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
2018:
Real estate loans:
Residential properties	$	9,715	$	193		$	—		$	—	$	9,908
Commercial properties		4,399		(9	)		—			—		4,390
Land		395		(60	)		—			—		335
Commercial and industrial loans		3,624		1,557			(88	)		—		5,093
Consumer loans		267		7			—			—		274
Total	$	18,400	$	1,688		$	(88	)	$	—	$	20,000

2017
Real estate loans:
Residential properties	$	6,669	$	1,748		$	—		$	—	$	8,417
Commercial properties		2,983		339			—			—		3,322
Land		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

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, 2018:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	9,908	$	—	$	9,908	$	229
Commercial properties		—		4,390		—		4,390		1,343
Land		—		335		—		335		5
Commercial and industrial loans		1,931		3,162		—		5,093		789
Consumer loans		—		274		—		274		25
Total	$	1,931	$	18,069	$	—	$	20,000	$	2,391
Loans:
Real estate loans:
Residential properties	$	—	$	2,799,370	$	—	$	2,799,370	$	26,407
Commercial properties		3,982		703,781		695		708,458		167,910
Land		—		30,372		828		31,200		531
Commercial and industrial loans		9,342		326,121		1,832		337,295		54,025
Consumer loans		—		29,361		—		29,361		2,686
Total	$	13,324	$	3,889,005	$	3,355	$	3,905,684	$	251,559

December 31, 2017:
Allowance for loan losses:
Real estate loans:
Residential properties	$	—	$	9,715	$	—	$	9,715	$	248
Commercial properties		—		4,399		—		4,399		1,449
Land		—		395		—		395		4
Commercial and industrial loans		909		2,715		—		3,624		1,204
Consumer loans		—		267		—		267		100
Total	$	909	$	17,491	$	—	$	18,400	$	3,005
Loans:
Real estate loans:
Residential properties	$	—	$	2,581,245	$	—	$	2,581,245	$	26,605
Commercial properties		4,037		691,632		1,079		696,748		168,057
Land		—		36,323		837		37,160		167
Commercial and industrial loans		9,399		299,539		1,841		310,779		62,849
Consumer loans		—		29,330		—		29,330		2,899
Total	$	13,436	$	3,638,069	$	3,757	$	3,655,262	$	260,577

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 0.95% and 1.15% of the stated principal balance of these loans as of March 31, 2018 and December 31, 2017, respectively. In addition to this unaccreted credit component discount, an additional $0.4 million and $0.2 million of ALLL has been provided for these loans March 31, 2018 and December 31, 2017, 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, 2018:
Real estate loans:
Residential properties	$	2,796,111	$	3,259	$	—	$	—	$	2,799,370
Commercial properties		693,082		5,885		5,509		3,982		708,458
Land		30,372		—		828		—		31,200
Commercial and industrial loans		325,731		160		2,062		9,342		337,295
Consumer loans		29,361		—		—		—		29,361
Total	$	3,874,657	$	9,304	$	8,399	$	13,324	$	3,905,684

December 31, 2017:
Real estate loans:
Residential properties	$	2,578,773	$	192	$	2,280	$	—	$	2,581,245
Commercial properties		680,449		6,326		5,936		4,037		696,748
Land		36,321		—		839		—		37,160
Commercial and industrial loans		298,408		865		2,107		9,399		310,779
Consumer loans		29,330		—		—		—		29,330
Total	$	3,623,281	$	7,383	$	11,162	$	13,436	$	3,655,262

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, 2018:
Real estate loans:
Residential properties	$	—	$	—	$	—	$	—	$	—
Commercial properties		3,982		3,982		—		—		—
Commercial and industrial loans		250		250		9,092		9,092		1,931
Total	$	4,232	$	4,232	$	9,092	$	9,092	$	1,931

December 31, 2017:
Real estate loans:
Residential properties	$	—	$	—	$	—	$	—	$	—
Commercial properties		4,037		4,037		—		—		—
Commercial and industrial loans		250		250		9,149		9,149		909
Total	$	4,287	$	4,287	$	9,149	$	9,149	$	909

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:

	Three months Ended March 31, 2018				Year Ended December 31, 2017
(dollars in thousands)	Average Recorded Investment		Interest Income after Impairment		Average Recorded Investment		Interest Income after Impairment
Real estate loans:
Residential properties	$	—	$	—	$	1,323	$	20
Commercial properties		4,021		34		2,403		50
Commercial and industrial loans		9,360		—		5,503		5
Total	$	13,381	$	34	$	9,229	$	75

There was no interest income recognized on a cash basis in either 2018 or 2017 on impaired loans.