(6) Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

Allowance for Loan Losses and Recorded Investment in Financing Receivables

	For the Three Months Ended March 31, 2017
	Commercial										Residential
	and		Commercial		Land &			Home			Real
	Industrial		Real Estate		Development			Equity⁽¹⁾			Estate			Other⁽²⁾			Total
Allowance for loan losses:
Beginning balance	$	2,153	$	7,550	$	604		$	2,349		$	2,648		$	237		$	15,541
Charge-offs		—		—		—			(33	)		(49	)		(16	)	$	(98	)
Recoveries		58		98		46			51			3			17			273
Net recoveries (charge-offs)		58		98		46			18			(46	)		1			175
Provision for (recovery of) loan losses		43		302		(62	)		(88	)		(35	)		(160	)		—
Ending balance	$	2,254	$	7,950	$	588		$	2,279		$	2,567		$	78		$	15,716
Ending balance: individually evaluated for impairment	$	—	$	—	$	—		$	—		$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	2,254	$	7,950	$	588		$	2,279		$	2,567		$	78		$	15,716
Financing Receivables:
Ending balance	$	230,306	$	991,073	$	67,336		$	114,290		$	205,573		$	1,897		$	1,610,475
Ending balance: individually evaluated for impairment	$	78	$	841	$	—		$	136		$	3,022		$	—		$	4,077
Ending balance: collectively evaluated for impairment	$	230,228	$	990,232	$	67,336		$	114,154		$	202,551		$	1,897		$	1,606,398

(1)	Amount includes both home equity lines of credit and term loans.

(2)	Includes the unallocated portion of the allowance for loan losses.

	For the Three Months Ended March 31, 2016
	Commercial											Residential
	and			Commercial			Land &		Home			Real
	Industrial			Real Estate			Development		Equity⁽¹⁾			Estate			Other⁽²⁾			Total
Allowance for loan losses:
Beginning balance	$	2,921		$	8,142		$	1,058	$	2,816		$	3,029		$	42		$	18,008
Charge-offs		(11	)		(69	)		—		(165	)		(74	)		(106	)	$	(425	)
Recoveries		52			46			71		117			22			61			369
Net charge-offs		41			(23	)		71		(48	)		(52	)		(45	)		(56	)
(Recovery of) provision for loan losses		(268	)		391			236		(226	)		(263	)		130			—
Ending balance	$	2,694		$	8,510		$	1,365	$	2,542		$	2,714		$	127		$	17,952
Ending balance: individually evaluated for impairment	$	—		$	—		$	—	$	—		$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	2,694		$	8,510		$	1,365	$	2,542		$	2,714		$	127		$	17,952
Financing Receivables:
Ending balance	$	222,828		$	885,998		$	86,520	$	136,844		$	241,891		$	3,817		$	1,577,898
Ending balance: individually evaluated for impairment	$	—		$	615		$	—	$	83		$	3,110		$	96		$	3,904
Ending balance: collectively evaluated for impairment	$	222,828		$	885,383		$	86,520	$	136,761		$	238,781		$	3,721		$	1,573,994

(1)	Amount includes both home equity lines of credit and term loans.

(2)	Includes the unallocated portion of the allowance for loan losses.

Risk Characteristics

Commercial and Industrial Loans. Many of the Company’s commercial and industrial loans have a real estate component as part of the collateral securing the loan. Commercial and industrial loans are primarily secured by assets of the business, such as accounts receivable and inventory. Due to the nature of the collateral securing these loans, the liquidation of these assets may be problematic and costly.

Commercial Real Estate Loans. Commercial real estate owner occupied loans rely on the cash flow from the successful operation of the borrower’s business to make repayment. If the operating company experiences difficulties in terms of sales volume and/or profitability, the borrower’s ability to repay the loan may be impaired. Commercial real estate non-owner occupied loans rely on the payment of rent by third party tenants. The borrower’s ability to repay the loan or sell the property may be impacted by loss of tenants, lower lease rates needed to attract new tenants or the inability to sell a completed project in a timely fashion and at a profit. Commercial real estate owner occupied and non-owner occupied loans are secured by the underlying properties. The local economy and real estate market affect the appraised value of these properties which may impact the ultimate repayment of these loans.

Land and Development Loans. Land and development loans are primarily repaid by the sale of the developed properties or by conversion to a permanent term loan. These loans are dependent upon the completion of the project on time and within budget, which may be impacted by general economic conditions. The Company requires cash collateral in an interest reserve in order to extend credit on construction projects to mitigate the credit risk.

Home Equity Loans. This segment consists of both home equity lines of credit and home equity term loans on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by second liens on the property, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. The Company no longer originates home equity lines of credit or home equity term loans.

Residential Real Estate Loans. Included in this segment are residential mortgages on single family residences. These loans rely on the personal income of the borrower for repayment which may be impacted by economic conditions, such as unemployment levels, interest rates and the housing market. These loans are primarily secured by a lien on the underlying property, which serves as the secondary source of repayment. The secondary source of repayment may be impaired by the real estate market and local regulations. The Company no longer originates residential real estate loans on single family residences.

Other Loans. Other loans consist of personal credit lines, mobile home loans and consumer installment loans. These loans rely on the borrowers’ personal income for repayment and are either unsecured or secured by personal use assets and mobile homes. These loans may be impacted by economic conditions such as unemployment levels. The liquidation of the assets securing these loans may be difficult and costly.

The allowance for loan losses was $15.7 million and $15.5 million at March 31, 2017 and December 31, 2016, respectively. The ratio of allowance for loan losses to gross loans held-for-investment was 0.98% at March 31, 2017 and 0.97% at December 31, 2016.

The provision for loan losses charged to expense is based upon historical loan loss and recovery experience, a series of qualitative factors and an evaluation of incurred losses in the current loan portfolio, including the evaluation of impaired loans under FASB ASC 310, Receivables (“FASB ASC 310”). Values assigned to the qualitative factors and those developed from historic loss and recovery experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and those criticized and classified loans that continue to perform.

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay in payment or insignificant shortfall in amount of payments received does not necessarily result in a loan being identified as impaired. For this purpose, delays less than 90 days are considered to be insignificant. Impairment losses are included in the provision for loan losses in the unaudited condensed consolidated statements of operations. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss and recovery experience and qualitative factors. Such loans generally include consumer loans, residential real estate loans and small business loans. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios, management’s abilities and external factors.

The following table presents the Company’s components of impaired loans receivable, segregated by class of loans. Commercial and consumer loans that were collectively evaluated for impairment are not included in the data that follows:

Impaired Loans As of March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
For the Three Months Ended March 31, 2017
With no related allowance:
Commercial:
CRE owner occupied	$	327	$	506	$	—	$	330	$	—	$	—
CRE non-owner occupied		504		512		—		510		—		—
Consumer:
Residential real estate		3,022		3,386		—		3,047		—		—
Home equity lines of credit		68		72		—		70		—		—
Home equity term loans		68		83		—		68		—		—
Other		78		87		—		81		—		—
With an allowance recorded:
N/A
Total commercial	$	831	$	1,018	$	—	$	840	$	—	$	—
Total consumer	$	3,236	$	3,628	$	—	$	3,266	$	—	$	—

Impaired Loans As of March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Accrued Interest Income Recognized		Cash Interest Income Recognized
For the Three Months Ended March 31, 2016
With no related allowance:
Commercial:
CRE non-owner occupied	$	613	$	834	$	—	$	622	$	—	$	—
Consumer:
Residential real estate		3,110		3,237		—		3,134		—		—
Home equity term loans		83		92		—		85		—		—
Other		96		96		—		99		—		—
With an allowance recorded:
N/A
Total commercial	$	613	$	834	$	—	$	622	$	—	$	—
Total consumer	$	3,289	$	3,425	$	—	$	3,318	$	—	$	—

In accordance with FASB ASC 310, those impaired loans for which the collateral is sufficient to support the outstanding principal do not result in a specific allowance for loan losses. Included in impaired loans at March 31, 2017 were fourteen TDRs totaling $2.3 million, for which the collateral is sufficient to support the outstanding principal, four of which were in accruing status. There were no TDRs at March 31, 2017 that included a commitment to lend additional funds as of March 31, 2017.

There were no TDR agreements entered into during the three months ended March 31, 2017 and 2016.

During the three month periods ended March 31, 2017 and 2016, the Company did not have any TDR agreements that had subsequently defaulted that were entered into within the respective preceding twelve months.

The following table presents the Company’s distribution of risk ratings within the Company’s loan portfolio, segregated by class, as of March 31, 2017 and December 31, 2016:

Credit Quality Indicators by Internally Assigned Grade

	Commercial & industrial		Commercial real estate owner occupied		Commercial real estate non- owner occupied		Land and development		Home Equity Lines of Credit		Home Equity Term Loans		Residential Real Estate		Other		Total
As of March 31, 2017
Grade:
Pass	$	228,260	$	260,285	$	728,598	$	67,336	$	105,817	$	8,337	$	202,223	$	1,897	$	1,602,753
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		2,046		1,686		504		—		68		68		3,350		—		7,722
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	230,306	$	261,971	$	729,102	$	67,336	$	105,885	$	8,405	$	205,573	$	1,897	$	1,610,475
As of December 31, 2016
Grade:
Pass	$	233,907	$	229,635	$	742,146	$	67,165	$	110,377	$	9,032	$	208,460	$	2,357	$	1,603,079
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		2,039		1,713		516		—		—		72		2,414		85		6,839
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	235,946	$	231,348	$	742,662	$	67,165	$	110,377	$	9,104	$	210,874	$	2,442	$	1,609,918

The Company’s primary tool for assessing risk when evaluating a credit in terms of its underwriting, structure, documentation and eventual collectability is a risk rating system in which the loan is assigned a numeric value. Behind each numeric category is a defined set of characteristics reflective of the particular level of risk.

The risk rating system is based on a 10-point grade. The upper six grades are for “pass” categories, the seventh grade is for the “criticized” category, the eighth grade represents “classified” categories which are equivalent to the guidelines utilized by the OCC and the final two grades are for “doubtful” and “loss” categories.

The portfolio manager is responsible for assigning, maintaining, and documenting accurate risk ratings for all commercial loans and commercial real estate loans. The portfolio manager assigns a risk rating at the inception of the loan, reaffirms it annually, and adjusts the rating based on the performance of the loan. As part of the loan review process, the Chief Credit Officer or Deputy Chief Credit Officer will review risk ratings for accuracy. The portfolio manager’s risk rating will also be reviewed periodically by the third-party loan review function and the Bank’s regulators.

To calculate risk ratings in a consistent fashion, the Company uses a Risk Rating Methodology that assesses quantitative and qualitative components which include elements of the Company’s financial condition, abilities of management, position in the market, collateral and guarantor support and the impact of changing conditions. When combined with professional judgment, an overall risk rating is assigned.

The following table presents the Company’s analysis of past due loans, segregated by class of loans, as of March 31, 2017 and December 31, 2016:

Aging of Receivables

	30-59 Days Past Due		60-89 Days Past Due		90 Days Past Due		Total Past Due		Current		Total Financing Receivables
As of March 31, 2017
Commercial:
Commercial and industrial	$	—	$	—	$	—	$	—	$	230,306	$	230,306
CRE owner occupied		—		70		295		365		261,606		261,971
CRE non-owner occupied		678		—		323		1,001		728,101		729,102
Land and development		—		—		—		—		67,336		67,336
Consumer:
Home equity lines of credit		1,083		30		68		1,181		104,704		105,885
Home equity term loans		—		—		—		—		8,405		8,405
Residential real estate		1,272		539		951		2,762		202,811		205,573
Other		—		6		—		6		1,891		1,897
Total	$	3,033	$	645	$	1,637	$	5,315	$	1,605,160	$	1,610,475
As of December 31, 2016
Commercial:
Commercial and industrial	$	—	$	—	$	—		—	$	235,946	$	235,946
CRE owner occupied		—		—		269		269		231,079		231,348
CRE non-owner occupied		331		—		185		516		742,146		742,662
Land and development		—		—		—		—		67,165		67,165
Consumer:
Home equity lines of credit		367		—		—		367		110,010		110,377
Home equity term loans		121		—		—		121		8,983		9,104
Residential real estate		4,020		851		744		5,615		205,259		210,874
Other		59		7		85		151		2,291		2,442
Total	$	4,898	$	858	$	1,283	$	7,039	$	1,602,879	$	1,609,918