Allowance for Loan Losses

9 Months Ended

Sep. 30, 2020

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)

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