Note 7: Loans and Allowance For Loan Losses

3 Months Ended

Sep. 30, 2012

Notes

Note 7: Loans and Allowance For Loan Losses

NOTE 7: LOANS AND ALLOWANCE FOR LOAN LOSSES

	September 30,	December 31,
	2012	2011
(In Thousands)
One- to four-family residential construction	$30,747	$23,976
Subdivision construction	37,387	61,140
Land development	63,964	68,771
Commercial construction	124,612	119,589
Owner occupied one- to four-family residential	84,086	91,994
Non-owner occupied one- to four-family residential	148,854	145,781
Commercial real estate	650,952	639,857
Other residential	272,271	243,742
Commercial business	255,441	236,384
Industrial revenue bonds	44,209	59,750
Consumer auto	74,838	59,368
Consumer other	82,555	77,540
Home equity lines of credit	53,383	47,114
FDIC-supported loans, net of discounts (TeamBank)	87,873	128,875
FDIC-supported loans, net of discounts (Vantus Bank)	105,050	123,036
FDIC-supported loans, net of discounts (Sun Security Bank)	101,951	144,626
FDIC-supported loans, net of discounts (InterBank)	269,889	--
Total gross loans receivable	2,488,062	2,271,543
Undisbursed portion of loans in process	(112,926)	(103,424)
Allowance for loan losses	(40,307)	(41,232)
Deferred loan fees and gains, net	(2,319)	(2,726)
Total net loans	$2,332,510	$2,124,161
Weighted average interest rate	5.56%	5.86%

Classes of loans by aging were as follows:

	September 30, 2012
							Total Loans
	30-59 Days	60-89 Days	Over 90	Total Past		Total Loans	> 90 Days and
	Past Due	Past Due	Days	Due	Current	Receivable	Still Accruing
(In Thousands)
One- to four-family
residential construction	$204	$--	$--	$204	$30,543	$30,747	$--
Subdivision construction	156	18	770	944	36,443	37,387	--
Land development	12	--	6,887	6,899	57,065	63,964	--
Commercial construction	--	--	--	--	124,612	124,612	--
Owner occupied one- to four-
family residential	525	476	1,758	2,759	81,327	84,086	--
Non-owner occupied one- to
four-family residential	1,216	1,108	4,445	6,769	142,085	148,854	--
Commercial real estate	7,116	581	2,825	10,522	640,430	650,952	--
Other residential	4,459	--	2,950	7,409	264,862	272,271	--
Commercial business	595	33	2,404	3,032	252,409	255,441	--
Industrial revenue bonds	--	--	2,110	2,110	42,099	44,209	--
Consumer auto	443	50	130	623	74,215	74,838	31
Consumer other	864	429	973	2,266	80,289	82,555	601
Home equity lines of credit	252	55	99	406	52,977	53,383	--
FDIC-supported loans, net of
discounts (TeamBank)	1,167	167	18,842	20,176	67,697	87,873	8
FDIC-supported loans, net of
discounts (Vantus Bank)	487	53	8,014	8,554	96,496	105,050	1
FDIC-supported loans,
net of discounts
(Sun Security Bank)	5,304	273	23,607	29,184	72,767	101,951	--
FDIC-supported loans,
net of discounts
(InterBank)	5,673	1,052	33,219	39,944	229,945	269,889	--
Total before FDIC-supported loans, net of discount	28,473	4,295	109,033	141,801	2,346,261	2,488,062	633
Less FDIC-supported loans,
net of discounts	12,631	1,545	83,682	97,858	466,905	564,763	1
Total	$15,842	$2,750	$25,351	$43,943	$1,879,356	$1,923,299	$632

	December 31, 2011
							Total Loans
	30-59 Days	60-89 Days	Over 90	Total Past		Total Loans	> 90 Days and
	Past Due	Past Due	Days	Due	Current	Receivable	Still Accruing
(In Thousands)
One- to four-family
residential construction	$2,082	$342	$--	$2,424	$21,552	$23,976	$--
Subdivision construction	4,014	388	6,661	11,063	50,077	61,140	--
Land development	--	4	2,655	2,659	66,112	68,771	--
Commercial construction	--	--	--	--	119,589	119,589	--
Owner occupied one- to four-
family residential	833	--	3,999	4,832	87,162	91,994	40
Non-owner occupied one- to
four-family residential	117	--	3,425	3,542	142,239	145,781	--
Commercial real estate	6,323	535	6,204	13,062	626,795	639,857	--
Other residential	--	--	--	--	243,742	243,742	--
Commercial business	426	10	1,362	1,798	234,586	236,384	--
Industrial revenue bonds	--	--	2,110	2,110	57,640	59,750	--
Consumer auto	455	56	107	618	58,750	59,368	10
Consumer other	1,508	641	800	2,949	74,591	77,540	356
Home equity lines of credit	45	29	174	248	46,866	47,114	--
FDIC-supported loans, net of
discounts (TeamBank)	2,422	862	19,215	22,499	106,376	128,875	--
FDIC-supported loans, net of
discounts (Vantus Bank)	562	57	5,999	6,618	116,418	123,036	5
FDIC-supported loans,
net of discounts
(Sun Security Bank)	5,628	6,851	40,299	52,778	91,848	144,626	150
Total before FDIC-supported loans, net of discount	24,415	9,775	93,010	127,200	2,144,343	2,271,543	561
Less FDIC-supported loans,
net of discounts	8,612	7,770	65,513	81,895	314,642	396,537	155
Total	$15,803	$2,005	$27,497	$45,305	$1,829,701	$1,875,006	$406

Nonaccruing loans (excluding FDIC-supported loans, net of discount) are summarized as follows:

	September 30,	December 31,
	2012	2011
(In Thousands)
One- to four-family residential construction	$--	$--
Subdivision construction	770	6,661
Land development	6,887	2,655
Commercial construction	--	--
Owner occupied one- to four-family residential	1,758	3,959
Non-owner occupied one- to four-family residential	4,445	3,425
Commercial real estate	2,825	6,204
Other residential	2,950	--
Commercial business	2,404	1,362
Industrial revenue bonds	2,110	2,110
Consumer auto	99	97
Consumer other	372	444
Home equity lines of credit	99	174
Total	$24,719	$27,091

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2012.  Also presented are the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of September 30, 2012 and for the three and nine months ended September 30, 2011 and December 31, 2011:

	One- to Four-
	Family
	Residential and	Other	Commercial	Commercial	Commercial
	Construction	Residential	Real Estate	Construction	Business	Consumer	Total
(In Thousands)
Allowance for loan losses
Balance July 1, 2012	$7,899	$4,012	$15,592	$6,929	$3,341	$2,949	$40,722
Provision charged to expense	(724)	348	2,950	4,227	1,512	87	8,400
Losses charged off	(245)	(310)	(1,579)	(6,870)	(648)	(699)	(10,351)
Recoveries	65	22	448	471	110	420	1,536
Balance September 30, 2012	$6,995	$4,072	$17,411	$4,757	$4,315	$2,757	$40,307
Balance January 1, 2012	$11,424	$3,088	$18,390	$2,982	$2,974	$2,374	$41,232
Provision charged to expense	(1,830)	4,206	12,265	17,525	2,758	1,153	36,077
Losses charged off	(2,740)	(3,562)	(13,784)	(16,462)	(1,701)	(1,661)	(39,910)
Recoveries	141	340	540	712	284	891	2,908
Balance September 30, 2012	$6,995	$4,072	$17,411	$4,757	$4,315	$2,757	$40,307
Ending balance:
Individually evaluated for
impairment	$1,700	$711	$3,299	$755	$1,541	$178	$8,184
Collectively evaluated for
impairment	$5,284	$3,361	$13,993	$4,002	$2,758	$2,579	$31,977
Loans acquired and
accounted for under ASC
310-30	$11	$--	$118	$--	$16	$1	$146
Loans
Individually evaluated for
impairment	$18,051	$18,517	$49,052	$11,922	$6,208	$1,118	$104,868
Collectively evaluated for
impairment	$283,024	$253,754	$646,108	$176,653	$249,233	$209,659	$1,818,431
Loans acquired and
accounted for under ASC
310-30	$285,454	$58,272	$154,512	$1,969	$18,826	$45,730	$564,763
Balance July 1, 2011	$11,562	$3,629	$15,003	$5,155	$2,324	$2,814	$40,487
Provision charged to expense	(784)	533	7,709	(3)	1,050	(5)	8,500
Losses charged off	(836)	(23)	(5,104)	(2,107)	(506)	(966)	(9,542)
Recoveries	7	1	17	395	153	448	1,021
Balance September 30, 2011	$9,949	$4,140	$17,625	$3,440	$3,021	$2,291	$40,466
Balance January 1, 2011	$11,483	$3,866	$14,336	$5,852	$3,281	$2,669	$41,487
Provision charged to expense	2,892	3,183	13,595	3,475	1,058	928	25,131
Losses charged off	(4,462)	(2,911)	(10,374)	(6,291)	(2,222)	(2,773)	(29,033)
Recoveries	36	2	68	404	904	1,467	2,881
Balance September 30, 2011	$9,949	$4,140	$17,625	$3,440	$3,021	$2,291	$40,466
At December 31, 2011
Allowance for loan losses
Individually evaluated for
impairment	$4,989	$89	$3,584	$594	$736	$38	$10,030
Collectively evaluated for
impairment	$6,435	$2,999	$14,806	$2,358	$2,238	$2,336	$31,172
Loans acquired and
accounted for under ASC
310-30	$--	$--	$--	$30	$--	$--	$30
Loans
Individually evaluated for
impairment	$39,519	$20,802	$99,254	$27,592	$10,720	$839	$198,726
Collectively evaluated for
impairment	$283,371	$222,940	$600,353	$160,768	$225,665	$183,183	$1,676,280
Loans acquired and
accounted for under ASC
310-30	$109,909	$25,877	$157,805	$40,215	$28,784	$33,947	$396,537

The portfolio segments used in the preceding two tables correspond to the loan classes used in all other tables in Note 7 as follows:

·         The one-to four-family residential and construction segment includes the one- to four-family residential construction, subdivision construction, owner occupied one- to four-family residential and non-owner occupied one- to four-family residential classes

·         The other residential and construction segment corresponds to the other residential class

·         The commercial real estate segment includes the commercial real estate and industrial revenue bonds classes

·         The commercial construction segment includes the land development and commercial construction classes

·         The commercial business segment corresponds to the commercial business class

·         The consumer segment includes the consumer auto, consumer other and home equity lines of credit classes

Impaired loans are summarized as follows:

	September 30, 2012
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance
(In Thousands)
One- to four-family residential construction	$612	$612	$283
Subdivision construction	3,204	4,854	310
Land development	11,922	18,665	755
Commercial construction	--	--	--
Owner occupied one- to four-family residential	5,168	5,392	493
Non-owner occupied one- to four-family residential	9,067	9,491	615
Commercial real estate	49,052	49,921	3,299
Other residential	18,517	19,781	711
Commercial business	3,423	3,774	1,541
Industrial revenue bonds	2,785	2,865	--
Consumer auto	160	177	25
Consumer other	781	837	116
Home equity lines of credit	177	177	36
Total	$104,868	$116,546	$8,184

	September 30, 2011
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance
(In Thousands)
One- to four-family residential construction	$2,708	$4,138	$358
Subdivision construction	12,159	16,992	1,016
Land development	6,436	6,489	985
Commercial construction	--	--	--
Owner occupied one- to four-family residential	5,202	5,793	792
Non-owner occupied one- to four-family residential	8,752	8,987	945
Commercial real estate	52,567	53,533	3,695
Other residential	8,286	9,259	66
Commercial business	2,917	4,395	451
Industrial revenue bonds	2,110	2,190	22
Consumer auto	117	134	3
Consumer other	432	536	23
Home equity lines of credit	197	208	12
Total	$101,883	$112,654	$8,368

	December 31, 2011
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance
(In Thousands)
One- to four-family residential construction	$873	$917	$12
Subdivision construction	12,999	14,730	2,953
Land development	7,150	7,317	594
Commercial construction	--	--	--
Owner occupied one- to four-family residential	5,481	6,105	776
Non-owner occupied one- to four-family residential	11,259	11,768	1,249
Commercial real estate	49,961	55,233	3,562
Other residential	12,102	12,102	89
Commercial business	4,679	5,483	736
Industrial revenue bonds	2,110	2,190	22
Consumer auto	147	168	3
Consumer other	579	680	22
Home equity lines of credit	174	184	12
Total	$107,514	$116,877	$10,030

	Three Months Ended
	September 30, 2012
	Average
	Investment	Interest
	in Impaired	Income
	Loans	Recognized
(In Thousands)
One- to four-family residential construction	$612	$17
Subdivision construction	3,188	153
Land development	15,826	408
Commercial construction	1,020	--
Owner occupied one- to four-family residential	4,970	208
Non-owner occupied one- to four-family residential	10,389	289
Commercial real estate	42,607	1,742
Other residential	17,718	686
Commercial business	3,290	119
Industrial revenue bonds	3,267	--
Consumer auto	154	12
Consumer other	679	60
Home equity lines of credit	134	9
Total	$103,854	$3,703

	Nine Months Ended
	September 30, 2012
	Average
	Investment	Interest
	in Impaired	Income
	Loans	Recognized
(In Thousands)
One- to four-family residential construction	$738	$39
Subdivision construction	10,225	440
Land development	12,286	889
Commercial construction	510	35
Owner occupied one- to four-family residential	5,094	370
Non-owner occupied one- to four-family residential	10,854	743
Commercial real estate	44,223	3,266
Other residential	17,408	1,267
Commercial business	3,927	279
Industrial revenue bonds	3,117	--
Consumer auto	163	24
Consumer other	662	122
Home equity lines of credit	136	15
Total	$109,343	$7,489

	Three Months Ended
	September 30, 2011
	Average
	Investment	Interest
	in Impaired	Income
	Loans	Recognized
(In Thousands)
One- to four-family residential construction	$2,334	$16
Subdivision construction	11,260	97
Land development	7,034	68
Commercial construction	--	--
Owner occupied one- to four-family residential	4,399	21
Non-owner occupied one- to four-family residential	8,603	84
Commercial real estate	34,181	659
Other residential	8,288	53
Commercial business	2,560	18
Industrial revenue bonds	2,110	--
Consumer auto	116	1
Consumer other	473	1
Home equity lines of credit	184	--
Total	$81,542	$1,018

	Nine Months Ended
	September 30, 2011
	Average
	Investment	Interest
	in Impaired	Income
	Loans	Recognized
(In Thousands)
One- to four-family residential construction	$2,033	$34
Subdivision construction	9,692	212
Land development	10,846	301
Commercial construction	411	--
Owner occupied one- to four-family residential	4,512	55
Non-owner occupied one- to four-family residential	9,497	285
Commercial real estate	28,915	1,120
Other residential	10,118	244
Commercial business	4,363	80
Industrial revenue bonds	2,145	--
Consumer auto	213	5
Consumer other	544	8
Home equity lines of credit	239	1
Total	$83,528	$2,345

	Year Ended December 31, 2011
	Average
	Investment	Interest
	in Impaired	Income
	Loans	Recognized
(In Thousands)
One- to four-family residential construction	$1,939	$39
Subdivision construction	10,154	282
Land development	9,983	379
Commercial construction	308	--
Owner occupied one- to four-family residential	4,748	76
Non-owner occupied one- to four-family residential	9,658	425
Commercial real estate	34,403	1,616
Other residential	9,475	454
Commercial business	4,173	125
Industrial revenue bonds	2,137	--
Consumer auto	192	6
Consumer other	544	10
Home equity lines of credit	227	1
Total	$87,941	$3,413

At September 30, 2012, $39.8 million of impaired loans had specific valuation allowances totaling $8.2 million.  At December 31, 2011, all impaired loans had specific valuation allowances totaling $10.0 million.  Previous to the third quarter of 2012, the Company reported all impaired loans as having specific valuation allowances, even though in many instances the allowance assigned to a particular loan was actually only the general valuation percentage used for that particular category of loans.  In the third quarter of 2012, the Company began reporting specific valuation allowances on impaired loans only if the recorded loan balance was greater than the calculated fair value of the collateral supporting the loan.  This change was also factored into the general valuation allowances recorded by the Company, and did not result in a significant change to the overall allowance for loan losses recorded by the Company.

Included in certain loan categories in the impaired loans are troubled debt restructurings that were classified as impaired. Troubled debt restructurings are loans that are modified by granting concessions to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.  The types of concessions made are factored into the estimation of the allowance for loan losses for troubled debt restructurings primarily using a discounted cash flows or collateral adequacy approach.

At September 30, 2012, the Company had $8.0 million of construction loans, $18.2 million of single family and multi-family residential mortgage loans, $31.8 million of commercial real estate loans, $3.1 million of commercial business loans and $140,000 of consumer loans that were modified in troubled debt restructurings and impaired.  Of the total troubled debt restructurings, $51.8 million were accruing interest at September 30, 2012.  At December 31, 2011, the Company had $9.0 million of construction loans, $17.0 million of single family and multi-family residential mortgage loans, $31.3 million of commercial real estate loans, $671,000 of commercial business loans and $156,000 of consumer loans that were modified in troubled debt restructurings and impaired.  Of the total troubled debt restructurings, $50.8 million were accruing interest at December 31, 2011.

During the previous 12 months, 5 non-owner occupied residential mortgage loans totaling $605,000, 5 commercial real estate loans totaling $5.8 million, and 1 consumer loan totaling $20,000, were modified as troubled debt restructurings and had payment defaults subsequent to the modifications.  When loans modified as troubled debt restructuring have subsequent payment defaults, the defaults are factored into the determination of the allowance for loan losses to ensure specific valuation allowances reflect amounts considered uncollectible.  

The Company reviews the credit quality of its loan portfolio using an internal grading system that classifies loans as “Satisfactory,” “Watch,” “Special Mention,” “Substandard and “Doubtful.”  Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if certain deficiencies are not corrected.  Doubtful loans are those having all the weaknesses inherent to those classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Special mention loans possess potential weaknesses that deserve management’s close attention but do not expose the Bank to a degree of risk that warrants substandard classification.  Loans classified as watch are being monitored because of indications of potential weaknesses or deficiencies that may require future classification as special mention or substandard.  Loans not meeting any of the criteria previously described are considered satisfactory.  The FDIC-covered loans are evaluated using this internal grading system.  However, since these loans are accounted for in pools and are currently substantially covered through loss sharing agreements with the FDIC, all of the loan pools were considered satisfactory at September 30, 2012 and December 31, 2011, respectively.  See Note 8 for further discussion of the acquired loan pools and loss sharing agreements.  The loan grading system is presented by loan class below:

	September 30, 2012
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
(In Thousands)
One- to four-family residential
construction	$30,135	$--	$--	$612	$--	$30,747
Subdivision construction	32,191	2,990	--	2,206	--	37,387
Land development	51,016	5,201	--	7,747	--	63,964
Commercial construction	124,612	--	--	--	--	124,612
Owner occupied one- to four-						--
family residential	80,059	636	--	3,391	--	84,086
Non-owner occupied one- to four-						--
family residential	134,147	6,071	--	8,636	--	148,854
Commercial real estate	568,150	52,279	--	30,523	--	650,952
Other residential	253,493	9,466	--	9,312	--	272,271
Commercial business	244,179	7,839	--	1,107	2,316	255,441
Industrial revenue bonds	41,424	675	--	2,110	--	44,209
Consumer auto	74,679	--	--	159	--	74,838
Consumer other	81,813	--	--	742	--	82,555
Home equity lines of credit	53,206	--	--	177	--	53,383
FDIC-supported loans, net of
Discounts (TeamBank)	87,873	--	--	--	--	87,873
FDIC-supported loans, net of
discounts (Vantus Bank)	105,050	--	--	--	--	105,050
FDIC-supported loans, net of
discounts (Sun Security Bank)	101,951	--	--	--	--	101,951
FDIC-supported loans, net of
discounts (InterBank)	269,889	--	--	--	--	269,889
Total	$2,333,867	$85,157	$--	$66,722	$2,316	$2,488,062

	December 31, 2011
			Special
	Satisfactory	Watch	Mention	Substandard	Total
(In Thousands)
One- to four-family residential
construction	$21,436	$2,354	$--	$186	$23,976
Subdivision construction	45,754	2,701	--	12,685	61,140
Land development	41,179	20,902	245	6,445	68,771
Commercial construction	119,589	--	--	--	119,589
Owner occupied one- to four-family
residential	86,725	1,018	--	4,251	91,994
Non-owner occupied one- to four-family
residential	129,458	5,232	249	10,842	145,781
Commercial real estate	542,712	51,757	13,384	32,004	639,857
Other residential	222,940	13,262	--	7,540	243,742
Commercial business	225,664	5,403	638	4,679	236,384
Industrial revenue bonds	57,640	--	--	2,110	59,750
Consumer auto	59,237	--	--	131	59,368
Consumer other	77,006	--	--	534	77,540
Home equity lines of credit	46,940	--	--	174	47,114
FDIC-supported loans, net of discounts
(TeamBank)	128,875	--	--	--	128,875
FDIC-supported loans, net of discounts
(Vantus Bank)	123,036	--	--	--	123,036
FDIC-supported loans, net of discounts
(Sun Security Bank)	144,626	--	--	--	144,626
Total	$2,072,817	$102,629	$14,516	$81,581	$2,271,543