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NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2020

NOTE 6: LOANS AND ALLOWANCE FOR LOAN LOSSES

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

		March 31,			December 31,
		2020			2019
		(In Thousands)

One- to four-family residential construction	$	33,410		$	33,963
Subdivision construction		14,604			16,088
Land development		38,507			40,431
Commercial construction		1,220,037			1,322,861
Owner occupied one- to four-family residential		424,778			387,016
Non-owner occupied one- to four-family residential		122,009			120,343
Commercial real estate		1,527,413			1,494,172
Other residential		964,353			866,006
Commercial business		321,833			313,209
Industrial revenue bonds		14,324			13,189
Consumer auto		131,583			151,854
Consumer other		44,835			46,720
Home equity lines of credit		121,644			118,988
Loans acquired and accounted for under ASC 310-30, net of discounts		117,209			127,206
		5,096,539			5,052,046
Undisbursed portion of loans in process		(850,663	)		(850,666	)
Allowance for loan losses		(43,928	)		(40,294	)
Deferred loan fees and gains, net		(6,913	)		(7,104	)
	$	4,195,035		$	4,153,982

Weighted average interest rate		4.77	%		4.97	%

		March 31, 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	$	-	$	-	$	-	$	-	$	33,410	$	33,410	$	-
Subdivision construction		-		-		-		-		14,604		14,604		-
Land development		119		-		-		119		38,388		38,507		-
Commercial construction		-		-		-		-		1,220,037		1,220,037		-
Owner occupied one- to
four-family residential		2,466		47		2,031		4,544		420,234		424,778		-
Non-owner occupied one-
to four-family residential		689		-		268		957		121,052		122,009		-
Commercial real estate		360		-		737		1,097		1,526,316		1,527,413		-
Other residential		-		-		-		-		964,353		964,353		-
Commercial business		60		-		1,199		1,259		320,574		321,833		-
Industrial revenue bonds		-		-		-		-		14,324		14,324		-
Consumer auto		1,722		265		453		2,440		129,143		131,583		-
Consumer other		884		112		127		1,123		43,712		44,835		-
Home equity lines of credit		204		85		464		753		120,891		121,644		-
Loans acquired and
accounted for under
ASC 310-30, net of
discounts		2,922		213		5,856		8,991		108,218		117,209		-
		9,426		722		11,135		21,283		5,075,256		5,096,539		-
Less loans acquired and accounted for under
ASC 310-30, net of discounts		2,922		213		5,856		8,991		108,218		117,209		-

Total	$	6,504	$	509	$	5,279	$	12,292	$	4,967,038	$	4,979,330	$	-

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

		March 31,		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		2,031		1,198
Non-owner occupied one- to four-family residential		268		181
Commercial real estate		737		632
Other residential		-		-
Commercial business		1,199		1,235
Industrial revenue bonds		-		-
Consumer auto		453		558
Consumer other		127		198
Home equity lines of credit		464		517

Total	$	5,279	$	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:

		At or for the Three Months Ended March 31, 2020
								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		246		246		93		247		2
Land development		-		-		-		-		-
Commercial construction		-		-		-		-		-
Owner occupied one- to four-family residential		2,929		3,214		79		2,522		46
Non-owner occupied one- to four-family residential		494		694		18		433		6
Commercial real estate		4,109		4,143		506		4,122		30
Other residential		-		-		-		-		-
Commercial business		1,238		1,736		10		1,263		16
Industrial revenue bonds		-		-		-		-		-
Consumer auto		1,030		1,253		167		1,078		26
Consumer other		281		441		13		287		10
Home equity lines of credit		475		499		4		577		12

Total	$	10,802	$	12,226	$	890	$	10,529	$	148

		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

		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 March 31, 2020, $4.9 million of impaired loans had specific valuation allowances totaling $890,000. 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 months ended March 31, 2020 and, respectively, by type of modification:

		Three Months Ended March 31, 2020
								Total
		Interest Only		Term		Combination		Modification
		(In Thousands)

One- to four-family residential	$	-	$	-	$	130	$	130
Consumer		-		-		48		48
	$	-	$	-	$	178	$	178

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

Consumer	$	-	$	27	$	-	$	27

At March 31, 2020, the Company had $2.0 million of loans that were modified in troubled debt restructurings and impaired, as follows: $246,000 of construction and land development loans, $885,000 of one- to four-family and other residential mortgage loans, $405,000 of commercial real estate loans, $139,000 of commercial business loans and $341,000 of consumer loans. Of the total troubled debt restructurings at March 31, 2020, $1.3 million were accruing interest and $677,000 were non-accrual assets and 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, 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 months ended March 31, 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 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.

As of March 31, 2020, we had modified 747 loans with a total principal balance outstanding of $359.2 million. 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 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, 2020 and December 31, 2019, 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, 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 year ended December 31, 2019 or the three months ended March 31, 2020. However, the deterioration of economic conditions that occurred in the three months ended March 31, 2020 and was expected to continue thereafter was a significant factor in the determination of the allowance for loan losses.