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NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2019

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

Classes of loans at March 31, 2019 and December 31, 2018 were as follows:

	March 31,	December 31,
	2019	2018
	(In Thousands)

One- to four-family residential construction	$ 26,935	$ 26,177
Subdivision construction	12,352	13,844
Land development	46,438	44,492
Commercial construction	1,328,853	1,417,166
Owner occupied one- to four-family residential	288,933	276,866
Non-owner occupied one- to four-family residential	118,258	122,438
Commercial real estate	1,388,678	1,371,435
Other residential	864,990	784,894
Commercial business	321,327	322,118
Industrial revenue bonds	13,702	13,940
Consumer auto	229,700	253,528
Consumer other	53,348	57,350
Home equity lines of credit	120,696	121,352
Loans acquired and accounted for under ASC 310-30, net of discounts	161,125	167,651
	4,975,335	4,993,251
Undisbursed portion of loans in process	(879,500)	(958,441)
Allowance for loan losses	(38,651)	(38,409)
Deferred loan fees and gains, net	(6,848)	(7,400)
	$ 4,050,336	$ 3,989,001

Weighted average interest rate	5.23%	5.16%

Classes of loans by aging were as follows:

	March 31, 2019
							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	$ —	$ —	$ —	$ —	$ 26,935	$ 26,935	$ —
Subdivision construction	53	—	—	53	12,299	12,352	—
Land development	78	—	18	96	46,342	46,438	—
Commercial construction	—	—	—	—	1,328,853	1,328,853	—
Owner occupied one- to
four-family residential	2,390	248	949	3,587	285,346	288,933	—
Non-owner occupied one-
o to four-family residential	135	36	164	335	117,923	118,258	—
Commercial real estate	714	1,950	847	3,511	1,385,167	1,388,678	—
Other residential	4,439	—	—	4,439	860,551	864,990	—
Commercial business	74	—	1,405	1,479	319,848	321,327	—
Industrial revenue bonds	—	—	—	—	13,702	13,702	—
Consumer auto	1,727	417	822	2,966	226,734	229,700	—
Consumer other	661	72	194	927	52,421	53,348	—
Home equity lines of credit	150	—	238	388	120,308	120,696	—
Loans acquired and
accounted for under
ASC 310-30, net of
discounts	3,461	76	3,540	7,077	154,048	161,125	—
	13,882	2,799	8,177	24,858	4,950,477	4,975,335	—
Less loans acquired and accounted for under
ASC 310-30, net	3,461	76	3,540	7,077	154,048	161,125	—

Total	$ 10,421	$ 2,723	$ 4,637	$ 17,781	$ 4,796,429	$ 4,814,210	$ —

	December 31, 2018
							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	$ —	$ —	$ —	$ —	$ 26,177	$ 26,177	$ —
Subdivision construction	—	—	—	—	13,844	13,844	—
Land development	13	—	49	62	44,430	44,492	—
Commercial construction	—	—	—	—	1,417,166	1,417,166	—
Owner occupied one- to
four-family residential	1,431	806	1,206	3,443	273,423	276,866	—
Non-owner occupied one-
to four-family residential	1,142	144	1,458	2,744	119,694	122,438	—
Commercial real estate	3,940	53	334	4,327	1,367,108	1,371,435	—
Other residential	—	—	—	—	784,894	784,894	—
Commercial business	72	54	1,437	1,563	320,555	322,118	—
Industrial revenue bonds	3	—	—	3	13,937	13,940	—
Consumer auto	2,596	722	1,490	4,808	248,720	253,528	—
Consumer other	691	181	240	1,112	56,238	57,350	—
Home equity lines of credit	229	—	86	315	121,037	121,352	—
Loans acquired and
accounted for under ASC 310-30, net of
discounts	2,195	1,416	6,827	10,438	157,213	167,651	—
	12,312	3,376	13,127	28,815	4,964,436	4,993,251	—
Less loans acquired and accounted for under ASC 310-30, net	2,195	1,416	6,827	10,438	157,213	167,651	—

Total	$ 10,117	$ 1,960	$ 6,300	$ 18,377	$ 4,807,223	$ 4,825,600	$ —

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

	March 31,	December 31,
	2019	2018
	(In Thousands)

One- to four-family residential construction	$ —	$ —
Subdivision construction	—	—
Land development	18	49
Commercial construction	—	—
Owner occupied one- to four-family residential	949	1,206
Non-owner occupied one- to four-family residential	164	1,458
Commercial real estate	847	334
Other residential	—	—
Commercial business	1,405	1,437
Industrial revenue bonds	—	—
Consumer auto	822	1,490
Consumer other	194	240
Home equity lines of credit	238	86

Total	$ 4,637	$ 6,300

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019. 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 March 31, 2019:

	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, January 1, 2019	$ 3,122	$ 4,713	$ 19,803	$ 3,105	$ 1,568	$ 6,098	$ 38,409
Provision (benefit) charged to expense	358	723	1,163	(571)	(152)	429	1,950
Losses charged off	(455)	—	—	(31)	(74)	(2,206)	(2,766)
Recoveries	11	—	15	12	142	878	1,058
Balance, March 31, 2019	$ 3,036	$ 5,436	$ 20,981	$ 2,515	$ 1,484	$ 5,199	$ 38,651

Ending balance:
Individually evaluated for
impairment	$ 382	$ —	$ 946	$ —	$ 246	$ 327	$ 1,901
Collectively evaluated for
impairment	$ 2,615	$ 5,404	$ 19,819	$ 2,463	$ 1,226	$ 4,841	$ 36,368
Loans acquired and
accounted for under
ASC 310-30	$ 39	$ 32	$ 216	$ 52	$ 12	$ 31	$ 382

Loans
Individually evaluated for
impairment	$ 4,317	$ —	$ 5,926	$ 14	$ 1,713	$ 1,938	$ 13,908
Collectively evaluated for
impairment	$ 442,161	$ 864,990	$ 1,382,752	$ 1,375,277	$ 333,316	$ 401,806	$ 4,800,302
Loans acquired and
accounted for under
ASC 310-30	$ 90,530	$ 12,709	$ 31,892	$ 4,201	$ 4,411	$ 17,382	$ 161,125

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 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, January 1, 2018	$ 2,108	$ 2,839	$ 18,639	$ 1,767	$ 3,581	$ 7,558	$ 36,492
Provision (benefit) charged to expense	424	605	(486)	362	482	563	1,950
Losses charged off	(14)	(256)	(102)	(37)	(409)	(2,822)	(3,640)
Recoveries	84	24	11	96	41	1,252	1,508
Balance, March 31, 2018	$ 2,602	$ 3,212	$ 18,062	$ 2,188	$ 3,695	$ 6,551	$ 36,310

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, 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
Individually evaluated for
impairment	$ 694	$ —	$ 613	$ —	$ 309	$ 425	$ 2,041
Collectively evaluated for
impairment	$ 2,392	$ 4,681	$ 18,958	$ 3,029	$ 1,247	$ 5,640	$ 35,947
Loans acquired and
accounted for under
ASC 310-30	$ 36	$ 32	$ 232	$ 76	$ 12	$ 33	$ 421

Loans
Individually evaluated for
impairment	$ 6,116	$ —	$ 3,501	$ 14	$ 1,844	$ 2,464	$ 13,939
Collectively evaluated for
impairment	$ 433,209	$ 784,894	$ 1,367,934	$ 1,461,644	$ 334,214	$ 429,766	$ 4,811,661
Loans acquired and
accounted for under
ASC 310-30	$ 93,841	$ 12,790	$ 33,620	$ 4,093	$ 4,347	$ 18,960	$ 167,651

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:

	At or for the Three Months Ended March 31, 2019
				Average
		Unpaid		Investment	Interest
	Recorded	Principal	Specific	in Impaired	Income
	Balance	Balance	Allowance	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ —	$ —	$ —	$ —	$ —
Subdivision construction	283	314	103	305	2
Land development	14	18	—	14	—
Commercial construction	—	—	—	—	—
Owner occupied one- to four-
family residential	3,115	3,421	255	3,355	37
Non-owner occupied one- to four-
family residential	919	1,118	24	1,776	13
Commercial real estate	5,927	6,083	946	4,876	50
Other residential	—	—	—	—	—
Commercial business	1,713	2,125	246	1,775	32
Industrial revenue bonds	—	—	—	—	—
Consumer auto	1,261	1,518	226	1,391	24
Consumer other	415	639	62	464	11
Home equity lines of credit	261	276	39	218	7

Total	$ 13,908	$ 15,512	$ 1,901	$ 14,174	$ 176

	At or for the Year Ended December 31, 2018
				Average
		Unpaid		Investment	Interest
	Recorded	Principal	Specific	in Impaired	Income
	Balance	Balance	Allowance	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ —	$ —	$ —	$ —	$ —
Subdivision construction	318	318	105	321	17
Land development	14	18	—	14	1
Commercial construction	—	—	—	—	—
Owner occupied one- to four-
family residential	3,576	3,926	285	3,406	197
Non-owner occupied one- to four-
family residential	2,222	2,519	304	2,870	158
Commercial real estate	3,501	3,665	613	6,216	337
Other residential	—	—	—	1,026	20
Commercial business	1,844	2,207	309	2,932	362
Industrial revenue bonds	—	—	—	—	—
Consumer auto	1,874	2,114	336	2,069	167
Consumer other	479	684	72	738	59
Home equity lines of credit	111	128	17	412	28

Total	$ 13,939	$ 15,579	$ 2,041	$ 20,004	$ 1,346

	At or for the Three Months Ended March 31, 2018
				Average
		Unpaid		Investment	Interest
	Recorded	Principal	Specific	in Impaired	Income
	Balance	Balance	Allowance	Loans	Recognized
	(In Thousands)

One- to four-family residential construction	$ —	$ —	$ —	$ —	$ —
Subdivision construction	343	363	112	370	6
Land development	15	18	—	15	—
Commercial construction	—	—	—	—	—
Owner occupied one- to four-
family residential	3,293	3,608	295	3,293	45
Non-owner occupied one- to four-
family residential	3,389	3,680	368	3,438	54
Commercial real estate	6,987	7,137	224	7,266	78
Other residential	1,025	1,025	—	2,411	10
Commercial business	4,187	4,840	2,176	3,691	31
Industrial revenue bonds	—	—	—	—	—
Consumer auto	2,463	2,655	444	2,461	41
Consumer other	904	1,011	136	868	19
Home equity lines of credit	560	601	86	567	19

Total	$ 23,166	$ 24,938	$ 3,841	$ 24,380	$ 303

At March 31, 2019, $8.1 million of impaired loans had specific valuation allowances totaling $1.9 million. At December 31, 2018, $8.4 million of impaired loans had specific valuation allowances totaling $2.0 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 months ended March 31, 2019 and 2018, respectively, by type of modification:

	Three Months Ended March 31, 2019
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Consumer	$ —	$ 27	$ —	$ 27

	Three Months Ended March 31, 2018
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Mortgage loans on real estate:
One- to four-family residential	$ 1,348	$ —	$ —	$ 1,348
Consumer	—	152	—	152

	$ 1,348	$ 152	$ —	$ 1,500

At March 31, 2019, the Company had $5.3 million of loans that were modified in troubled debt restructurings and impaired, as follows: $279,000 of construction and land development loans, $2.6 million of one- to four-family and other residential mortgage loans, $1.3 million of commercial real estate loans, $440,000 of commercial business loans and $673,000 of consumer loans. Of the total troubled debt restructurings at March 31, 2019, $4.2 million were accruing interest and $1.2 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 three months ended March 31, 2019. 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, 2018, the Company had $6.9 million of loans that were modified in troubled debt restructurings and impaired, as follows: $283,000 of construction and land development loans, $3.9 million of one- to four-family and other residential mortgage loans, $1.3 million of commercial real estate loans, $548,000 of commercial business loans and $803,000 of consumer loans. Of the total troubled debt restructurings at December 31, 2018, $4.7 million were accruing interest and $2.5 million were classified as substandard using the Company’s internal grading system. The Company had no troubled debt restructurings which were modified in the previous 12 months and subsequently defaulted during the year ended December 31, 2018.

During the three months ended March 31, 2019, $49,000 of loans, all of which consisted of consumer 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 months ended March 31, 2018, loans designated as troubled debt restructurings totaling $23,000, all of which consisted of consumer loans, 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 evaluated using this internal grading system. These loans are accounted for in pools. Minimal adverse classification in these acquired loan pools was identified as of March 31, 2019 and December 31, 2018, 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:

	March 31, 2019
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
	(In Thousands)

One- to four-family residential
construction	$ 26,904	$ 31	$ —	$ —	$ —	$ 26,935
Subdivision construction	12,334	—	—	18	—	12,352
Land development	41,938	4,500	—	—	—	46,438
Commercial construction	1,328,853	—	—	—	—	1,328,853
Owner occupied one- to four-
family residential	287,220	—	—	1,713	—	288,933
Non-owner occupied one- to
four- family residential	117,073	937	—	248	—	118,258
Commercial real estate	1,363,967	19,892	—	4,819	—	1,388,678
Other residential	864,491	499	—	—	—	864,990
Commercial business	315,063	4,858	—	1,406	—	321,327
Industrial revenue bonds	13,702	—	—	—	—	13,702
Consumer auto	228,600	94	—	1,006	—	229,700
Consumer other	52,908	154	—	286	—	53,348
Home equity lines of credit	120,294	151	—	251	—	120,696
Loans acquired and accounted
for under ASC 310-30,
net of discounts	161,107	—	—	18	—	161,125

Total	$ 4,934,454	$ 31,116	$ —	$ 9,765	$ —	$ 4,975,335

	December 31, 2018
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
	(In Thousands)

One- to four-family residential
construction	$ 25,803	$ 374	$ —	$ —	$ —	$ 26,177
Subdivision construction	12,077	1,718	—	49	—	13,844
Land development	39,892	4,600	—	—	—	44,492
Commercial construction	1,417,166	—	—	—	—	1,417,166
Owner occupied one- to-four-
family residential	274,661	43	—	2,162	—	276,866
Non-owner occupied one- to-
four-family residential	119,951	941	—	1,546	—	122,438
Commercial real estate	1,357,987	11,061	—	2,387	—	1,371,435
Other residential	784,393	501	—	—	—	784,894
Commercial business	315,518	5,163	—	1,437	—	322,118
Industrial revenue bonds	13,940	—	—	—	—	13,940
Consumer auto	251,824	116	—	1,588	—	253,528
Consumer other	56,859	157	—	334	—	57,350
Home equity lines of credit	121,134	118	—	100	—	121,352
Loans acquired and accounted
for under ASC 310-30,
net of discounts	167,632	—	—	19	—	167,651

Total	$ 4,958,837	$ 24,792	$ —	$ 9,622	$ —	$ 4,993,251