Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2019

(4)	LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:

	June 30, 2019					December 31, 2018
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and financial:
Commercial and industrial	$	1,062,527		20.86	%	$	1,032,787		20.76	%
Oil & gas production and equipment		122,268		2.40			94,729		1.90
Agriculture		130,957		2.57			136,313		2.74
State and political subdivisions:
Taxable		74,596		1.46			76,211		1.53
Tax-exempt		51,114		1.00			48,415		0.97
Real estate:
Construction		450,525		8.84			451,224		9.07
Farmland		227,635		4.47			219,241		4.41
One to four family residences		990,377		19.44			979,170		19.68
Multifamily residential properties		68,743		1.35			65,949		1.33
Commercial		1,525,064		29.94			1,506,937		30.28
Consumer		345,783		6.79			328,069		6.59
Other (not classified above)		44,814		0.88			36,931		0.74
Total loans	$	5,094,403		100.00	%	$	4,975,976		100.00	%

The Company’s loans are mostly to customers within Oklahoma and approximately 64% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual and related 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.

The Company’s commercial and industrial loan category includes a small percentage of loans to companies that provide ancillary services to the oil and gas industry, such as transportation, preparation contractors and equipment manufacturers. The balance of these loans was approximately $74 million at June 30, 2019 and approximately $60 million at December 31, 2018.

Accounting policies related to appraisals, nonaccruals and charge-offs are disclosed in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Nonperforming and Restructured Assets

The following is a summary of nonperforming and restructured assets:

	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Past due 90 days or more and still accruing	$	2,663	$	1,916
Nonaccrual		17,998		22,603
Restructured		16,486		13,188
Total nonperforming and restructured loans		37,147		37,707
Other real estate owned and repossessed assets		7,004		6,873
Total nonperforming and restructured assets	$	44,151	$	44,580

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.0 million for the six months ended June 30, 2019 and approximately $1.1 million for the six months ended June 30, 2018.

The Company charges interest on principal balances outstanding on restructured loans during deferral periods. 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.

	June 30, 2019		December 31, 2018
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	1,127	$	838
Non-residential real estate other		674		187
Residential real estate permanent mortgage		1,585		954
Residential real estate all other		5,327		5,488
Commercial and financial:
Non-consumer non-real estate		2,958		5,682
Consumer non-real estate		394		437
Other loans		272		490
Acquired loans		5,661		8,527
Total	$	17,998	$	22,603

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. 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 June 30, 2019
Real estate:
Non-residential real estate owner occupied	$	4,203	$	852	$	536	$	5,591	$	649,600	$	655,191	$	117
Non-residential real estate other		1,088		—		325		1,413		1,179,092		1,180,505		177
Residential real estate permanent mortgage		2,583		760		986		4,329		330,046		334,375		384
Residential real estate all other		2,218		340		4,908		7,466		849,448		856,914		150
Commercial and financial:
Non-consumer non-real estate		1,652		918		2,099		4,669		1,360,458		1,365,127		454
Consumer non-real estate		1,846		540		470		2,856		342,684		345,540		232
Other loans		220		1,083		183		1,486		142,387		143,873		183
Acquired loans		2,583		882		3,592		7,057		205,821		212,878		966
Total	$	16,393	$	5,375	$	13,099	$	34,867	$	5,059,536	$	5,094,403	$	2,663
As of December 31, 2018
Real estate:
Non-residential real estate owner occupied	$	5,114	$	810	$	43	$	5,967	$	620,654	$	626,621	$	—
Non-residential real estate other		2,772		32		114		2,918		1,143,210		1,146,128		—
Residential real estate permanent mortgage		2,448		653		693		3,794		324,908		328,702		430
Residential real estate all other		1,728		292		2,799		4,819		822,685		827,504		612
Commercial and financial:
Non-consumer non-real estate		3,620		702		833		5,155		1,278,499		1,283,654		282
Consumer non-real estate		1,991		565		559		3,115		323,747		326,862		325
Other loans		322		158		178		658		141,251		141,909		—
Acquired loans		5,240		1,669		4,936		11,845		282,751		294,596		267
Total	$	23,235	$	4,881	$	10,155	$	38,271	$	4,937,705	$	4,975,976	$	1,916

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. During the period ended June 30, 2019 and June 30, 2018, 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 June 30, 2019
Real estate:
Non-residential real estate owner occupied	$	8,051	$	7,933	$	239	$	7,662
Non-residential real estate other		1,687		1,422		190		1,615
Residential real estate permanent mortgage		2,427		2,151		183		1,964
Residential real estate all other		6,629		6,350		3,081		6,529
Commercial and financial:
Non-consumer non-real estate		18,389		10,842		931		10,944
Consumer non-real estate		781		672		149		691
Other loans		659		455		17		322
Acquired loans		9,553		7,244		2		8,863
Total	$	48,176	$	37,069	$	4,792	$	38,590

As of December 31, 2018
Real estate:
Non-residential real estate owner occupied	$	7,126	$	6,933	$	202	$	7,739
Non-residential real estate other		949		757		50		6,057
Residential real estate permanent mortgage		1,789		1,545		127		1,650
Residential real estate all other		7,177		6,862		2,433		7,154
Commercial and financial:
Non-consumer non-real estate		18,507		10,977		881		12,140
Consumer non-real estate		928		829		131		846
Other loans		710		490		35		481
Acquired loans		12,846		9,864		2		11,050
Total	$	50,032	$	38,257	$	3,861	$	47,117

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 disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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 June 30, 2019
Real estate:
Non-residential real estate owner occupied	$	457,211	$	171,239	$	25,491	$	1,250	$	—	$	655,191
Non-residential real estate other		950,058		202,397		27,291		759		—		1,180,505
Residential real estate permanent mortgage		281,593		43,479		7,242		2,061		—		334,375
Residential real estate all other		669,269		167,518		14,375		5,752		—		856,914
Commercial and financial:
Non-consumer non-real estate		1,077,429		252,175		33,630		1,893		—		1,365,127
Consumer non-real estate		320,278		21,955		2,707		565		35		345,540
Other loans		138,414		4,160		1,289		10		—		143,873
Acquired loans		124,437		71,790		9,751		6,603		297		212,878
Total	$	4,018,689	$	934,713	$	121,776	$	18,893	$	332	$	5,094,403

As of December 31, 2018
Real estate:
Non-residential real estate owner occupied	$	451,059	$	157,715	$	16,949	$	898	$	—	$	626,621
Non-residential real estate other		932,454		188,341		25,146		187		—		1,146,128
Residential real estate permanent mortgage		279,870		39,806		7,401		1,625		—		328,702
Residential real estate all other		644,217		162,003		15,232		6,052		—		827,504
Commercial and financial:
Non-consumer non-real estate		1,000,089		264,134		15,128		4,303		—		1,283,654
Consumer non-real estate		302,217		21,600		2,255		790		—		326,862
Other loans		136,132		5,542		116		119		—		141,909
Acquired loans		156,008		109,075		20,884		8,284		345		294,596
Total	$	3,902,046	$	948,216	$	103,111	$	22,258	$	345	$	4,975,976

Allowance for Loan Losses Methodology

The allowance for loan losses (“ALL”) methodology is disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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)
Three Months Ended June 30, 2019
Real estate:
Non-residential real estate owner occupied	$	6,655	$	(3	)	$	—	$	(3	)	$	235		$	6,887
Non-residential real estate other		11,362		(16	)		1		(15	)		(60	)		11,287
Residential real estate permanent mortgage		3,261		(4	)		4		—			64			3,325
Residential real estate all other		11,046		(143	)		25		(118	)		793			11,721
Commercial and financial:
Non-consumer non-real estate		14,409		(87	)		85		(2	)		825			15,232
Consumer non-real estate		3,072		(162	)		38		(124	)		286			3,234
Other loans		2,408		—			43		43			(2	)		2,449
Acquired loans		702		(170	)		149		(21	)		292			973
Total	$	52,915	$	(585	)	$	345	$	(240	)	$	2,433		$	55,108


Six Months Ended June 30, 2019
Real estate:
Non-residential real estate owner occupied	$	6,328	$	(9	)	$	1	$	(8	)	$	567		$	6,887
Non-residential real estate other		11,027		(22	)		1		(21	)		281			11,287
Residential real estate permanent mortgage		3,261		(67	)		9		(58	)		122			3,325
Residential real estate all other		10,673		(195	)		27		(168	)		1,216			11,721
Commercial and financial:
Non-consumer non-real estate		13,151		(157	)		152		(5	)		2,086			15,232
Consumer non-real estate		3,065		(282	)		109		(173	)		342			3,234
Other loans		2,423		—			78		78			(52	)		2,449
Acquired loans		1,461		(196	)		153		(43	)		(445	)		973
Total	$	51,389	$	(928	)	$	530	$	(398	)	$	4,117		$	55,108

	ALL
	Balance at beginning of period		Charge- offs			Recoveries		Net charge-offs			Provisions charged to operations			Balance at end of period
	(Dollars in thousands)
Three Months Ended June 30, 2018
Real estate:
Non-residential real estate owner occupied	$	6,650	$	—		$	—	$	—		$	(224	)	$	6,426
Non-residential real estate other		10,548		—			—		—			157			10,705
Residential real estate permanent mortgage		3,281		(6	)		23		17			9			3,307
Residential real estate all other		9,831		(151	)		3		(148	)		440			10,123
Commercial and financial:
Non-consumer non-real estate		14,785		(153	)		10		(143	)		427			15,069
Consumer non-real estate		2,699		(194	)		44		(150	)		290			2,839
Other loans		2,336		(2	)		12		10			(18	)		2,328
Acquired loans		1,420		(166	)		5		(161	)		144			1,403
Total	$	51,550	$	(672	)	$	97	$	(575	)	$	1,225		$	52,200


Six Months Ended June 30, 2018
Real estate:
Non-residential real estate owner occupied	$	6,195	$	(19	)	$	1	$	(18	)	$	249		$	6,426
Non-residential real estate other		10,519		(1	)		39		38			148			10,705
Residential real estate permanent mortgage		3,226		(62	)		26		(36	)		117			3,307
Residential real estate all other		9,672		(241	)		6		(235	)		686			10,123
Commercial and financial:
Non-consumer non-real estate		15,334		(309	)		23		(286	)		21			15,069
Consumer non-real estate		2,793		(444	)		124		(320	)		366			2,839
Other loans		2,481		(2	)		24		22			(175	)		2,328
Acquired loans		1,446		(193	)		23		(170	)		127			1,403
Total	$	51,666	$	(1,271	)	$	266	$	(1,005	)	$	1,539		$	52,200

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

	ALL
	June 30, 2019				December 31, 2018

	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	1,003	$	5,884	$	669	$	5,659
Non-residential real estate other		1,055		10,232		1,119		9,908
Residential real estate permanent mortgage		508		2,817		505		2,756
Residential real estate all other		4,189		7,532		3,413		7,260
Commercial and financial:
Non-consumer non-real estate		3,679		11,553		2,114		11,037
Consumer non-real estate		427		2,807		374		2,691
Other loans		10		2,439		65		2,358
Acquired loans		—		973		—		1,461
Total	$	10,871	$	44,237	$	8,259	$	43,130

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
	June 30, 2019						December 31, 2018
	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
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	26,741	$	628,450	$	—	$	17,846	$	608,775	$	—
Non-residential real estate other		28,050		1,152,455		—		25,333		1,120,795		—
Residential real estate permanent mortgage		9,303		325,072		—		9,026		319,676		—
Residential real estate all other		20,127		836,787		—		21,285		806,219		—
Commercial and financial:
Non-consumer non-real estate		35,523		1,329,604		—		19,432		1,264,222		—
Consumer non-real estate		3,304		342,236		—		3,093		323,769		—
Other loans		10		143,863		—		209		141,700		—
Acquired loans		14,399		196,226		2,253		22,132		265,084		7,380
Total	$	137,457	$	4,954,693	$	2,253	$	118,356	$	4,850,240	$	7,380

Non-Cash Transfers from Loans and Premises and Equipment

Transfers from loans and premises and equipment to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Such transfers during the periods presented, are summarized as follows:

	Six Months Ended June 30,
	2019		2018
	(Dollars in thousands)
Other real estate owned	$	2,010	$	1,123
Repossessed assets		627		550
Total	$	2,637	$	1,673