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NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Sep. 30, 2018

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

One- to four-family residential construction	$ 25,477	$ 20,793
Subdivision construction	16,054	18,062
Land development	44,502	43,971
Commercial construction	1,283,468	1,068,352
Owner occupied one- to four-family residential	255,994	190,515
Non-owner occupied one- to four-family residential	109,282	119,468
Commercial real estate	1,383,871	1,235,329
Other residential	791,786	745,645
Commercial business	332,037	353,351
Industrial revenue bonds	14,179	21,859
Consumer auto	277,884	357,142
Consumer other	57,921	63,368
Home equity lines of credit	117,061	115,439
Loans acquired and accounted for under ASC 310-30, net of discounts	177,150	209,669
	4,886,666	4,562,963
Undisbursed portion of loans in process	(899,620)	(793,669)
Allowance for loan losses	(37,497)	(36,492)
Deferred loan fees and gains, net	(6,783)	(6,500)
	$ 3,942,766	$ 3,726,302

Weighted average interest rate	5.03%	4.74%

Classes of loans by aging were as follows:

	September 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	$ —	$ 294	$ —	$ 294	$ 25,183	$ 25,477	$ —
Subdivision construction	12	—	—	12	16,042	16,054	—
Land development	—	32	—	32	44,470	44,502	—
Commercial construction	—	—	—	—	1,283,468	1,283,468	—
Owner occupied one- to
four-family residential	138	62	1,270	1,470	254,524	255,994	—
Non-owner occupied one-
o to four-family residential	—	—	1,481	1,481	107,801	109,282	—
Commercial real estate	327	38	346	711	1,383,160	1,383,871	—
Other residential	—	—	—	—	791,786	791,786	—
Commercial business	129	—	1,590	1,719	330,318	332,037	—
Industrial revenue bonds	—	—	—	—	14,179	14,179	—
Consumer auto	2,705	858	1,367	4,930	272,954	277,884	—
Consumer other	473	220	326	1,019	56,902	57,921	—
Home equity lines of credit	353	—	95	448	116,613	117,061	—
Loans acquired and
accounted for under
ASC 310-30, net of
discounts	1,780	1,442	2,385	5,607	171,543	177,150	—
	5,917	2,946	8,860	17,723	4,868,943	4,886,666	—
Less loans acquired and accounted for under
ASC 310-30, net	1,780	1,442	2,385	5,607	171,543	177,150	—

Total	$ 4,137	$ 1,504	$ 6,475	$ 12,116	$ 4,697,400	$ 4,709,516	$ —

	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:

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

One- to four-family residential construction	$ —	$ —
Subdivision construction	—	98
Land development	—	—
Commercial construction	—	—
Owner occupied one- to four-family residential	1,270	904
Non-owner occupied one- to four-family residential	1,481	1,758
Commercial real estate	346	1,226
Other residential	—	1,877
Commercial business	1,590	2,063
Industrial revenue bonds	—	—
Consumer auto	1,367	2,272
Consumer other	326	557
Home equity lines of credit	95	404

Total	$ 6,475	$ 11,159

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 September 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 July 1, 2018	$ 2,727	$ 3,845	$ 19,474	$ 2,395	$ 2,991	$ 6,124	$ 37,556
Provision (benefit) charged to expense	7	341	708	538	(1,019)	725	1,300
Losses charged off	(18)	(194)	—	(4)	(274)	(2,128)	(2,618)
Recoveries	79	41	1	97	80	961	1,259
Balance September 30, 2018	$ 2,795	$ 4,033	$ 20,183	$ 3,026	$ 1,778	$ 5,682	$ 37,497

Balance January 1, 2018	$ 2,108	$ 2,839	$ 18,639	$ 1,767	$ 3,581	$ 7,558	$ 36,492
Provision (benefit) charged to expense	494	1,310	1,519	1,009	(991)	1,859	5,200
Losses charged off	(59)	(525)	(102)	(87)	(1,155)	(7,062)	(8,990)
Recoveries	252	409	127	337	343	3,327	4,795
Balance September 30, 2018	$ 2,795	$ 4,033	$ 20,183	$ 3,026	$ 1,778	$ 5,682	$ 37,497

Ending balance:
Individually evaluated for
impairment	$ 771	$ —	$ 635	$ —	$ 324	$ 433	$ 2,163
Collectively evaluated for
impairment	$ 1,987	$ 4,006	$ 19,288	$ 2,953	$ 1,438	$ 5,221	$ 34,893
Loans acquired and
accounted for under ASC
310-30	$ 37	$ 27	$ 260	$ 73	$ 16	$ 28	$ 441

Loans
Individually evaluated for
impairment	$ 6,302	$ —	$ 3,556	$ 14	$ 2,008	$ 2,524	$ 14,404
Collectively evaluated for
impairment	$ 400,505	$ 791,786	$ 1,380,315	$ 1,327,956	$ 344,208	$ 450,342	$ 4,695,112
Loans acquired and
accounted for under ASC
310-30	$ 98,702	$ 12,927	$ 35,980	$ 4,240	$ 4,613	$ 20,688	$ 177,150

The following table presents the activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 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 July 1, 2017	$ 2,413	$ 3,655	$ 15,442	$ 1,711	$ 4,365	$ 8,947	$ 36,533
Provision (benefit) charged to expense	285	190	643	298	562	972	2,950
Losses charged off	(74)	(10)	(357)	—	(1,090)	(3,151)	(4,682)
Recoveries	46	89	74	129	66	1,038	1,442
Balance September 30, 2017	$ 2,670	$ 3,924	$ 15,802	$ 2,138	$ 3,903	$ 7,806	$ 36,243

Balance January 1, 2017	$ 2,322	$ 5,486	$ 15,938	$ 2,284	$ 3,015	$ 8,355	$ 37,400
Provision (benefit) charged to expense	407	(1,708)	1,413	74	1,786	5,178	7,150
Losses charged off	(150)	(12)	(1,649)	(386)	(1,365)	(9,120)	(12,682)
Recoveries	91	158	100	166	467	3,393	4,375
Balance September 30, 2017	$ 2,670	$ 3,924	$ 15,802	$ 2,138	$ 3,903	$ 7,806	$ 36,243

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:

	September 30, 2018
		Unpaid
	Recorded	Principal	Specific
	Balance	Balance	Allowance

One- to four-family residential construction	$ —	$ —	$ —
Subdivision construction	241	241	107
Land development	14	18	—
Commercial construction	—	—	—
Owner occupied one- to four- family residential	3,663	3,995	343
Non-owner occupied one- to four- family residential	2,398	2,677	321
Commercial real estate	3,556	3,714	635
Other residential	—	—	—
Commercial business	2,008	2,383	324
Industrial revenue bonds	—	—	—
Consumer auto	1,843	2,046	331
Consumer other	566	751	85
Home equity lines of credit	115	133	17

Total	$ 14,404	$ 15,958	$ 2,163

	Three Months Ended		Nine Months Ended
	September 30, 2018		September 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	299	3	336	11
Land development	15	1	15	1
Commercial construction	—	—	—	—
Owner occupied one- to four-family residential	3,401	53	3,322	142
Non-owner occupied one- to four-family residential	2,583	38	3,082	130
Commercial real estate	6,689	55	7,115	278
Other residential	675	—	1,368	20
Commercial business	2,581	40	3,277	329
Industrial revenue bonds	—	—	—	—
Consumer auto	1,865	37	2,120	118
Consumer other	671	11	806	48
Home equity lines of credit	405	—	500	28

Total	$ 19,184	$ 238	$ 21,941	$ 1,105

	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

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

One- to four-family residential construction	$ —	$ —	$ —
Subdivision construction	434	450	116
Land development	315	319	—
Commercial construction	—	—	—
Owner occupied one- to four-family residential	3,441	3,740	351
Non-owner occupied one- to four-family residential	3,293	3,560	104
Commercial real estate	9,358	9,581	599
Other residential	3,390	3,390	—
Commercial business	3,141	4,311	2,396
Industrial revenue bonds	—	—	—
Consumer auto	2,740	2,936	491
Consumer other	1,042	1,148	156
Home equity lines of credit	647	725	100

Total	$ 27,801	$ 30,160	$ 4,313

	Three Months Ended		Nine Months Ended
	September 30, 2017		September 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	$ —	$ —	$ 258	$ —
Subdivision construction	444	9	652	21
Land development	424	12	2,319	33
Commercial construction	—	—	—	—
Owner occupied one- to four-family residential	3,440	44	3,384	124
Non-owner occupied one- to four-family residential	2,550	80	2,183	128
Commercial real estate	6,819	266	9,068	425
Other residential	3,457	27	3,660	102
Commercial business	5,580	35	6,148	161
Industrial revenue bonds	—	—	—	—
Consumer auto	2,548	79	2,323	156
Consumer other	1,005	26	886	65
Home equity lines of credit	633	14	456	32

Total	$ 26,900	$ 592	$ 31,337	$ 1,247

At September 30, 2018, $8.7 million of impaired loans had specific valuation allowances totaling $2.2 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 nine months ended September 30, 2018 and 2017, respectively, by type of modification:

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

Consumer	$ —	$ 67	$ —	$ 67

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

Mortgage loans on real estate:
Commercial	$ —	$ —	$ 5,759	$ 5,759
Consumer	—	194	—	194

	$ —	$ 194	$ 5,759	$ 5,953

	Nine Months Ended September 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	—	506	—	506

	$ 1,348	$ 506	$ —	$ 1,854

	Nine Months Ended September 30, 2017
				Total
	Interest Only	Term	Combination	Modification
	(In Thousands)

Mortgage loans on real estate:
Commercial	$ —	$ —	$ 5,759	$ 5,759
Commercial business	—	—	274	274
Consumer	—	199	—	199

	$ —	$ 199	$ 6,033	$ 6,232

At September 30, 2018, the Company had $7.0 million of loans that were modified in troubled debt restructurings and impaired, as follows: $256,000 of construction and land development loans, $4.1 million of one- to four-family and other residential mortgage loans, $1.3 million of commercial real estate loans, $568,000 of commercial business loans and $856,000 of consumer loans. Of the total troubled debt restructurings at September 30, 2018, $4.8 million were accruing interest and $2.3 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 nine months ended September 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 one- to four-family and other 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. The reduction in troubled debt restructurings during the three and nine months ended September 30, 2018 was primarily due to the removal of performing loans that were part of two customer relationships totaling $5.7 million due to return to market interest rates, cash flow improvement and amortization and payment performance.

During the three and nine months ended September 30, 2018, $46,000 and $85,000 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 months ended September 30, 2017, loans designated as troubled debt restructurings totaling $327,000 met the criteria for placement back on accrual status. The $327,000 consisted of $285,000 of commercial real estate loans and $42,000 of consumer loans. During the nine months ended September 30, 2017, loans designated as troubled debt restructurings totaling $672,000 met the criteria for placement back on accrual status. The $672,000 consisted of $345,000 of one- to four- family residential loans, $285,000 of commercial real estate loans and $42,000 of consumer loans.

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 September 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:

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

One- to four-family residential
construction	$ 25,056	$ 421	$ —	$ —	$ —	$ 25,477
Subdivision construction	14,087	1,967	—	—	—	16,054
Land development	39,902	4,600	—	—	—	44,502
Commercial construction	1,283,468	—	—	—	—	1,283,468
Owner occupied one- to four-
family residential	253,695	62	—	2,237	—	255,994
Non-owner occupied one- to
four- family residential	106,619	1,092	—	1,571	—	109,282
Commercial real estate	1,370,246	11,330	—	2,295	—	1,383,871
Other residential	791,285	501	—	—	—	791,786
Commercial business	325,260	5,187	—	1,590	—	332,037
Industrial revenue bonds	14,179	—	—	—	—	14,179
Consumer auto	276,220	155	—	1,509	—	277,884
Consumer other	57,337	162	—	422	—	57,921
Home equity lines of credit	116,804	152	—	105	—	117,061
Loans acquired and accounted
for under ASC 310-30,
net of discounts	177,130	—	—	20	—	177,150

Total	$ 4,851,288	$ 25,629	$ —	$ 9,749	$ —	$ 4,886,666

	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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