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NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2018

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	March 31,	December 31,
	2018	2017
	(In Thousands)

One- to four-family residential construction	$ 24,621	$ 20,793
Subdivision construction	16,067	18,062
Land development	45,940	43,971
Commercial construction	1,126,007	1,068,352
Owner occupied one- to four-family residential	202,075	190,515
Non-owner occupied one- to four-family residential	117,574	119,468
Commercial real estate	1,293,126	1,235,329
Other residential	736,679	745,645
Commercial business	351,889	353,351
Industrial revenue bonds	21,031	21,859
Consumer auto	323,152	357,142
Consumer other	60,561	63,368
Home equity lines of credit	114,842	115,439
Loans acquired and accounted for under ASC 310-30, net of discounts	197,506	209,669
	4,631,070	4,562,963
Undisbursed portion of loans in process	(826,307)	(793,669)
Allowance for loan losses	(36,310)	(36,492)
Deferred loan fees and gains, net	(6,739)	(6,500)
	$ 3,761,714	$ 3,726,302

Weighted average interest rate	4.86%	4.74%

Classes of loans by aging were as follows:

	March 31, 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	$ 684	$ --	$ --	$ 684	$ 23,937	$ 24,621	$ --
Subdivision construction	146	--	96	242	15,825	16,067	--
Land development	19	113	--	132	45,808	45,940	--
Commercial construction	--	--	--	--	1,126,007	1,126,007	--
Owner occupied one- to four-
family residential	2,052	12	804	2,868	199,207	202,075	--
Non-owner occupied one- to
four-family residential	298	2,110	1,980	4,388	113,186	117,574	--
Commercial real estate	3,460	567	360	4,387	1,288,739	1,293,126	--
Other residential	412	--	--	412	736,267	736,679	--
Commercial business	800	612	3,260	4,672	347,217	351,889	--
Industrial revenue bonds	--	--	--	--	21,031	21,031	--
Consumer auto	2,674	535	1,950	5,159	317,993	323,152	--
Consumer other	619	131	541	1,291	59,270	60,561	--
Home equity lines of credit	145	76	345	566	114,276	114,842	--
Loans acquired and
accounted for under
ASC 310-30, net of
discounts	3,514	612	8,859	12,985	184,521	197,506	--
	14,823	4,768	18,195	37,786	4,593,284	4,631,070	--
Less loans acquired and accounted for under
ASC 310-30, net	3,514	612	8,859	12,985	184,521	197,506	--

Total	$ 11,309	$ 4,156	$ 9,336	$ 24,801	$ 4,408,763	$ 4,433,564	$ --

	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:

	March 31,	December 31,
	2018	2017
	(In Thousands)

One- to four-family residential construction	$ —	$ —
Subdivision construction	96	98
Land development	—	—
Commercial construction	—	—
Owner occupied one- to four-family residential	804	904
Non-owner occupied one- to four-family residential	1,980	1,758
Commercial real estate	360	1,226
Other residential	—	1,877
Commercial business	3,260	2,063
Industrial revenue bonds	—	—
Consumer auto	1,950	2,272
Consumer other	541	557
Home equity lines of credit	345	404

Total	$ 9,336	$ 11,159

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

Ending balance:
Individually evaluated for
impairment	$ 775	$ —	$ 224	$ —	$ 2,176	$ 666	$ 3,841
Collectively evaluated for
impairment	$ 1,795	$ 3,186	$ 17,681	$ 2,098	$ 1,498	$ 5,839	$ 32,097
Loans acquired and
accounted for under ASC
310-30	$ 32	$ 26	$ 157	$ 90	$ 21	$ 46	$ 372

Loans
Individually evaluated for
impairment	$ 7,024	$ 1,025	$ 6,987	$ 15	$ 4,187	$ 3,928	$ 23,166
Collectively evaluated for
impairment	$ 353,313	$ 735,654	$ 1,286,139	$ 1,171,932	$ 368,733	$ 494,627	$ 4,410,398
Loans acquired and
accounted for under ASC
310-30	$ 113,045	$ 14,320	$ 37,654	$ 3,740	$ 4,472	$ 24,275	$ 197,506

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 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
Balance January 1, 2017	$ 2,322	$ 5,486	$ 15,938	$ 2,284	$ 3,015	$ 8,355	$ 37,400
Provision (benefit) charged to expense	549	(1,751)	(476)	501	1,885	1,542	2,250
Losses charged off	(35)	—	(1)	(295)	(275)	(3,403)	(4,009)
Recoveries	21	55	26	7	46	1,197	1,352
Balance March 31, 2017	$ 2,857	$ 3,790	$ 15,487	$ 2,497	$ 4,671	$ 7,691	$ 36,993

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:

	At or for the Three Months Ended March 31, 2018
				Average
		Unpaid		Investment in	Interest
	Recorded	Principal	Specific	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 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

	At or for the Three Months Ended March 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	$ 381	$ 381	$ 1	$ 391	$ —
Subdivision construction	807	820	128	811	7
Land development	4,379	4,478	1,292	3,465	16
Commercial construction	—	—	—	—	—
Owner occupied one- to four- family residential	3,331	3,623	384	3,410	37
Non-owner occupied one- to four- family residential	2,010	2,277	55	1,933	22
Commercial real estate	8,676	9,803	523	11,329	58
Other residential	3,797	3,813	2	3,804	38
Commercial business	6,993	7,643	3,342	5,885	86
Industrial revenue bonds	—	—	—	—	—
Consumer auto	2,086	2,175	377	2,393	29
Consumer other	782	845	117	796	15
Home equity lines of credit	359	379	58	395	10

Total	$ 33,601	$ 36,237	$ 6,279	$ 34,612	$ 318

At March 31, 2018, $11.6 million of impaired loans had specific valuation allowances totaling $3.8 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 months ended March 31, 2018 and 2017, respectively, by type of modification:

	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

	Three Months Ended March 31, 2017
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Commercial business	$ —	$ —	$ 274	$ 274

	$ —	$ —	$ 274	$ 274

At March 31, 2018, the Company had $13.9 million of loans that were modified in troubled debt restructurings and impaired, as follows: $262,000 of construction and land development loans, $5.5 million of single family and multi-family residential mortgage loans, $6.5 million of commercial real estate loans, $851,000 of commercial business loans and $704,000 of consumer loans. Of the total troubled debt restructurings at March 31, 2018, $12.1 million were accruing interest and $7.8 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, 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 months ended March 31, 2018, loans designated as troubled debt restructurings totaling $23,000, all of which were consumer loans, 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, 2017, $234,000 of loans, 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 March 31, 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 the three months ended March 31, 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, 2018
			Special
	Satisfactory	Watch	Mention	Substandard	Doubtful	Total
	(In Thousands)

One- to four-family residential
construction	$ 24,104	$ 517	$ —	$ —	$ —	$ 24,621
Subdivision construction	13,665	2,306	—	96	—	16,067
Land development	41,240	4,700	—	—	—	45,940
Commercial construction	1,126,007	—	—	—	—	1,126,007
Owner occupied one- to four-
family residential	200,368	—	—	1,707	—	202,075
Non-owner occupied one- to four-
family residential	113,916	1,432	—	2,226	—	117,574
Commercial real estate	1,279,403	8,056	—	5,667	—	1,293,126
Other residential	735,153	1,526	—	—	—	736,679
Commercial business	343,087	5,056	—	3,746	—	351,889
Industrial revenue bonds	21,031	—	—	—	—	21,031
Consumer auto	320,840	—	—	2,312	—	323,152
Consumer other	59,785	13	—	763	—	60,561
Home equity lines of credit	114,293	—	—	549	—	114,842
Loans acquired and accounted
for under ASC 310-30,
net of discounts	197,473	—	—	33	—	197,506

Total	$ 4,590,365	$ 23,606	$ —	$ 17,099	$ —	$ 4,631,070

	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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