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NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2018

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

Classes of loans at June 30, 2018 and December 31, 2017 were as follows:

	June 30,	December 31,
	2018	2017
	(In Thousands)

One- to four-family residential construction	$ 31,770	$ 20,793
Subdivision construction	15,913	18,062
Land development	46,643	43,971
Commercial construction	1,258,564	1,068,352
Owner occupied one- to four-family residential	228,211	190,515
Non-owner occupied one- to four-family residential	112,416	119,468
Commercial real estate	1,307,966	1,235,329
Other residential	785,202	745,645
Commercial business	347,312	353,351
Industrial revenue bonds	20,021	21,859
Consumer auto	298,977	357,142
Consumer other	60,052	63,368
Home equity lines of credit	114,742	115,439
Loans acquired and accounted for under ASC 310-30, net of discounts	184,136	209,669
	4,811,925	4,562,963
Undisbursed portion of loans in process	(907,906)	(793,669)
Allowance for loan losses	(37,556)	(36,492)
Deferred loan fees and gains, net	(6,662)	(6,500)
	$ 3,859,801	$ 3,726,302

Weighted average interest rate	4.96%	4.74%

Classes of loans by aging were as follows:

	June 30, 2018
							Total Loans
						Total	> 90 Days
	30-59 Days	60-89 Days	Over	Total		Loans	Past Due and
	Past Due	Past Due	90 Days	Past Due	Current	Receivable	Still Accruing
	(In Thousands)

One- to four-family
residential construction	$ —	$ —	$ —	$ —	$ 31,770	$ 31,770	$ —
Subdivision construction	—	—	91	91	15,822	15,913	—
Land development	594	—	—	594	46,049	46,643	—
Commercial construction	—	—	—	—	1,258,564	1,258,564	—
Owner occupied one- to
four-family residential	100	267	848	1,215	226,996	228,211	—
Non-owner occupied one-
o to four-family residential	359	479	1,743	2,581	109,835	112,416	—
Commercial real estate	6,267	412	352	7,031	1,300,935	1,307,966	—
Other residential	—	—	—	—	785,202	785,202	—
Commercial business	40	201	2,852	3,093	344,219	347,312	—
Industrial revenue bonds	—	—	—	—	20,021	20,021	—
Consumer auto	2,876	437	1,482	4,795	294,182	298,977	—
Consumer other	570	62	441	1,073	58,979	60,052	—
Home equity lines of credit	154	166	316	636	114,106	114,742	—
Loans acquired and
accounted for under
ASC 310-30, net of
discounts	868	1,067	6,876	8,811	175,325	184,136	—
	11,828	3,091	15,001	29,920	4,782,005	4,811,925	—
Less loans acquired and accounted for under
ASC 310-30, net	868	1,067	6,876	8,811	175,325	184,136	—

Total	$ 10,960	$ 2,024	$ 8,125	$ 21,109	$ 4,606,680	$ 4,627,789	$ —

	December 31, 2017
							Total Loans
						Total	> 90 Days Past
	30-59 Days	60-89 Days	Over 90	Total Past		Loans	Due and
	Past Due	Past Due	Days	Due	Current	Receivable	Still Accruing
	(In Thousands)

One- to four-family
residential construction	$ 250	$ —	$ —	$ 250	$ 20,543	$ 20,793	$ —
Subdivision construction	—	—	98	98	17,964	18,062	—
Land development	54	37	—	91	43,880	43,971	—
Commercial construction	—	—	—	—	1,068,352	1,068,352	—
Owner occupied one- to
four-family residential	1,927	71	904	2,902	187,613	190,515	—
Non-owner occupied one-
to four-family residential	947	190	1,816	2,953	116,515	119,468	58
Commercial real estate	8,346	993	1,226	10,565	1,224,764	1,235,329	—
Other residential	540	353	1,877	2,770	742,875	745,645	—
Commercial business	2,623	1,282	2,063	5,968	347,383	353,351	—
Industrial revenue bonds	—	—	—	—	21,859	21,859	—
Consumer auto	5,196	1,230	2,284	8,710	348,432	357,142	12
Consumer other	464	64	557	1,085	62,283	63,368	—
Home equity lines of credit	58	—	430	488	114,951	115,439	26
Loans acquired and
accounted for under ASC 310-30, net of
discounts	4,449	1,951	10,675	17,075	192,594	209,669	272
	24,854	6,171	21,930	52,955	4,510,008	4,562,963	368
Less loans acquired and accounted for under ASC 310-30, net	4,449	1,951	10,675	17,075	192,594	209,669	272

Total	$ 20,405	$ 4,220	$ 11,255	$ 35,880	$ 4,317,414	$ 4,353,294	$ 96

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

	June 30,	December 31,
	2018	2017
	(In Thousands)

One- to four-family residential construction	$ —	$ —
Subdivision construction	91	98
Land development	—	—
Commercial construction	—	—
Owner occupied one- to four-family residential	848	904
Non-owner occupied one- to four-family residential	1,743	1,758
Commercial real estate	352	1,226
Other residential	—	1,877
Commercial business	2,852	2,063
Industrial revenue bonds	—	—
Consumer auto	1,482	2,272
Consumer other	441	557
Home equity lines of credit	316	404

Total	$ 8,125	$ 11,159

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2018. 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 June 30, 2018:

	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 April 1, 2018	$ 2,602	$ 3,212	$ 18,062	$ 2,188	$ 3,695	$ 6,551	$ 36,310
Provision (benefit) charged to expense	63	364	1,297	109	(454)	571	1,950
Losses charged off	(27)	(75)	—	(46)	(472)	(2,112)	(2,732)
Recoveries	89	344	115	144	222	1,114	2,028
Balance June 30, 2018	$ 2,727	$ 3,845	$ 19,474	$ 2,395	$ 2,991	$ 6,124	$ 37,556

Balance January 1, 2018	$ 2,108	$ 2,839	$ 18,639	$ 1,767	$ 3,581	$ 7,558	$ 36,492
Provision (benefit) charged to expense	487	969	811	471	28	1,134	3,900
Losses charged off	(41)	(331)	(102)	(83)	(881)	(4,934)	(6,372)
Recoveries	173	368	126	240	263	2,366	3,536
Balance June 30, 2018	$ 2,727	$ 3,845	$ 19,474	$ 2,395	$ 2,991	$ 6,124	$ 37,556

Ending balance:
Individually evaluated for
impairment	$ 737	$ —	$ 220	$ —	$ 1,422	$ 641	$ 3,020
Collectively evaluated for
impairment	$ 1,953	$ 3,817	$ 18,988	$ 2,322	$ 1,545	$ 5,443	$ 34,068
Loans acquired and
accounted for under ASC
310-30	$ 37	$ 28	$ 266	$ 73	$ 24	$ 40	$ 468

Loans
Individually evaluated for
impairment	$ 6,740	$ 1,015	$ 8,313	$ 15	$ 3,350	$ 3,330	$ 22,763
Collectively evaluated for
impairment	$ 381,570	$ 784,187	$ 1,299,653	$ 1,305,192	$ 363,983	$ 470,441	$ 4,605,026
Loans acquired and
accounted for under ASC
310-30	$ 103,903	$ 13,193	$ 36,857	$ 3,404	$ 4,444	$ 22,335	$ 184,136

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2017:

	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 April 1, 2017	$ 2,857	$ 3,790	$ 15,487	$ 2,497	$ 4,671	$ 7,691	$ 36,993
Provision (benefit) charged to expense	(427)	(147)	1,246	(724)	(661)	2,663	1,950
Losses charged off	(41)	(2)	(1,291)	(92)	—	(2,565)	(3,991)
Recoveries	24	14	—	30	355	1,158	1,581
Balance June 30, 2017	$ 2,413	$ 3,655	$ 15,442	$ 1,711	$ 4,365	$ 8,947	$ 36,533

Balance January 1, 2017	$ 2,322	$ 5,486	$ 15,938	$ 2,284	$ 3,015	$ 8,355	$ 37,400
Provision (benefit) charged to expense	122	(1,898)	770	(223)	1,224	4,205	4,200
Losses charged off	(76)	(2)	(1,292)	(387)	(275)	(5,968)	(8,000)
Recoveries	45	69	26	37	401	2,355	2,933
Balance June 30, 2017	$ 2,413	$ 3,655	$ 15,442	$ 1,711	$ 4,365	$ 8,947	$ 36,533

The following table presents the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2017:

	One- to Four-
	Family
	Residential and	Other	Commercial	Commercial	Commercial
	Construction	Residential	Real Estate	Construction	Business	Consumer	Total
	(In Thousands)

Allowance for loan losses
Individually evaluated for
impairment	$ 513	$ —	$ 599	$ —	$ 2,140	$ 699	$ 3,951
Collectively evaluated for
impairment	$ 1,564	$ 2,813	$ 17,843	$ 1,690	$ 1,369	$ 6,802	$ 32,081
Loans acquired and
accounted for under ASC
310-30	$ 31	$ 26	$ 197	$ 77	$ 72	$ 57	$ 460

Loans
Individually evaluated for
impairment	$ 6,950	$ 2,907	$ 8,315	$ 15	$ 3,018	$ 4,129	$ 25,334
Collectively evaluated for
impairment	$ 341,888	$ 742,738	$ 1,227,014	$ 1,112,308	$ 372,192	$ 531,820	$ 4,327,960
Loans acquired and
accounted for under ASC
310-30	$ 120,295	$ 14,877	$ 39,210	$ 3,806	$ 5,275	$ 26,206	$ 209,669

The portfolio segments used in the preceding three tables correspond to the loan classes used in all other tables in Note 6 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 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

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include not only nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.

Impaired loans (excluding FDIC-assisted loans, net of discount), are summarized as follows:

	June 30, 2018
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance

One- to four-family residential construction	$ —	$ —	$ —
Subdivision construction	335	357	110
Land development	15	18	—
Commercial construction	—	—	—
Owner occupied one- to four- family residential	3,261	3,579	284
Non-owner occupied one- to four- family residential	3,144	3,465	343
Commercial real estate	8,313	8,468	220
Other residential	1,015	1,015	—
Commercial business	3,350	4,754	1,422
Industrial revenue bonds	—	—	—
Consumer auto	2,033	2,228	369
Consumer other	784	1,007	118
Home equity lines of credit	513	553	154

Total	$ 22,763	$ 25,444	$ 3,020

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
	Average		Average
	Investment	Interest	Investment	Interest
	in Impaired	Income	in Impaired	Income
	Loans	Recognized	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ —	$ —	$ —	$ —
Subdivision construction	338	2	354	8
Land development	15	—	15	—
Commercial construction	—	—	—	—
Owner occupied one- to four-family residential	3,272	44	3,283	89
Non-owner occupied one- to four-family residential	3,225	38	3,331	92
Commercial real estate	7,391	145	7,328	223
Other residential	1,017	10	1,714	20
Commercial business	3,559	258	3,625	289
Industrial revenue bonds	—	—	—	—
Consumer auto	2,034	40	2,247	81
Consumer other	879	18	874	37
Home equity lines of credit	528	9	548	28

Total	$ 22,258	$ 564	$ 23,319	$ 867

	At or for the Year Ended December 31, 2017
				Average
		Unpaid		Investment	Interest
	Recorded	Principal	Specific	in Impaired	Income
	Balance	Balance	Allowance	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ —	$ —	$ —	$ 193	$ —
Subdivision construction	349	367	114	584	22
Land development	15	18	—	1,793	24
Commercial construction	—	—	—	—	—
Owner occupied one- to four-
family residential	3,405	3,723	331	3,405	166
Non-owner occupied one- to four-
family residential	3,196	3,465	68	2,419	165
Commercial real estate	8,315	8,490	599	9,075	567
Other residential	2,907	2,907	—	3,553	147
Commercial business	3,018	4,222	2,140	5,384	173
Industrial revenue bonds	—	—	—	—	—
Consumer auto	2,713	2,898	484	2,383	222
Consumer other	825	917	124	906	69
Home equity lines of credit	591	648	91	498	33

Total	$ 25,334	$ 27,655	$ 3,951	$ 30,193	$ 1,588

	June 30, 2017
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance
	(In Thousands)

One- to four-family residential construction	$ 380	$ 380	$ —
Subdivision construction	498	512	120
Land development	457	545	—
Commercial construction	—	—	—
Owner occupied one- to four-family residential	3,475	3,766	357
Non-owner occupied one- to four-family residential	2,189	2,446	88
Commercial real estate	5,945	6,303	67
Other residential	3,582	3,600	—
Commercial business	6,973	7,827	3,189
Industrial revenue bonds	—	—	—
Consumer auto	2,272	2,462	412
Consumer other	885	998	133
Home equity lines of credit	359	431	58

Total	$ 27,015	$ 29,270	$ 4,424

	Three Months Ended		Six Months Ended
	June 30, 2017		June 30, 2017
	Average		Average
	Investment	Interest	Investment	Interest
	in Impaired	Income	in Impaired	Income
	Loans	Recognized	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ 382	$ —	$ 386	$ —
Subdivision construction	701	5	756	12
Land development	3,069	5	3,267	21
Commercial construction	—	—	—	—
Owner occupied one- to four-family residential	3,302	43	3,356	80
Non-owner occupied one- to four-family residential	2,066	26	1,999	48
Commercial real estate	9,056	101	10,193	159
Other residential	3,719	37	3,761	75
Commercial business	6,979	40	6,432	126
Industrial revenue bonds	—	—	—	—
Consumer auto	2,029	48	2,211	77
Consumer other	857	24	827	39
Home equity lines of credit	339	8	367	18

Total	$ 32,499	$ 337	$ 33,555	$ 655

At June 30, 2018, $9.7 million of impaired loans had specific valuation allowances totaling $3.0 million. At December 31, 2017, $12.7 million of impaired loans had specific valuation allowances totaling $4.0 million.

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 flow or collateral adequacy approach.

The following tables present newly restructured loans during the three and six months ended June 30, 2018 and 2017, respectively, by type of modification:

	Three Months Ended June 30, 2018
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Consumer	$ —	$ 287	$ —	$ 287

	Three Months Ended June 30, 2017
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Consumer	$ —	$ 5	$ —	$ 5

	Six Months Ended June 30, 2018
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Mortgage loans on real estate:
One- to four-family residential	$ 1,348	$ —	$ —	$ 1,348
Consumer	—	439	—	439

	$ 1,348	$ 439	$ —	$ 1,787

	Six Months Ended June 30, 2017
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Commercial business	$ —	$ —	$ 274	$ 274
Consumer	—	5	—	5

	$ —	$ 5	$ 274	$ 279

At June 30, 2018, the Company had $13.4 million of loans that were modified in troubled debt restructurings and impaired, as follows: $259,000 of construction and land development loans, $5.5 million of single family and multi-family residential mortgage loans, $6.0 million of commercial real estate loans, $836,000 of commercial business loans and $886,000 of consumer loans. Of the total troubled debt restructurings at June 30, 2018, $11.1 million were accruing interest and $7.5 million were classified as substandard using the Company’s internal grading system, which is described below. The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the six months ended June 30, 2018. When loans modified as troubled debt restructurings 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. At December 31, 2017, the Company had $15.0 million of loans that were modified in troubled debt restructurings and impaired, as follows: $266,000 of construction and land development loans, $6.2 million of single family and multi-family residential mortgage loans, $7.1 million of commercial real estate loans, $867,000 of commercial business loans and $617,000 of consumer loans. Of the total troubled debt restructurings at December 31, 2017, $12.3 million were accruing interest and $8.8 million were classified as substandard using the Company’s internal grading system.

During the three and six months ended June 30, 2018, $16,000 and $39,000 of loans, respectively, all of which consisted of one- to four-family residential loans, designated as troubled debt restructurings met the criteria for placement back on accrual status. The criteria is generally a minimum of six months of consistent and timely payment performance under original or modified terms. During the three and six months ended June 30, 2017, $111,000 and $345,000 of loans, respectively, all of which consisted of one- to four- family residential loans, designated as troubled debt restructurings met the criteria for placement back on accrual status.

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.” 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. 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. 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. Loans not meeting any of the criteria previously described are considered satisfactory. The FDIC-assisted acquired loans are also evaluated using this internal grading system and are accounted for in pools. Minimal adverse classification in these acquired loan pools was identified as of June 30, 2018 and December 31, 2017, respectively. See Note 7 for further discussion of the acquired loan pools and the termination of the loss sharing agreements.

The Company evaluates the loan risk internal grading system definitions and allowance for loan loss methodology on an ongoing basis. The general component of the allowance for loan losses is affected by several factors, including, but not limited to, average historical losses, average life of the loans, the current composition of the loan portfolio, current and expected economic conditions, collateral values and internal risk ratings. Management considers all these factors in determining the adequacy of the Company’s allowance for loan losses. In early 2018, we expanded our loan risk rating system to allow for further segregation of satisfactory credits. No significant changes were made to the allowance for loan loss methodology during the past year.

The loan grading system is presented by loan class below:

	June 30, 2018
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
	(In Thousands)

One- to four-family residential
construction	$ 31,139	$ 631	$ —	$ —	$ —	$ 31,770
Subdivision construction	13,749	2,073	—	91	—	15,913
Land development	41,943	4,700	—	—	—	46,643
Commercial construction	1,258,564	—	—	—	—	1,258,564
Owner occupied one- to four-
family residential	226,388	—	—	1,823	—	228,211
Non-owner occupied one- to
four- family residential	109,007	1,423	—	1,986	—	112,416
Commercial real estate	1,297,215	3,726	—	7,025	—	1,307,966
Other residential	783,381	1,821	—	—	—	785,202
Commercial business	339,344	5,048	—	2,920	—	347,312
Industrial revenue bonds	20,021	—	—	—	—	20,021
Consumer auto	297,174	—	—	1,803	—	298,977
Consumer other	59,390	12	—	650	—	60,052
Home equity lines of credit	114,240	—	—	502	—	114,742
Loans acquired and accounted
for under ASC 310-30,
net of discounts	184,105	—	—	31	—	184,136

Total	$ 4,775,660	$ 19,434	$ —	$ 16,831	$ —	$ 4,811,925

	December 31, 2017
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
	(In Thousands)

One- to four-family residential
construction	$ 20,275	$ 518	$ —	$ —	$ —	$ 20,793
Subdivision construction	15,602	2,362	—	98	—	18,062
Land development	39,171	4,800	—	—	—	43,971
Commercial construction	1,068,352	—	—	—	—	1,068,352
Owner occupied one- to-four-
family residential	188,706	—	—	1,809	—	190,515
Non-owner occupied one- to-
four-family residential	117,103	389	—	1,976	—	119,468
Commercial real estate	1,218,431	9,909	—	6,989	—	1,235,329
Other residential	742,237	1,532	—	1,876	—	745,645
Commercial business	344,479	6,306	—	2,066	500	353,351
Industrial revenue bonds	21,859	—	—	—	—	21,859
Consumer auto	354,588	—	—	2,554	—	357,142
Consumer other	62,682	—	—	686	—	63,368
Home equity lines of credit	114,860	—	—	579	—	115,439
Loans acquired and accounted
for under ASC 310-30,
net of discounts	209,657	—	—	12	—	209,669

Total	$ 4,518,002	$ 25,816	$ —	$ 18,645	$ 500	$ 4,562,963

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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