Note 7 — Allowance for Loan Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk characteristics. Each segment possesses varying degrees of risk based on, among other things, the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated using the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The following provides a summary of the ALLL calculation for the major segments within the Company’s loan portfolio.

Owner Occupied Commercial Real Estate Loans, Commercial and Industrial Loans and SBA Loans

The Company’s base ALLL factor for owner occupied commercial real estate loans, commercial business loans and SBA loans is determined by management using the Bank’s annualized actual trailing charge-off data over intervals of 72, 36, 24, 12 and 6 months. Adjustments to those base factors are made for relevant internal and external factors. For owner occupied commercial real estate loans, commercial business loans and SBA loans, those factors include:

Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,

Changes in the nature and volume of the loan portfolio, including new types of lending,

Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and

The existence and effect of concentrations of credit, and changes in the level of such concentrations.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all Federal Deposit Insurance Corporation (“FDIC”) insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.

Multi-Family and Non-Owner Occupied Commercial Real Estate and Construction Loans

The Company’s base ALLL factor for multi-family and non-owner occupied commercial real estate and construction loans is determined by management using the Bank’s annualized actual trailing charge-off data over intervals of 72, 36, 24, 12 and 6 months. Adjustments to those base factors are made for relevant internal and external factors. For multi-family and non-owner occupied commercial real estate loans, those factors include:

Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,

Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, and

The existence and effect of concentrations of credit, and changes in the level of such concentrations.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for all FDIC-insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.

One-to-Four Family and Consumer Loans

The Company’s base ALLL factor for one-to-four family and consumer loans is determined by management using the Bank’s annualized actual trailing charge-off data over intervals of 72, 36, 24, 12 and 6 months. Adjustments to those base factors are made for relevant internal and external factors. For one-to-four family and consumer loans, those factors include:

Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment, and

Changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.

Warehouse Facilities

The Company’s warehouse facilities are structured as repurchase facilities, whereby we purchase funded one-to-four family loans on an interim basis. Therefore, the base ALLL factor for warehouse facilities is equal to that for one-to-four family and consumer loans as discussed above. Adjustments to the base factor are made for relevant internal and external factors. Those factors include:

Changes in national, regional and local economic conditions, including trends in real estate values and the interest rate environment,

Changes in the nature and volume of the loan portfolio, including new types of lending, and

The existence and effect of concentrations of credit, and changes in the level of such concentrations.

The resulting total ALLL factor is compared for reasonableness against the 10-year average, 15-year average, and trailing 12 month total charge-off data for one-to-four family loans for all FDIC-insured commercial banks and savings institutions based in California. This factor is applied to balances graded pass-1 through pass-5. For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on management’s judgment, taking into consideration the specific characteristics of the Bank’s portfolio and analysis of results from a select group of the Company’s peers.

The following tables summarize the allocation of the ALLL as well as the activity in the ALLL attributed to various segments in the loan portfolio as of and for the three months ended for the periods indicated:

	Commercial and industrial			Commercial owner occupied			SBA			Warehouse Facilities			Commercial non-owner occupied			Multi- family			One-to-four family			Construction			Land			Other loans			Total
	(dollars in thousands)

Balance, December 31, 2014	$	4,200		$	1,757		$	568		$	546		$	2,007		$	1,060		$	842		$	1,088		$	108		$	24		$	12,200
Charge-offs	(396		)	—			—			—			—			—			—			—			—			—			(396		)
Recoveries	12			—			—			—			—			—			—			—			—			—			12
Provisions for (reduction in) loan losses	1,116			96			(21		)	343			124			243			(168		)	122			(30		)	5			1,830
Balance, March 31, 2015	$	4,932		$	1,853		$	547		$	889		$	2,131		$	1,303		$	674		$	1,210		$	78		$	29		$	13,646

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
General portfolio allocation	4,932			1,853			547			889			2,131			1,303			674			1,210			78			29			13,646

Loans individually evaluated for impairment	1,853			379			—			—			458			—			232			—			—			—			2,922
Specific reserves to total loans individually evaluated for impairment	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%
Loans collectively evaluated for impairment	$	418,365		$	351,972		$	49,855		$	216,554		$	451,964		$	397,130		$	116,503		$	111,704		$	7,243		$	6,641		$	2,127,931
General reserves to total loans collectively evaluated for impairment	1.18		%	0.53		%	1.10		%	0.41		%	0.47		%	0.33		%	0.58		%	1.08		%	1.08		%	0.44		%	0.64		%

Total gross loans	$	420,218		$	352,351		$	49,855		$	216,554		$	452,422		$	397,130		$	116,735		$	111,704		$	7,243		$	6,641		$	2,130,853
Total allowance to gross loans	1.17		%	0.53		%	1.10		%	0.41		%	0.47		%	0.33		%	0.58		%	1.08		%	1.08		%	0.44		%	0.64		%

	Commercial and industrial			Commercial owner occupied			SBA			Warehouse Facilities			Commercial non-owner occupied			Multi- family			One-to-four family			Construction			Land			Other loans			Total
	(dollars in thousands)

Balance, December 31, 2013	$	1,968		$	1,818		$	151		$	392		$	1,658		$	817		$	1,099		$	136		$	127		$	34		$	8,200
Charge-offs	(124		)	—			—			—			(365		)	—			(12		)	—			—			—			(501		)
Recoveries	5			—			2			—			—			—			30			—			—			—			37
Provisions for (reduction in) loan losses	516			(64		)	26			(16		)	564			(12		)	(198		)	187			(46		)	(8		)	949
Balance, March 31, 2014	$	2,365		$	1,754		$	179		$	376		$	1,857		$	805		$	919		$	323		$	81		$	26		$	8,685

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	—		$	—		$	—		$	—		$	—		$	—		$	104		$	—		$	—		$	—		$	104
General portfolio allocation	2,365			1,754			179			376			1,857			805			815			323			81			26			8,581

Loans individually evaluated for impairment	31			718			14			—			1,327			—			593			—			—			—			2,683
Specific reserves to total loans individually evaluated for impairment	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	0.00		%	17.54		%	0.00		%	0.00		%	0.00		%	3.88		%
Loans collectively evaluated for impairment	$	271,846		$	223,130		$	11,031		$	81,033		$	332,163		$	223,200		$	140,876		$	29,857		$	6,170		$	3,480		$	1,322,786
General reserves to total loans collectively evaluated for impairment	0.87		%	0.79		%	1.62		%	0.46		%	0.56		%	0.36		%	0.58		%	1.08		%	1.31		%	0.75		%	0.65		%

Total gross loans	$	271,877		$	223,848		$	11,045		$	81,033		$	333,490		$	223,200		$	141,469		$	29,857		$	6,170		$	3,480		$	1,325,469
Total allowance to gross loans	0.87		%	0.78		%	1.62		%	0.46		%	0.56		%	0.36		%	0.65		%	1.08		%	1.31		%	0.75		%	0.66		%