NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2020

Notes

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

Classes of loans at June 30, 2020 and December 31, 2019 were as follows:

		June 30,		December 31,
		2020		2019
		(In Thousands)
One- to four-family residential construction	$	34,376	$	33,963
Subdivision construction		13,637		16,088
Land development		38,646		40,431
Commercial construction		1,211,294		1,322,861
Owner occupied one- to four-family residential		463,493		387,016
Non-owner occupied one- to four-family residential		118,897		120,343
Commercial real estate		1,532,274		1,494,172
Other residential		1,024,591		866,006
Commercial business		441,310		313,209
Industrial revenue bonds		14,222		13,189
Consumer auto		113,927		151,854
Consumer other		42,882		46,720
Home equity lines of credit		116,293		118,988
Loans acquired and accounted for under ASC 310-30, net of discounts		110,664		127,206
		5,276,506		5,052,046
Undisbursed portion of loans in process		(816,783)		(850,666)
Allowance for loan losses		(49,801)		(40,294)
Deferred loan fees and gains, net		(10,277)		(7,104)
	$	4,399,645	$	4,153,982
Weighted average interest rate		4.34%		4.97%

		June 30, 2020
														Total Loans
												Total		> 90 Days
		30-59 Days		60-89 Days		90+ Days		Total				Loans		Past Due and
		Past Due		Past Due		Past Due		Past Due		Current		Receivable		Still Accruing
		(In Thousands)
One- to four-family
residential construction	$	79	$	-	$	-	$	79	$	34,297	$	34,376	$	-
Subdivision construction		-		-		-		-		13,637		13,637		-
Land development		-		24		-		24		38,622		38,646		-
Commercial construction		-		-		-		-		1,211,294		1,211,294		-
Owner occupied one- to
four-family residential		227		175		2,109		2,511		460,982		463,493		-
Non-owner occupied one-
to four-family residential		224		28		279		531		118,366		118,897		-
Commercial real estate		-		-		727		727		1,531,547		1,532,274		-
Other residential		-		-		-		-		1,024,591		1,024,591		-
Commercial business		-		-		1,182		1,182		440,128		441,310		-
Industrial revenue bonds		-		-		-		-		14,222		14,222		-
Consumer auto		305		40		361		706		113,221		113,927		-
Consumer other		85		1		114		200		42,682		42,882		-
Home equity lines of credit		669		103		517		1,289		115,004		116,293		-
Loans acquired and
accounted for under
ASC 310-30, net of
discounts		267		189		5,149		5,605		105,059		110,664		-
		1,856		560		10,438		12,854		5,263,652		5,276,506		-
Less loans acquired and accounted for under
ASC 310-30, net of discounts		267		189		5,149		5,605		105,059		110,664		-
Total	$	1,589	$	371	$	5,289	$	7,249	$	5,158,593	$	5,165,842	$	-

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

		June 30,		December 31,
		2020		2019
		(In Thousands)
One- to four-family residential construction	$	-	$	-
Subdivision construction		-		-
Land development		-		-
Commercial construction		-		-
Owner occupied one- to four-family residential		2,109		1,198
Non-owner occupied one- to four-family residential		279		181
Commercial real estate		727		632
Other residential		-		-
Commercial business		1,182		1,235
Industrial revenue bonds		-		-
Consumer auto		361		558
Consumer other		114		198
Home equity lines of credit		517		517
Total	$	5,289	$	4,519

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, 2020
				Unpaid
		Recorded		Principal		Specific
		Balance		Balance		Allowance
		(In Thousands)
One- to four-family residential construction	$	-	$	-	$	-
Subdivision construction		24		24		-
Land development		-		-		-
Commercial construction		-		-		-
Owner occupied one- to four-family residential		2,751		3,034		78
Non-owner occupied one- to four-family residential		279		471		-
Commercial real estate		3,674		3,711		486
Other residential		-		-		-
Commercial business		1,220		1,726		9
Industrial revenue bonds		-		-		-
Consumer auto		753		959		122
Consumer other		246		374		12
Home equity lines of credit		527		557		4
Total	$	9,474	$	10,856	$	711

	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
		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		170		1		209		3
Land development		-		-		-		-
Commercial construction		-		-		-		-
Owner occupied one- to four-family residential		2,882		34		2,702		80
Non-owner occupied one- to four-family residential		418		5		425		11
Commercial real estate		3,885		37		4,004		67
Other residential		-		-		-		-
Commercial business		1,223		9		1,243		25
Industrial revenue bonds		-		-		-		-
Consumer auto		868		14		973		40
Consumer other		265		6		276		16
Home equity lines of credit		500		7		538		19
Total	$	10,211	$	113	$	10,370	$	261

		At or for the Year Ended December 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		251		251		96		277		9
Land development		-		-		-		328		101
Commercial construction		-		-		-		-		-
Owner occupied one- to four- family residential		2,300		2,423		82		2,598		131
Non-owner occupied one- to four-family residential		409		574		20		954		43
Commercial real estate		4,020		4,049		517		4,940		264
Other residential		-		-		-		-		-
Commercial business		1,286		1,771		13		1,517		81
Industrial revenue bonds		-		-		-		-		-
Consumer auto		1,117		1,334		181		1,128		125
Consumer other		356		485		16		383		48
Home equity lines of credit		528		548		4		362		37
Total	$	10,267	$	11,435	$	929	$	12,487	$	839

		June 30, 2019
				Unpaid
		Recorded		Principal		Specific
		Balance		Balance		Allowance
		(In Thousands)
One- to four-family residential construction	$	-	$	-	$	-
Subdivision construction		261		261		100
Land development		3,556		3,588		-
Commercial construction		-		-		-
Owner occupied one- to four-family residential		2,157		2,434		114
Non-owner occupied one- to four-family residential		764		944		22
Commercial real estate		7,809		7,834		555
Other residential		-		-		-
Commercial business		1,451		1,918		470
Industrial revenue bonds		-		-		-
Consumer auto		1,040		1,230		133
Consumer other		417		651		20
Home equity lines of credit		364		380		3
Total	$	17,819	$	19,240	$	1,417

	Three Months Ended June 30, 2019				Six Months Ended June 30, 2019
		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		280		3		293		5
Land development		1,189		99		601		99
Commercial construction		-		-		-		-
Owner occupied one- to four-family residential		2,839		20		3,097		57
Non-owner occupied one- to four-family residential		815		6		1,296		18
Commercial real estate		6,349		86		5,612		136
Other residential		-		-		-		-
Commercial business		1,626		26		1,700		58
Industrial revenue bonds		-		-		-		-
Consumer auto		1,088		18		1,240		43
Consumer other		401		11		432		22
Home equity lines of credit		290		10		254		17
Total	$	14,877	$	279	$	14,525	$	455

At June 30, 2020, $4.2 million of impaired loans had specific valuation allowances totaling $711,000.  At December 31, 2019, $5.2 million of impaired loans had specific valuation allowances totaling $929,000.  

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, which were considered troubled debt restructurings, during the three and six months ended June 30, 2020 and, respectively, by type of modification:

		Three Months Ended June 30, 2020
								Total
		Interest Only		Term		Combination		Modification
		(In Thousands)
Consumer		-		16		28		44
	$	-	$	16	$	28	$	44

		Three Months Ended June 30, 2019
								Total
		Interest Only		Term		Combination		Modification
		(In Thousands)
Consumer	$	-	$	52	$	-	$	52

		Six Months Ended June 30, 2020
								Total
		Interest Only		Term		Combination		Modification
		(In Thousands)
One- to four-family residential	$	-	$	-	$	130	$	130
Consumer		-		16		76		92
	$	-	$	16	$	206	$	222

		Six Months Ended June 30, 2019
								Total
		Interest Only		Term		Combination		Modification
		(In Thousands)
Consumer	$	-	$	79	$	-	$	79

At June 30, 2020, the Company had $861,000 of loans that were modified in troubled debt restructurings and impaired, as follows:  $24,000 of construction and land development loans, $404,000 of one- to four-family residential mortgage loans, $97,000 of commercial real estate loans, $128,000 of commercial business loans and $208,000 of consumer loans.  Of the total troubled debt restructurings at June 30, 2020, $216,000 were accruing interest and $645,000 were non-accrual assets.  Of the $861,000 in troubled debt restructurings, $670,000 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, 2020.  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, 2019, the Company had $1.9 million of loans that were modified in troubled debt restructurings and impaired, as follows:  $251,000 of construction and land development loans, $768,000 of single family residential mortgage loans, $412,000 of commercial real estate loans, $156,000 of commercial business loans and $343,000 of consumer loans.  Of the total troubled debt restructurings at December 31, 2019, $1.4 million were accruing interest and $562,000 were non-accrual assets and 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, 2019.  

During the three and six months ended June 30, 2020, there were no loans designated as troubled debt restructurings that met the criteria for placement back on accrual status.  The criteria are 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, 2019, $14,000 and $63,000 of loans, respectively, all of which consisted of consumer loans, designated as troubled debt restructurings met the criteria for placement back on accrual status.

As of June 30, 2020, we had modified 2,133 loans with a total principal balance outstanding of $1.0 billion, in response to the COVID-19 pandemic. These loan modifications were made as provided for under Section 4013 of the CARES Act and within the guidance provided by the federal banking regulatory agencies, the SEC and the FASB; therefore, they are not considered troubled debt restructurings.

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

		June 30, 2020
						Special
		Satisfactory		Watch		Mention		Substandard		Doubtful		Total
		(In Thousands)
One- to four-family residential
construction	$	33,400	$	976	$	-	$	-	$	-	$	34,376
Subdivision construction		13,613		-		-		24		-		13,637
Land development		38,646		-		-		-		-		38,646
Commercial construction		1,211,294		-		-		-		-		1,211,294
Owner occupied one- to four-
family residential		460,804		-		-		2,689		-		463,493
Non-owner occupied one- to
four-family residential		118,074		545		-		278		-		118,897
Commercial real estate		1,467,520		61,080		-		3,674		-		1,532,274
Other residential		1,024,591		-		-		-		-		1,024,591
Commercial business		429,065		11,063		-		1,182		-		441,310
Industrial revenue bonds		14,222		-		-		-		-		14,222
Consumer auto		113,229		25		-		673		-		113,927
Consumer other		42,548		88		-		246		-		42,882
Home equity lines of credit		115,735		41		-		517		-		116,293
Loans acquired and accounted
for under ASC 310-30,
net of discounts		110,652		-		-		12		-		110,664
Total	$	5,193,393	$	73,818	$	-	$	9,295	$	-	$	5,276,506

		December 31, 2019
						Special
		Satisfactory		Watch		Mention		Substandard		Doubtful		Total
		(In Thousands)
One- to four-family residential
construction	$	33,963	$	-	$	-	$	-	$	-	$	33,963
Subdivision construction		16,061		27		-		-		-		16,088
Land development		40,431		-		-		-		-		40,431
Commercial construction		1,322,861		-		-		-		-		1,322,861
Owner occupied one- to-four-
family residential		385,001		26		-		1,989		-		387,016
Non-owner occupied one- to-
four-family residential		119,743		419		-		181		-		120,343
Commercial real estate		1,458,400		32,063		-		3,709		-		1,494,172
Other residential		866,006		-		-		-		-		866,006
Commercial business		307,322		4,651		-		1,236		-		313,209
Industrial revenue bonds		13,189		-		-		-		-		13,189
Consumer auto		150,874		47		-		933		-		151,854
Consumer other		46,294		92		-		334		-		46,720
Home equity lines of credit		118,428		43		-		517		-		118,988
Loans acquired and accounted
for under ASC 310-30,
net of discounts		127,192		-		-		14		-		127,206
Total	$	5,005,765	$	37,368	$	-	$	8,913	$	-	$	5,052,046