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 probable incurred 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 Company’s base ALLL factors are determined by management using the Bank’s annualized actual trailing charge-off data over a full credit cycle with the loss emergence period extending from 1 year to 1.4 years. Adjustments to those base factors are made for relevant internal and external factors. Those factors may 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.

For loans risk graded as watch or worse, progressively higher potential loss factors are applied based on a migration analysis of risk grading and net charge-offs.

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 and nine months ended for the periods indicated:



	Three Months Ended September 30, 2018
	Commercial and industrial			Franchise		Commercial owner occupied		SBA			Agribusiness		Commercial non-owner occupied		Multi-family		One-to-four family		Construction		Farmland			Land			Consumer loans			Total
	(dollars in thousands)
Balance, June 30, 2018	$	10,164		$	6,181	$	1,137	$	2,575		$	2,694	$	1,450	$	563	$	698	$	4,809	405			$	972		$	99		$	31,747
Charge-offs	(100		)	—		—		(44		)	—		—		—		—		—		—			—			(85		)	(229		)
Recoveries	120			—		8		8			—		—		—		—		—		—			—			6			142
Provisions for (reduction in) loan losses	200			151		68		288			871		33		60		21		11		(30		)	(104		)	77			1,646
Balance, September 30, 2018	$	10,384		$	6,332	$	1,213	$	2,827		$	3,565	$	1,483	$	623	$	719	$	4,820	$	375		$	868		$	97		$	33,306



	Three Months Ended September 30, 2017
	Commercial and industrial			Franchise		Commercial owner occupied		SBA		Agribusiness			Commercial non-owner occupied		Multi-family		One-to-four family		Construction		Farmland		Land			Consumer loans			Total
	(dollars in thousands)
Balance, June 30, 2017	$	7,644		$	5,367	$	672	$	2,519	$	206		$	1,204	$	611	$	724	$	5,036	28		$	959		$	85		$	25,055
Charge-offs	(32		)	—		—		—		—			—		—		—		—		—		—			—			(32		)
Recoveries	15			—		12		42		—			—		—		2		—		—		—			—			71
Provisions for (reduction in) loan losses	682			452		131		409		(37		)	116		47		120		104		64		(15		)	(24		)	2,049
Balance, September 30, 2017	$	8,309		$	5,819	$	815	$	2,970	$	169		$	1,320	$	658	$	846	$	5,140	$	92	$	944		$	61		$	27,143



	Nine Months Ended September 30, 2018
	Commercial and industrial			Franchise			Commercial owner occupied			SBA			Agribusiness			Commercial non-owner occupied			Multi-family			One-to-four family			Construction			Farmland			Land			Consumer loans			Total
	(dollars in thousands)
Balance, December 31, 2017	$	9,721		$	5,797		$	767		$	2,890		$	1,291		$	1,266		$	607		$	803		$	4,569		$	137		$	993		$	95		$	28,936
Charge-offs	(1,011		)	—			—			(100		)	—			—			—			—			—			—			—			(137		)	(1,248		)
Recoveries	283			—			32			43			—			—			—			1			—			—			—			7			366
Provisions for (reduction in) loan losses	1,391			535			414			(6		)	2,274			217			16			(85		)	251			238			(125		)	132			5,252
Balance, September 30, 2018	$	10,384		$	6,332		$	1,213		$	2,827		$	3,565		$	1,483		$	623		$	719		$	4,820		$	375		$	868		$	97		$	33,306

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	—		$	—		$	—		$	250		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	250
General portfolio allocation	10,384			6,332			1,213			2,577			3,565			1,483			623			719			4,820			375			868			97			33,056
Loans individually evaluated for impairment	1,027			209			—			2,748			—			1,290			589			1,388			—			—			4			13			7,268
Specific reserves to total loans individually evaluated for impairment	—		%	—		%	—		%	9.10		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	3.44		%
Loans collectively evaluated for impairment	$	1,358,814		$	735,157		$	1,675,528		$	190,739		$	133,241		$	1,929,875		$	1,554,103		$	375,229		$	504,708		$	138,479		$	49,988		$	114,723		$	8,760,584
General reserves to total loans collectively evaluated for impairment	0.76		%	0.86		%	0.07		%	1.35		%	2.68		%	0.08		%	0.04		%	0.19		%	0.96		%	0.27		%	1.74		%	0.08		%	0.38		%
Total gross loans held for investment	$	1,359,841		$	735,366		$	1,675,528		$	193,487		$	133,241		$	1,931,165		$	1,554,692		$	376,617		$	504,708		$	138,479		$	49,992		$	114,736		$	8,767,852
Total allowance to gross loans held for investment	0.76		%	0.86		%	0.07		%	1.46		%	2.68		%	0.08		%	0.04		%	0.19		%	0.96		%	0.27		%	1.74		%	0.08		%	0.38		%



	Nine Months Ended September 30, 2017
	Commercial and industrial			Franchise			Commercial owner occupied			SBA			Agribusiness			Commercial non-owner occupied			Multi-family			One-to-four family			Construction			Farmland			Land			Consumer loans			Total
	(dollars in thousands)
Balance, December 31, 2016	$	6,362		$	3,845		$	1,193		$	1,039		$	—		$	1,715		$	2,927		$	365		$	3,632		—			$	198		$	20		$	21,296
Charge-offs	(894		)	—			—			(8		)	—			—			—			—			—			—			—			—			(902		)
Recoveries	70			—			94			125			—			—			—			4			—			—			—			1			294
Provisions for (reduction in) loan losses	2,771			1,974			(472		)	1,814			169			(395		)	(2,269		)	477			1,508			92			746			40			6,455
Balance, September 30, 2017	$	8,309		$	5,819		$	815		$	2,970		$	169		$	1,320		$	658		$	846		$	5,140		$	92		$	944		$	61		$	27,143

Amount of allowance attributed to:
Specifically evaluated impaired loans	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		—			$	—		$	—		$	—
General portfolio allocation	8,309			5,819			815			2,970			169			1,320			658			846			5,140			92			944			61			27,143
Loans individually evaluated for impairment	228			—			83			90			—			—			—			103			11			—			—			—			515
Specific reserves to total loans individually evaluated for impairment	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—			—		%	—		%	—		%
Loans collectively evaluated for impairment	$	762,863		$	626,508		$	805,054		$	107,121		$	86,466		$	1,098,995		$	797,370		$	246,145		$	301,323		140,581			$	30,719		$	6,228		$	5,009,373
General reserves to total loans collectively evaluated for impairment	1.09		%	0.93		%	0.10		%	2.77		%	0.20		%	0.12		%	0.08		%	0.34		%	1.71		%	0.07		%	3.07		%	0.98		%	0.54		%
Total gross loans held for investment	$	763,091		$	626,508		$	805,137		$	107,211		$	86,466		$	1,098,995		$	797,370		$	246,248		$	301,334		140,581			$	30,719		$	6,228		$	5,009,888
Total allowance to gross loans held for investment	1.09		%	0.93		%	0.10		%	2.77		%	0.20		%	0.12		%	0.08		%	0.34		%	1.71		%	0.07		%	3.07		%	0.98		%	0.54		%