NOTE 5: ALLOWANCE FOR LOAN LOSSES

The following is a roll forward of the Bank’s allowance for loan losses for the quarters ended March 31:

(dollars in thousands)	Beginning Balance		Provision for Loan Losses			Charge-offs		Recoveries		Ending Balance
2017:
Real estate loans:
Residential properties	$	6,669	$	1,748		$	—	$	—	$	8,417
Commercial properties		2,983		339			—		—		3,322
Land and construction		233		30			—		—		263
Commercial and industrial loans		5,227		(2,057	)		—		231		3,401
Consumer loans		288		9			—		—		297
Total	$	15,400	$	69		$	—	$	231	$	15,700

2016:
Real estate loans:
Residential properties	$	6,799	$	(370	)	$	—	$	—	$	6,429
Commercial properties		1,813		464			—		—		2,277
Land and construction		103		23			—		—		126
Commercial and industrial loans		1,649		140			—		—		1,789
Consumer loans		236		143			—		—		379
Total	$	10,600	$	400		$	—	$	—	$	11,000

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
March 31, 2017:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	8,417	$	—	$	8,417	$	120
Commercial properties		—		3,322		—		3,322		116
Land and construction		—		263		—		263		2
Commercial and industrial loans		—		3,401		—		3,401		134
Consumer loans		—		297		—		297		18
Total	$	—	$	15,700	$	—	$	15,700	$	390
Loans:
Real estate loans:
Residential properties	$	5,992	$	2,077,909	$	—	$	2,083,901	$	12,190
Commercial properties		2,109		477,844		176		480,129		19,736
Land and construction		—		25,057		—		25,057		435
Commercial and industrial loans		2,959		237,204		3,142		243,305		19,626
Consumer loans		—		29,064		—		29,064		1,204
Total	$	11,060	$	2,847,078	$	3,318	$	2,861,456	$	53,191

December 31, 2016:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	6,669	$	—	$	6,669	$	128
Commercial properties		—		2,983		—		2,983		136
Land and construction		—		233		—		233		2
Commercial and industrial loans		—		5,227		—		5,227		147
Consumer loans		—		288		—		288		19
Total	$	—	$	15,400	$	—	$	15,400	$	432
Loans:
Real estate loans:
Residential properties	$	6,093	$	1,774,796	$	—	$	1,780,889	$	12,373
Commercial properties		2,148		474,634		177		476,959		24,796
Land and construction		—		24,100		—		24,100		437
Commercial and industrial loans		753		233,992		3,196		237,941		20,165
Consumer loans		—		32,127		—		32,127		1,266
Total	$	8,994	$	2,539,649	$	3,373	$	2,552,016	$	59,037

The column labeled “Unaccreted Credit Component Other Loans” represents the amount of unaccreted credit component discount for the other loans acquired in a business combination, and the stated principal balance of the related loans. The discount is equal to 0.73% and 0.73% of the stated principal balance of these loans as of March 31, 2017 and December 31, 2016, respectively. In addition to this unaccreted credit component discount, an additional $0.5 million and $0.5 million of ALLL has been provided for these loans March 31, 2017 and December 31, 2016, respectively.

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 TDRs are considered impaired at the time they are restructured. 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
March 31, 2017:
Real estate loans:
Residential properties	$	2,076,409	$	1,500	$	—	$	5,992	$	2,083,901
Commercial properties		473,724		1,903		2,393		2,109		480,129
Land and construction		25,057		—		—		—		25,057
Commercial and industrial loans		228,680		5,984		5,682		2,959		243,305
Consumer loans		29,064		—		—		—		29,064
Total	$	2,832,934	$	9,387	$	8,075	$	11,060	$	2,861,456

December 31, 2016:
Real estate loans:
Residential properties	$	1,773,296	$	1,500	$	—	$	6,093	$	1,780,889
Commercial properties		470,484		1,913		2,414		2,148		476,959
Land and construction		24,100		—		—		—		24,100
Commercial and industrial loans		219,676		3,625		13,887		753		237,941
Consumer loans		32,127		—		—		—		32,127
Total	$	2,519,683	$	7,038	$	16,301	$	8,994	$	2,552,016

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
March 31, 2017:
Real estate loans:
Residential properties	$	5,992	$	5,992	$	—	$	—	$	—
Commercial properties		2,109		2,109		—		—		—
Commercial and industrial loans		2,959		2,959		—		—		—
Consumer loans		—		—		—		—		—
Total	$	11,060	$	11,060	$	—	$	—	$	—

December 31, 2016:
Real estate loans:
Residential properties	$	6,093	$	6,093	$	—	$	—	$	—
Commercial properties		2,148		2,148		—		—		—
Commercial and industrial loans		753		753		—		—		—
Consumer loans		—		—		—		—		—
Total	$	8,994	$	8,994	$	—	$	—	$	—

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:

	Three months Ended March 31, 2017				Year Ended December 31, 2016
(dollars in thousands)	Average Recorded Investment		Interest Income after Impairment		Average Recorded Investment		Interest Income after Impairment
Real estate loans:
Residential properties	$	6,041	$	20	$	1,970	$	14
Commercial properties		2,130		11		2,252		17
Commercial and industrial loans		2,983		1		1,673		20
Consumer loans		—		—		4		—
Total	$	11,154	$	32	$	5,899	$	51

There was no interest income recognized on a cash basis in either 2017 or 2016 on impaired loans.