619 $ 7,562 Charge-offs (315 ) — (303 ) (618 ) Recoveries 84 — 198 282 Provision (recovery of) 4,446 1,318 (91 ) 5,673 Ending of period $ 9,587 $ 2,889 $ 423 $ 12,899 For the Nine Months Ended September 30, 2019 Mortgage Loans on Real Estate Commercial and Industrial Consumer Total Beginning of period $ 4,967 $ 1,374 $ 1,561 $ 7,902 Charge-offs (368 ) — (1,163 ) (1,531 ) Recoveries 67 1 185 253 Provision 415 277 179 871 Ending of period $ 5,081 $ 1,652 $ 762 $ 7,495 Provision for loan losses was $5.7 million for the nine months ended September 30, 2020 compared to $871 thousand for the nine months ended September 30, 2019. Provision in 2020 was primarily attributable to qualitative loss factors to provide for losses estimated to have been incurred as of September 30, 2020, as a result of challenges certain borrowers are facing due to the pandemic, evidenced, in part, by loan deferrals and modifications granted to these borrowers, gross loan growth of approximately $71.9 million, excluding PPP loans, and higher specific reserves on impaired loans. Impaired Loans The following table presents the 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 September 30, 2020 As of December 31, 2019 Recorded Investment Borrowers’ Unpaid Principal Balance Related Allowance Recorded Investment Borrowers’ Unpaid Principal Balance Related Allowance With no related allowance: Residential first mortgages $ 712 $ 712 $ — $ 510 $ 510 $ — Commercial mortgages (non-owner occupied) 3,270 3,270 — — — — Construction, land and land development 15 15 — 17 17 — Commercial mortgages (owner occupied) 361 361 — 419 419 — Residential revolving and junior mortgages — — — — — — Commercial and industrial 1,014 1,014 — — — — Consumer — — — — — — Total impaired loans with no related allowance 5,372 5,372 — 946 946 — With an allowance recorded: Residential first mortgages 3,585 3,585 763 2,857 2,857 676 Commercial mortgages (non-owner occupied) 2,838 2,838 651 433 433 58 Construction, land and land development 766 766 546 171 171 44 Commercial mortgages (owner occupied) 657 657 31 1,048 1,048 53 Residential revolving and junior mortgages 45 45 45 47 47 47 Commercial and industrial 4,740 4,740 746 455 455 49 Consumer 105 105 105 112 112 112 Total impaired loans with allowance recorded 12,736 12,736 2,887 5,123 5,123 1,039 Total impaired loans: Residential first mortgages 4,297 4,297 763 3,367 3,367 676 Commercial mortgages (non-owner occupied) 6,108 6,108 651 433 433 58 Construction, land and land development 781 781 546 188 188 44 Commercial mortgages (owner occupied) 1,018 1,018 31 1,467 1,467 53 Residential revolving and junior mortgages 45 45 45 47 47 47 Commercial and industrial 5,754 5,754 746 455 455 49 Consumer 105 105 105 112 112 112 Total impaired loans $ 18,108 $ 18,108 $ 2,887 $ 6,069 $ 6,069 $ 1,039 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 September 30, 2020 September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance: Residential first mortgages $ 714 $ 8 $ 1,039 $ 14 Commercial mortgages (non-owner occupied) 3,263 23 — — Construction, land and land development 15 — 326 1 Commercial mortgages (owner occupied) 363 7 427 6 Residential revolving and junior mortgages — — — — Commercial and industrial 1,024 13 — — Consumer — — — — Total impaired loans with no allowance 5,379 51 1,792 21 With an allowance recorded: Residential first mortgages 3,595 19 3,039 34 Commercial mortgages (non-owner occupied) 1,635 22 434 3 Construction, land and land development 768 5 175 3 Commercial mortgages (owner occupied) 656 8 1,055 14 Residential revolving and junior mortgages 46 1 128 2 Commercial and industrial 3,561 64 1,344 30 Consumer 108 — 118 2 Total impaired loans with allowance recorded 10,369 119 6,293 88 Total impaired loans: Residential first mortgages 4,309 27 4,078 48 Commercial mortgages (non-owner occupied) 4,898 45 434 3 Construction, land and land development 783 5 501 4 Commercial mortgages (owner occupied) 1,019 15 1,482 20 Residential revolving and junior mortgages 46 1 128 2 Commercial and industrial 4,585 77 1,344 30 Consumer 108 — 118 2 Total impaired loans $ 15,748 $ 170 $ 8,085 $ 109 For the Nine Months Ended September 30, 2020 September 30, 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized With no related allowance: Residential first mortgages $ 519 $ 20 $ 1,113 $ 43 Commercial mortgages (non-owner occupied) 1,632 43 — — Construction, land and land development 16 1 330 4 Commercial mortgages (owner occupied) 365 19 405 20 Residential revolving and junior mortgages — — — — Commercial and industrial 512 25 — — Consumer — — — — Total impaired loans with no allowance 3,044 108 1,848 67 With an allowance recorded: Residential first mortgages 3,262 55 3,181 93 Commercial mortgages (non-owner occupied) 1,034 32 436 30 Construction, land and land development 468 11 224 18 Commercial mortgages (owner occupied) 658 25 1,061 42 Residential revolving and junior mortgages 46 3 397 7 Commercial and industrial 1,918 105 672 30 Consumer 109 — 119 6 Total impaired loans with allowance recorded 7,495 231 6,090 226 Total impaired loans: Residential first mortgages 3,781 75 4,294 136 Commercial mortgages (non-owner occupied) 2,666 75 436 30 Construction, land and land development 484 12 554 22 Commercial mortgages (owner occupied) 1,023 44 1,466 62 Residential revolving and junior mortgages 46 3 397 7 Commercial and industrial 2,430 130 672 30 Consumer 109 — 119 6 Total impaired loans $ 10,539 $ 339 $ 7,938 $ 293 The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated. September 30, 2020 December 31, 2019 Nonaccrual loans $ 17,198 $ 4,476 Nonaccrual loans collectively evaluated for impairment (1,512 ) (1,895 ) Nonaccrual impaired loans 15,686 2,581 TDRs on accrual 2,422 3,270 Other impaired loans on accrual — 218 Total impaired loans $ 18,108 $ 6,069 Troubled Debt Restructurings In some situations, for economic or legal reasons related to a borrower’s financial condition, the Company may grant a concession to a borrower that it would not otherwise consider. Concessions include new terms that provide for a reduction of the face amount or maturity amount of the debt as stated in the original agreement, a reduction (absolute or contingent) of the stated interest rate for the remaining original life of the loan, and/or an extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk. Concessions granted to a borrower experiencing financial difficulties results in a loan that is subsequently 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 to minimize the economic loss and to avoid foreclosure or repossession of underlying collateral, if any. TDRs are considered impaired loans and are individually evaluated for impairment for the ALL. No loans designated as TDRs subsequently defaulted in the twelve months following the restructuring. The following table presents pre- and post-modification balances for loans newly designated as TDRs for the periods stated. For the Three Months Ended September 30, 2020 September 30, 2019 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 (non-owner occupied) (1) 1 220 220 — — — (1) Modification was an extension of the loan term. For the Nine Months Ended September 30, 2020 September 30, 2019 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 $ 391 $ 391 — $ — $ — Commercial mortgages (owner occupied) (2) — — — 1 48 52 Commercial mortgages (non-owner occupied) (2) 1 220 220 — — — (1) Modification was an interest payment deferral. (2) Modification was an extension of the loan term. The following table presents a roll-forward of accruing and nonaccrual TDRs for the period presented. Accruing Nonaccrual Total Balance as of December 31, 2019 $ 3,270 $ 1,352 $ 4,622 Charge-offs (183 ) (327 ) (510 ) Payments and other adjustments (615 ) (36 ) (651 ) New TDR designation — 611 611 Release TDR designation (50 ) — (50 ) Transfer — — — Balance as of September 30, 2020 $ 2,422 $ 1,600 $ 4,022 |