Loans And Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Loans And Allowance For Loan Losses [Abstract]

Loans And Allowance For Loan Losses

(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:

	September 30,					December 31,					September 30,
	2011					2010					2010
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	542,189		18.17	%	$	549,050		19.53	%	$	492,823		17.88	%
Oil & gas production & equipment		109,272		3.66			94,535		3.36			81,816		2.97
Agriculture		73,021		2.45			87,879		3.13			74,494		2.70
State and political subdivisions:
Taxable		7,079		0.24			9,627		0.34			8,794		0.32
Tax-exempt		12,192		0.41			10,301		0.37			10,322		0.38
Real estate:
Construction		258,182		8.65			230,367		8.19			212,830		7.72
Farmland		97,041		3.25			93,137		3.31			89,048		3.23
One to four family residences		655,007		21.95			608,786		21.65			568,755		20.64
Multifamily residential properties		37,173		1.24			31,257		1.11			29,123		1.06
Commercial		908,207		30.43			797,564		28.36			754,066		27.36
Consumer		260,718		8.74			273,277		9.73			409,754		14.87
Other		24,033		0.81			26,184		0.92			24,293		0.87
Total loans	$	2,984,114		100.00	%	$	2,811,964		100.00	%	$	2,756,118		100.00	%
Loans held for sale (included above)	$	13,066				$	11,776				$	159,660

The Company's loans are mostly to customers within Oklahoma and over 60% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained, if any, to secure loans are based upon the Company's underwriting standards and management's credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company's interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral.

As of September 30, 2011, the Company had no student loans held for sale and had approximately $48.4 million of student loans held for investment. Loans held for sale included $145.2 million of guaranteed student loans at September 30, 2010. Student loans are classified as consumer loans in the preceding table and valued at the lower of cost or market. On March 21, 2010, Congress passed student loan reform legislation centralizing student lending in a governmental agency, which as of June 30, 2010 resulted in an end to the student loan programs provided by the Company. During October 2010 the Company sold student loans held for sale of approximately $144 million.

Appraisal Policy

An updated appraisal of the collateral is obtained when a loan is first identified as a problem loan. Appraisals are reviewed annually and are updated as needed, or are updated more frequently if significant changes are believed to have occurred in the collateral or market conditions.

Nonaccrual Policy

The Company does not accrue interest on (1) any loan upon which a default of principal or interest has existed for a period of 90 days or over unless the collateral margin or guarantor support are such that full collection of principal and interest are not in doubt, and an orderly plan for collection is in process; and (2) any other loan for which it is expected full collection of principal and interest is not probable.

A nonaccrual loan may be restored to an accrual status when none of its principal and interest is past due and unpaid or otherwise becomes well secured and in the process of collection and when prospects for future contractual payments are no longer in doubt. With the exception of a formal debt forgiveness agreement, no loan which has had principal charged-off shall be restored to accrual status unless the charged-off principal has been recovered.

Nonperforming and Restructured Assets

Nonaccrual loans, accruing loans past due more than 90 days, and restructured loans are shown in the table below. Had nonaccrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $860,000 for the nine months ended September 30, 2011.

The following is a summary of nonperforming and restructured assets:

	September 30,			December 31,			September 30,
	2011			2010			2010
	(Dollars in thousands)
Past due over 90 days and still accruing	$	1,413		$	1,096		$	563
Nonaccrual		24,088			26,701			25,684
Other acquired loans covered by escrow		4,951			—			—
Restructured		1,059			294			378
Total nonperforming and restructured loans		31,511			28,091			26,625
Other real estate owned and repossessed assets		16,723			23,179			21,499
Total nonperforming and restructured assets	$	48,234		$	51,270		$	48,124
Nonperforming and restructured loans to total loans		1.06	%		1.00	%		0.97	%
Nonperforming and restructured assets to total assets		0.88	%		1.01	%		1.05	%

The other acquired loans covered by escrow listed above are a part of the loan portfolio of 1^st Bank Oklahoma that were acquired in the third quarter of 2011 and are covered by an escrow agreement whereby a portion of the purchase price was set aside to reimburse the Company for potential future losses. These loans were recorded at fair value at the acquisition date and were classified as nonperforming loans at September 30, 2011. The Company is still evaluating the loans and estimates that a substantial portion of the above amount may ultimately be reclassified to performing status.

Loans are segregated into classes based upon the nature of the collateral and the borrower. These classes are used to estimate the credit risk component in the allowance for loan losses.

The following table is a summary of amounts included in nonaccrual loans, segregated by class of loans. Residential real estate refers to one-to-four family real estate.

	As of September 30, 2011
	(Dollars in thousands)
Non-residential real estate	$	8,671
Residential real estate		5,871
Non-consumer non-real estate		1,286
Consumer non-real estate		180
Other loans		3,794
Acquired loans		4,286
Total	$	24,088

The following table presents an age analysis of past due loans, segregated by class of loans:

	Age Analysis of Past Due Receivables As of September 30, 2011
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(Dollars in thousands)
Non-residential real estate	$	2,269	$	542	$	2,811	$	1,026,738	$	1,029,549	$	1
Residential real estate		4,462		1,723		6,185		689,731		695,916		225
Non-consumer non-real estate		2,077		374		2,451		690,059		692,510		149
Consumer non-real estate		2,594		354		2,948		198,684		201,632		310
Other loans		2,749		3,492		6,241		152,302		158,543		108
Acquired loans		1,108		1,913		3,021		202,943		205,964		620
Total	$	15,259	$	8,398	$	23,657	$	2,960,457	$	2,984,114	$	1,413

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect the full amount of scheduled principal and interest payments in accordance with the original contractual terms of the loan agreement. If a loan is impaired, a specific valuation allowance may be allocated if necessary so that the loan is reported net at the present value of future cash flows using the loan's existing rate or the fair value of collateral if repayment is expected solely from the collateral. When it is not deemed necessary to allocate a specific valuation allowance to an impaired loan, the loan nevertheless has an allowance based on a historically adequate percentage determined for the class of loans.

The following table presents impaired loans, segregated by class of loans as of September 30, 2011. No interest income was recognized on impaired loans subsequent to their classification as impaired.

	Unpaid Principal Balance		Recorded Investment with Allowance		Related Allowance		Average Recorded Investment
	(Dollars in thousands)
Non-residential real estate	$	9,285	$	8,671	$	978	$	9,835
Residential real estate		6,520		5,871		1,520		6,351
Non-consumer non-real estate		1,584		1,286		358		1,676
Consumer non-real estate		215		180		47		204
Other loans		3,888		3,794		342		4,296
Acquired loans		5,609		4,286		100		2,229
Total	$	27,101	$	24,088	$	3,345	$	24,591

Credit Risk Monitoring and Loan Grading

The Company employs several means to monitor the risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience, and economic conditions.

Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. The loan grades used by the Company are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.

The general characteristics of the risk grades are as follows:

Grade 1 – Acceptable—Loans graded 1 represent reasonable and satisfactory credit risk which requires normal attention and supervision. Capacity to repay through primary and/or secondary sources is not questioned.

Grade 2 – Acceptable—Increased Attention—This category consists of loans that have credit characteristics deserving management's close attention. These potential weaknesses could result in deterioration of the repayment prospects for the loan or the Bank's credit position at some future date. Such credit characteristics include loans to highly leveraged borrowers in cyclical industries, adverse financial trends which could potentially weaken repayment capacity, loans that have fundamental structure deficiencies, loans lacking secondary sources of repayment where prudent, and loans with deficiencies in essential documentation, including financial information.

Grade 3—Loans with Problem Potential—This category consists of performing loans which are considered to exhibit problem potential. Loans in this category would generally include, but not be limited to, borrowers with a weakened financial condition or poor performance history, past dues, loans restructured to reduce payments to an amount that is below market standards and/or loans with severe documentation problems. In general, these loans have no identifiable loss potential in the near future, however, the possibility of a loss developing is heightened.

Grade 4—Problem Loans/Assets—Nonperforming—This category consists of nonperforming loans/assets which are considered to be problems. Nonperforming loans are described as being 90 days and over past due and still accruing, and loans that are nonaccrual. Other nonperforming assets in this category will be other real estate and repossessed assets which formerly secured loans.

Grade 5—Loss Potential—This category consists of loans/assets which are considered to possess loss potential. While the loss may not occur in the current year, management expects that loans/assets in this category will ultimately result in a loss, unless substantial improvement occurs.

Grade 6—Charge Off—This category consists of loans that are considered uncollectible and other assets with little or no value.

The following table presents internal loan grading by class of loans as of September 30, 2011:

	Grade
	1		2		3		4		5		Total
	(Dollars in thousands)
Non-residential real estate	$	881,622	$	107,228	$	32,223	$	8,476	$	—	$	1,029,549
Residential real estate		602,621		72,095		14,805		6,395		—		695,916
Non-consumer non-real estate		620,123		63,375		7,881		1,131		—		692,510
Consumer non-real estate		189,895		8,950		2,380		407		—		201,632
Other loans		151,336		2,608		1,874		2,725		—		158,543
Acquired loans		151,103		35,609		8,264		10,891		97		205,964
Total	$	2,596,700	$	289,865	$	67,427	$	30,025	$	97	$	2,984,114

Allowance for Loan Losses Methodology

The allowance for loan losses ("ALLL") is determined by a calculation based on segmenting the loans into the following categories: (1) adversely graded loans [Grades 3, 4, and 5] that have a specific reserve allocation; (2) loans without a specific reserve segmented by loans secured by real estate other than 1-4 family residential property, loans secured by 1-4 family residential property, commercial, industrial, and agricultural loans not secured by real estate, consumer purpose loans not secured by real estate, and loans over 60 days past due that are not otherwise Grade 3, 4, or 5; (3) Grade 2 loans; (4) Grade 1 loans; and (5) loans held for sale which are excluded.

The ALLL is calculated as the sum of the following: (1) the total dollar amount of specific reserve allocations; (2) the dollar amount derived by multiplying each segment of adversely graded loans without a specific reserve allocation times its respective reserve factor; (3) the dollar amount derived by multiplying Grade 2 loans and Grade 1 loans (less exclusions) times the respective reserve factor; and (4) other adjustments as deemed appropriate and documented by the Senior Loan Committee or Board of Directors.

The amount of the ALLL is an estimate based upon factors which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated ALLL in the near term.

Changes in the ALLL are summarized as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	37,092		$	37,002		$	35,745		$	36,383
Charge-offs		(629	)		(1,942	)		(2,364	)		(3,350	)
Recoveries		108			152			389			412
Net charge-offs		(521	)		(1,790	)		(1,975	)		(2,938	)
Provisions charged to operations		885			469			3,686			2,236
Balance at end of period	$	37,456		$	35,681		$	37,456		$	35,681

The following table details activity in the ALLL by class of loans for the quarter presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Non-Residential Real Estate			Residential Real Estate			Non- Consumer Non-Real Estate			Consumer Non-Real Estate			Other Loans			Acquired Loans			Total
	(Dollars in thousands)
Three Months Ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	13,651		$	9,380		$	9,334		$	2,237		$	1 ,712		$	778		$	37,092
Charge-offs		(67	)		(21	)		(210	)		(72	)		(121	)		(138	)		(629	)
Recoveries		7			20			46			24			2			9			108
Net charge-offs		(60	)		(1	)		(164	)		(48	)		(119	)		(129	)		(521	)
Provisions charged to operations		290			472			(460	)		136			156			291			885
Balance at September 30, 2011	$	13,881		$	9,851		$	8,710		$	2,325		$	1,749		$	940		$	37,456
Nine Months Ended September 30, 2011
Allowance for credit losses:
Beginning balance	$	13,142		$	8,957		$	9,587		$	2,301		$	1,758		$	—		$	35,745
Charge-offs		(336	)		(522	)		(394	)		(400	)		(243	)		(469	)		(2,364	)
Recoveries		23			115			130			92			9			20			389
Net charge-offs		(313	)		(407	)		(264	)		(308	)		(234	)		(449	)		(1,975	)
Provisions charged to operations		1,052			1,301			(613	)		332			225			1,389			3,686
Balance at September 30, 2011	$	13,881		$	9,851		$	8,710		$	2,325		$	1,749		$	940		$	37,456
Ending balances:
Individually evaluated for impairment	$	3,351		$	2,681		$	1,528		$	318		$	232		$	—		$	8,110
Collectively evaluated for impairment		10,530			7,170			7,182			2,007			1,517			940			29,346
Balance at September 30, 2011	$	13,881		$	9,851		$	8,710		$	2,325		$	1,749		$	940		$	37,456
Loans-Ending balances:
Individually evaluated for impairment	$	40,700		$	21,200		$	9,012		$	2,787		$	257		$	—		$	73,956
Collectively evaluated for impairment		988,849			674,716			683,498			198,845			158,286			186,712			2,890,906
Loans acquired with deteriorated credit quality		—			—			—			—			—			19,252			19,252
Balance at September 30, 2011	$	1,029,549		$	695,916		$	692,510		$	201,632		$	158,543		$	205,964		$	2,984,114

Transfers from Loans

Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow.

Transfers from loans to other real estate owned and repossessed assets are summarized as follows:

	Nine Months Ended September 30,
	2011		2010
	(Dollars in thousands)
Other real estate owned	$	3,831	$	15,543
Repossessed assets		1,096		816
Total	$	4,927	$	16,359