NOTE 5: 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, 2014:
Real estate loans:
Residential properties	$	6,696	$	(15	)	$	-		$	-	$	6,681
Commercial properties		1,572		5			-			-		1,577
Commercial and industrial loans		1,723		27			-			-		1,750
Consumer loans		159		(17	)		-			-		142
Total	$	10,150	$	-		$	-		$	-	$	10,150

Nine Months Ended September 30, 2014:
Real estate loans:
Residential properties	$	6,157	$	524		$	-		$	-	$	6,681
Commercial properties		1,440		137			-			-		1,577
Commercial and industrial loans		2,149		(399	)		-			-		1,750
Consumer loans		169		(27	)		-			-		142
Total	$	9,915	$	235		$	-		$	-	$	10,150

Year Ended December 31, 2013:
Real estate loans:
Residential properties	$	4,355	$	1,802		$	-		$	-	$	6,157
Commercial properties		936		561			(57	)		-		1,440
Commercial and industrial loans		2,841		71			(763	)		-		2,149
Consumer loans		208		(39	)		-			-		169
Total	$	8,340	$	2,395		$	(820	)	$	-	$	9,915

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, 2014:
Allowance for loan losses:
Real estate loans:
Residential properties	$	-	$	6,681	$	-	$	6,681	$	28
Commercial properties		-		1,577		-		1,577		212
Land and construction		-		-		-		-		4
Commercial and industrial loans		432		1,318		-		1,750		55
Consumer loans		-		142		-		142		11
Total	$	432	$	9,718	$	-	$	10,150	$	310
Loans:
Real estate loans:
Residential properties	$	1,964	$	790,636	$	-	$	792,600	$	2,901
Commercial properties		5,631		176,918		3,936		186,485		21,667
Land and construction		-		3,232		-		3,232		1,749
Commercial and industrial loans		5,728		92,482		1,972		100,182		5,959
Consumer loans		-		19,244		42		19,286		142
Total	$	13,323	$	1,082,512	$	5,950	$	1,101,785	$	32,418

December 31, 2013:
Allowance for loan losses:
Real estate loans:
Residential properties	$	-	$	6,157	$	-	$	6,157	$	36
Commercial properties		190		1,250		-		1,440		290
Land and construction		-		-		-		-		26
Commercial and industrial loans		925		1,224		-		2,149		126
Consumer loans		-		169		-		169		11
Total	$	1,115	$	8,800	$	-	$	9,915	$	489
Loans:
Real estate loans:
Residential properties	$	2,248	$	630,832	$	-	$	633,080	$	3,449
Commercial properties		821		150,053		4,108		154,982		23,968
Land and construction		-		2,314		1,480		3,794		1,939
Commercial and industrial loans		2,999		88,209		2,047		93,255		10,354
Consumer loans		-		18,441		43		18,484		160
Total	$	6,068	$	889,849	$	7,678	$	903,595	$	39,870

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 0.96% and 1.23% of the stated principal balance of these loans as of September 30, 2014 and December 31, 2013, respectively. In addition to this unaccreted credit component discount, an additional $0.3 million of the ALLL has been provided for these loans as of September 30, 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
Septmeber 30, 2014:
Real estate loans:
Residential properties	$	790,636	$	-	$	-	$	1,964	$	792,600
Commercial properties		175,587		1,331		3,936		5,631		186,485
Land and construction		3,232		-		-		-		3,232
Commercial and industrial loans		87,042		5,440		1,972		5,728		100,182
Consumer loans		19,124		-		162		-		19,286
Total	$	1,075,621	$	6,771	$	6,070	$	13,323	$	1,101,785

December 31, 2013:
Real estate loans:
Residential properties	$	630,832	$	-	$	-	$	2,248	$	633,080
Commercial properties		150,053		-		4,108		821		154,982
Land and construction		2,314		-		1,480		-		3,794
Commercial and industrial loans		88,166		43		2,047		2,999		93,255
Consumer loans		18,309		-		175		-		18,484
Total	$	889,674	$	43	$	7,810	$	6,068	$	903,595

Impaired loans evaluated individually and any related allowance is 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, 2014:
Real estate loans:
Residential properties	$	1,964	$	1,964	$	-	$	-	$	-
Commercial properties		5,631		5,631		-		-		-
Land and construction		-		-		-		-		-
Commercial and industrial loans		2,160		2,160		3,568		3,568		432
Consumer loans		-		-		-		-		-
Total	$	9,755	$	9,755	$	3,568	$	3,568	$	432

December 31, 2013:
Real estate loans:
Residential properties	$	2,248	$	2,248	$	-	$	-	$	-
Commercial properties		223		223		598		598		190
Land and construction		-		-		-		-		-
Commercial and industrial loans		-		-		2,999		2,999		925
Consumer loans		-		-		-		-		-
Total	$	2,471	$	2,471	$	3,597	$	3,597	$	1,115

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, 2014				Year Ended December 31, 2013
(dollars in thousands)	Average Recorded Investment		Interest Income after Impairment		Average Recorded Investment		Interest Income after Impairment
Real estate loans:
Residential properties	$	3,056	$	22	$	2,250	$	32
Commercial properties		2,433		74		323		22
Land and construction		-		-		-		-
Commercial and industrial loans		891		162		2,690		168
Consumer loans		6,379		258		-		-
Total	$	12,758	$	516	$	5,263	$	222

There was no interest income recognized on a cash basis in either 2014 or 2013 on impaired loans.