(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:

	December 31,
	2014					2013
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and financial:
Commercial and industrial	$	745,106		19.30	%	$	605,672		17.88	%
Oil & gas production and equipment		104,940		2.72			96,907		2.86
Agriculture		132,830		3.44			111,323		3.29
State and political subdivisions:
Taxable		20,431		0.53			10,217		0.30
Tax-exempt		20,952		0.54			11,073		0.33
Real estate:
Construction		356,621		9.24			284,808		8.41
Farmland		149,507		3.87			132,512		3.91
One to four family residences		775,795		20.09			703,903		20.78
Multifamily residential properties		66,766		1.73			60,080		1.77
Commercial		1,191,477		30.86			1,097,484		32.40
Consumer		267,179		6.92			250,588		7.40
Other (not classified above)		29,227		0.76			22,579		0.67
Total loans	$	3,860,831		100.00	%	$	3,387,146		100.00	%
Loans held for sale (included above)	$	9,433				$	6,469

The Company’s loans are mostly to customers within Oklahoma and over 65% 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.

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. As a lender, the Company faces the risk that a significant number of its borrowers will fail to pay their loans when due. If borrower defaults cause losses in excess of the Company’s allowance for loan losses, it could have an adverse effect on the Company’s business, profitability, and financial condition.

Loans secured by real estate, including farmland, multifamily, commercial, one to four family residential and construction and development loans, have been a large portion of the Company’s loan portfolio. The Company is subject to risk of future market fluctuations in property values relating to these loans. In addition, multi-family and commercial real estate (“CRE”) loans represent the majority of the Company’s real estate loans outstanding, a decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of the Company’s borrowers to repay their loans on a timely basis, which could have a negative impact on the Company’s financial condition and results of operation. The Company attempts to manage this risk through rigorous loan underwriting standards.

During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage.

Nonperforming and Restructured Assets

The following is a summary of nonperforming and restructured assets:

	December 31,
	2014			2013
	(Dollars in thousands)
Past due 90 days or more and still accruing	$	1,135		$	1,179
Nonaccrual		16,410			14,390
Restructured		16,515			17,624
Total nonperforming and restructured loans		34,060			33,193
Other real estate owned and repossessed assets		8,079			8,386
Total nonperforming and restructured assets	$	42,139		$	41,579
Nonperforming and restructured loans to total loans		0.88	%		0.98	%
Nonperforming and restructured assets to total assets		0.64	%		0.69	%

Nonaccrual loans, accruing loans past due 90 days or more, and restructured loans are shown in the table above. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.2 million in 2014, $1.5 million in 2013 and $1.3 million in 2012.

Restructured loans consisted primarily of one loan restructured to defer principal payments. The loan was evaluated by management and determined to be well collateralized. Additionally, none of the concessions granted involved a principal reduction or a change from the current market rate of interest. The collateral value will be monitored periodically to evaluate possible impairment. The Company charges interest on principal balances outstanding during deferral periods. As a result, the current and future financial effects of the recorded balance of loans considered to be restructured were not considered to be material.

Loans are segregated into classes based upon the nature of the collateral and the borrower. These classes are used to estimate 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.

	December 31,
	2014		2013
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	296	$	595
Non-residential real estate other		5,126		6,270
Residential real estate permanent mortgage		681		718
Residential real estate all other		1,796		1,521
Commercial and financial:
Non-consumer non-real estate		1,556		1,192
Consumer non-real estate		250		176
Other loans		1,659		1,407
Acquired loans		5,046		2,511
Total	$	16,410	$	14,390

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

	Age Analysis of Past Due Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(Dollars in thousands)
As of December 31, 2014
Real estate:
Non-residential real estate owner occupied	$	635	$	—	$	269	$	904	$	482,731	$	483,635	$	70
Non-residential real estate other		377		317		825		1,519		952,484		954,003		—
Residential real estate permanent mortgage		2,010		758		544		3,312		304,267		307,579		172
Residential real estate all other		1,820		194		1,488		3,502		633,586		637,088		387
Commercial and financial:
Non-consumer non-real estate		841		71		793		1,705		965,002		966,707		24
Consumer non-real estate		1,914		711		330		2,955		244,810		247,765		215
Other loans		1,858		916		741		3,515		158,902		162,417		—
Acquired loans		1,815		997		1,304		4,116		97,521		101,637		267
Total	$	11,270	$	3,964	$	6,294	$	21,528	$	3,839,303	$	3,860,831	$	1,135
As of December 31, 2013
Real estate:
Non-residential real estate owner occupied	$	411	$	—	$	316	$	727	$	454,305	$	455,032	$	96
Non-residential real estate other		5,391		269		1,543		7,203		856,179		863,382		2
Residential real estate permanent mortgage		2,000		566		789		3,355		262,625		265,980		275
Residential real estate all other		2,159		211		1,272		3,642		564,231		567,873		184
Commercial and financial:
Non-consumer non-real estate		1,122		118		1,047		2,287		793,028		795,315		125
Consumer non-real estate		1,761		667		392		2,820		225,515		228,335		279
Other loans		1,799		763		1,244		3,806		141,550		145,356		—
Acquired loans		1,491		310		593		2,394		63,479		65,873		218
Total	$	16,134	$	2,904	$	7,196	$	26,234	$	3,360,912	$	3,387,146	$	1,179

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 of allowance for loss, 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.

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

	Impaired Loans
	Unpaid Principal Balance		Recorded Investment with Allowance		Related Allowance		Average Recorded Investment
	(Dollars in thousands)
As of December 31, 2014
Real estate:
Non-residential real estate owner occupied	$	521	$	448	$	15	$	453
Non-residential real estate other		23,154		21,164		1,364		21,522
Residential real estate permanent mortgage		1,095		880		85		1,042
Residential real estate all other		2,480		2,270		299		2,273
Commercial and financial:
Non-consumer non-real estate		1,895		1,580		431		1,646
Consumer non-real estate		664		648		138		602
Other loans		2,101		1,659		228		1,512
Acquired loans		10,933		7,708		—		8,082
Total	$	42,843	$	36,357	$	2,560	$	37,132
As of December 31, 2013
Real estate:
Non-residential real estate owner occupied	$	877	$	752	$	28	$	881
Non-residential real estate other		24,964		23,351		2,161		23,816
Residential real estate permanent mortgage		1,253		1,025		58		1,170
Residential real estate all other		2,214		1,803		361		1,857
Commercial and financial:
Non-consumer non-real estate		1,801		1,459		388		1,553
Consumer non-real estate		628		611		139		455
Other loans		1,545		1,464		219		1,602
Acquired loans		9,848		7,861		124		7,928
Total	$	43,130	$	38,326	$	3,478	$	39,262

Credit Risk Monitoring and Loan Grading

The Company considers various factors to monitor the credit 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.

An internal risk grading system is used to indicate the credit risk of loans. 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. The government guaranteed portion of Small Business Administration (“SBA”) loans is excluded.

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:

	Internal Loan Grading
	Grade
	1		2		3		4		5		Total
	(Dollars in thousands)
As of December 31, 2014
Real estate:
Non-residential real estate owner occupied	$	402,706	$	75,555	$	5,008	$	366	$	—	$	483,635
Non-residential real estate other		795,209		133,542		20,126		5,126		—		954,003
Residential real estate permanent mortgage		272,411		27,855		6,369		944		—		307,579
Residential real estate all other		529,555		99,214		6,146		2,173		—		637,088
Commercial and financial:
Non-consumer non-real estate		821,094		117,457		26,550		1,606		—		966,707
Consumer non-real estate		233,424		12,229		1,548		564		—		247,765
Other loans		157,191		4,261		601		173		191		162,417
Acquired loans		46,465		36,951		12,651		5,206		364		101,637
Total	$	3,258,055	$	507,064	$	78,999	$	16,158	$	555	$	3,860,831
As of December 31, 2013
Real estate:
Non-residential real estate owner occupied	$	382,798	$	66,139	$	5,446	$	649	$	—	$	455,032
Non-residential real estate other		711,081		125,617		20,309		6,375		—		863,382
Residential real estate permanent mortgage		233,924		24,882		6,081		1,093		—		265,980
Residential real estate all other		475,421		82,571		8,238		1,643		—		567,873
Commercial and financial:
Non-consumer non-real estate		691,772		97,812		4,462		1,269		—		795,315
Consumer non-real estate		214,153		11,819		1,931		431		1		228,335
Other loans		141,787		2,558		772		239		—		145,356
Acquired loans		47,220		11,980		3,766		2,907		—		65,873
Total	$	2,898,156	$	423,378	$	51,005	$	14,606	$	1	$	3,387,146

Allowance for Loan Losses Methodology

The allowance for loan losses (“ALL”) 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 ALL 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 certain 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 ALL 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 ALL in the near term.

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

	ALL
	Balance at beginning of period		Charge- offs			Recoveries		Net charge- offs			Provisions charged to operations			Balance at end of period
	(Dollars in thousands)
As of December 31, 2014
Real estate:
Non-residential real estate owner occupied	$	4,827	$	(42	)	$	102	$	60		$	(481	)	$	4,406
Non-residential real estate other		11,026		(29	)		49		20			(1,430	)		9,616
Residential real estate permanent mortgage		2,825		(207	)		78		(129	)		252			2,948
Residential real estate all other		6,708		(171	)		32		(139	)		(300	)		6,269
Commercial and financial:
Non-consumer non-real estate		8,977		(564	)		70		(494	)		4,288			12,771
Consumer non-real estate		2,556		(687	)		203		(484	)		332			2,404
Other loans		1,991		(351	)		149		(202	)		570			2,359
Acquired loans		124		(568	)		719		151			(159	)		116
Total	$	39,034	$	(2,619	)	$	1,402	$	(1,217	)	$	3,072		$	40,889
As of December 31, 2013
Real estate:
Non-residential real estate owner occupied	$	5,104	$	(3	)	$	20	$	17		$	(294	)	$	4,827
Non-residential real estate other		9,865		(19	)		12		(7	)		1,168			11,026
Residential real estate permanent mortgage		2,781		(162	)		32		(130	)		174			2,825
Residential real estate all other		7,034		(209	)		33		(176	)		(150	)		6,708
Commercial and financial:
Non-consumer non-real estate		9,385		(217	)		175		(42	)		(366	)		8,977
Consumer non-real estate		2,451		(597	)		225		(372	)		477			2,556
Other loans		1,885		(300	)		75		(225	)		331			1,991
Acquired loans		220		(53	)		39		(14	)		(82	)		124
Total	$	38,725	$	(1,560	)	$	611	$	(949	)	$	1,258		$	39,034

The following table details the amount of ALL by class of loans for the period presented, on the basis of the impairment methodology used by the Company.

	December 31, 2014				December 31, 2013
	(Dollars in thousands)
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
Real estate:
Non-residential real estate owner occupied	$	202	$	4,204	$	231	$	4,596
Non-residential real estate other		1,518		8,098		2,449		8,577
Residential real estate permanent mortgage		407		2,541		243		2,582
Residential real estate all other		743		5,526		994		5,714
Commercial and financial:
Non-consumer non-real estate		4,671		8,100		966		8,011
Consumer non-real estate		372		2,032		334		2,222
Other loans		214		2,145		252		1,739
Acquired loans		—		116		—		124
Total	$	8,127	$	32,762	$	5,469	$	33,565

The following table details the loans outstanding by class of loans for the period presented, on the basis of the impairment methodology used by the Company.

	Loans
	December 31, 2014						December 31, 2013
	(Dollars in thousands)
	Individually evaluated for impairment		Collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Individually evaluated for impairment		Collectively evaluated for impairment		Loans acquired with deteriorated credit quality
Real estate:
Non-residential real estate owner occupied	$	5,374	$	478,261	$	—	$	6,095	$	448,937	$	—
Non-residential real estate other		25,251		928,752		—		26,684		836,698		—
Residential real estate permanent mortgage		7,313		300,266		—		7,174		258,806		—
Residential real estate all other		8,319		628,769		—		9,881		557,992		—
Commercial and financial:
Non-consumer non-real estate		28,156		938,551		—		5,731		789,584		—
Consumer non-real estate		2,112		245,653		—		2,362		225,972		—
Other loans		233		162,184		—		317		145,039		—
Acquired loans		—		83,416		18,221		—		59,200		6,674
Total	$	76,758	$	3,765,852	$	18,221	$	58,244	$	3,322,228	$	6,674

The following table is a summary of amounts included in the ALL for impaired loans with specific reserves and the recorded balance of the related loans. No material amounts of interest income were collected on impaired loans with specific reserves for 2014, 2013 or 2012.

	Year Ended December 31,
	2014		2013		2012
	(Dollars in thousands)
Allowance for loss on impaired loans	$	1,559	$	1,578	$	2,170
Recorded balance of impaired loans		3,673		5,283		6,185
Average recorded investment		4,478		5,734		8,416

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 during the periods presented are summarized as follows:

	Year Ended December 31,
	2014		2013		2012
	(Dollars in thousands)
Other real estate owned	$	3,573	$	1,710	$	2,543
Repossessed assets		1,209		1,171		1,034
Total	$	4,782	$	2,881	$	3,577

Related Party Loans

The Company has made loans in the ordinary course of business to the executive officers and directors of the Company and to certain affiliates of these executive officers and directors. Management believes that all such loans were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not represent more than a normal risk of collectability or present other unfavorable features. A summary of these loans is as follows:

Year Ended December 31,	Balance Beginning of the Period			Additions		Collections/ Terminations			Balance End of the Period
			(Dollars in thousands)
2014	$	27,134		$	22,521	$	(24,636	)	$	25,019
2013		29,030			11,979		(13,875	)		27,134
2012		25,264			24,706		(20,940	)		29,030