NOTE 6: ALLOWANCE FOR LOAN LOSSES

The following is a roll forward of the Bank’s allowance for loan losses for the following periods:

(dollars in thousands)	Beginning Balance		Provision for Loan Losses			Charge-offs			Recoveries		Ending Balance
Quarter Ended September 30, 2015:
Real estate loans:
Residential properties	$	6,628	$	291		$	—		$	—	$	6,919
Commercial properties		1,912		298			(70	)		—		2,140
Commercial and industrial loans		1,917		77			—			—		1,994
Consumer loans		343		(96	)		—			—		247
Total	$	10,800	$	570		$	(70	)	$	—	$	11,300

Nine Months Ended September 30, 2015:
Real estate loans:
Residential properties	$	6,586	$	333		$	—		$	—	$	6,919
Commercial properties		1,526		924			(310	)		—		2,140
Commercial and industrial loans		1,897		110			(13	)		—		1,994
Consumer loans		141		106			—			—		247
Total	$	10,150	$	1,473		$	(323	)	$	—	$	11,300

Year Ended December 31, 2014:
Real estate loans:
Residential properties	$	6,157	$	429		$	—		$	—	$	6,586
Commercial properties		1,440		86			—			—		1,526
Commercial and industrial loans		2,149		(252	)		—			—		1,897
Consumer loans		169		(28	)		—			—		141
Total	$	9,915	$	235		$	—		$	—	$	10,150

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by impairment method as of:

(dollars in thousands)	Allowance for Loan Losses								Unaccreted Credit
	Evaluated for Impairment				Purchased				Component
	Individually		Collectively		Impaired		Total		Other Loans
September 30, 2015:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	6,849	$	—	$	6,849	$	141
Commercial properties		—		2,092		—		2,092		409
Land and construction		—		118		—		118		46
Commercial and industrial loans		807		1,187		—		1,994		299
Consumer loans		—		247		—		247		14
Total	$	807	$	10,493	$	—	$	11,300	$	909
Loans:
Real estate loans:
Residential properties	$	—	$	999,720	$	—	$	999,720	$	7,958
Commercial properties		6,366		323,248		358		329,972		45,983
Land and construction		—		11,429		1,141		12,570		3,856
Commercial and industrial loans		7,748		145,348		5,163		158,259		30,360
Consumer loans		89		35,890		—		35,979		1,965
Total	$	14,203	$	1,515,635	$	6,662	$	1,536,500	$	90,122

December 31, 2014:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	6,586	$	—	$	6,586	$	26
Commercial properties		26		1,500		—		1,526		193
Land and construction		—		—		—		—		4
Commercial and industrial loans		686		1,211		—		1,897		45
Consumer loans		—		141		—		141		—
Total	$	712	$	9,438	$	—	$	10,150	$	268
Loans:
Real estate loans:
Residential properties	$	43	$	842,092	$	—	$	842,135	$	2,861
Commercial properties		5,742		199,378		200		205,320		21,126
Land and construction		—		4,309		—		4,309		1,099
Commercial and industrial loans		5,635		86,343		1,559		93,537		5,893
Consumer loans		116		20,962		47		21,125		8
Total	$	11,536	$	1,153,084	$	1,806	$	1,166,426	$	30,987

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for loans acquired in an acquisition that were not classified as purchased impaired or individually evaluated for impairment as of the dates indicated, and the stated principal balance of the related loans. The unaccreted credit component discount is equal to 1.01% and 0.86% of the stated principal balance of these loans as of September 30, 2015 and December 31, 2014, respectively. In addition to this unaccreted credit component discount, an additional $0.4 million of the ALLL has been provided for these loans as of September 30, 2015 and December 31, 2014.

The Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Bank analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as loans secured by multifamily or commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Bank uses the following definitions for risk ratings:

Pass: Loans classified as pass are strong credits with no existing or known potential weaknesses deserving of management’s close attention.

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Impaired: A loan is considered impaired, when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Additionally, all loans classified as troubled debt restructurings (“TDRs”) are considered impaired. Purchased credit impaired loans are not considered impaired loans for these purposes.

Loans listed as pass include larger non-homogeneous loans not meeting the risk rating definitions above and smaller, homogeneous loans not assessed on an individual basis.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows as of:

(dollars in thousands)	Pass		Special Mention		Substandard		Impaired		Total
September 30, 2015:
Real estate loans:
Residential properties	$	998,220	$	1,500	$	—	$	—	$	999,720
Commercial properties		323,248		—		358		6,366		329,972
Land and construction		11,429		—		1,141		—		12,570
Commercial and industrial loans		143,747		1,601		5,163		7,748		158,259
Consumer loans		35,890		—		—		89		35,979
Total	$	1,512,534	$	3,101	$	6,662	$	14,203	$	1,536,500

December 31, 2014:
Real estate loans:
Residential properties	$	841,538	$	554	$	—	$	43	$	842,135
Commercial properties		198,112		1,266		200		5,742		205,320
Land and construction		4,309		—		—		—		4,309
Commercial and industrial loans		81,067		5,276		1,559		5,635		93,537
Consumer loans		20,962		—		47		116		21,125
Total	$	1,145,988	$	7,096	$	1,806	$	11,536	$	1,166,426

Impaired loans evaluated individually and any related allowance are as follows as of:

	With No Allowance Recorded				With an Allowance Recorded
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Recorded Investment		Related Allowance
September 30, 2015:
Real estate loans:
Residential properties	$	—	$	—	$	—	$	—	$	—
Commercial properties		6,607		6,367		—		—		—
Commercial and industrial loans		4,455		4,291		3,457		3,457		807
Consumer loans		125		88		—		—		—
Total	$	11,187	$	10,746	$	3,457	$	3,457	$	807

December 31, 2014:
Real estate loans:
Residential properties	$	43	$	43	$	—	$	—	$	—
Commercial properties		5,568		5,568		174		174		26
Commercial and industrial loans		2,094		2,094		3,541		3,451		686
Consumer loans		116		116		—		—		—
Total	$	7,821	$	7,821	$	3,715	$	3,715	$	712

The weighted average annualized average balance of the recorded investment for impaired loans, beginning from when the loan became impaired, and any interest income recorded on impaired loans after they became impaired is as follows for the:

	Nine months Ended September 30, 2015				Year Ended December 31, 2014
(dollars in thousands)	Average Recorded Investment		Interest Income after Impairment		Average Recorded Investment		Interest Income after Impairment
Real estate loans:
Residential properties	$	36	$	2	$	3,000	$	25
Commercial properties		6,588		220		3,217		140
Commercial and industrial loans		8,067		343		1,196		241
Consumer loans		105		—		126		—
Total	$	14,796	$	565	$	7,539	$	406

There was no interest income recognized on a cash basis in either 2015 or 2014 on impaired loans.