Note 5: Loans and Allowance for Loan Losses

We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, Kansas, and Colorado. Our commercial lending operations are concentrated in Oklahoma City, Dallas, Tulsa, and other metropolitan markets in Texas, Kansas, Oklahoma, and Colorado. As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets. Please see “Note 20: Operating Segments” for more detail regarding loans by market. At December 31, 2016 and 2015, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government.

Our loan classifications were as follows:



(Dollars in thousands)	At December 31, 2016		At December 31, 2015
Real estate mortgage:
Commercial	$	882,071	$	938,462
One-to-four family residential		199,123		161,958
Real estate construction:
Commercial		199,113		129,070
One-to-four family residential		20,946		21,337
Commercial		556,248		507,173
Installment and consumer		19,631		21,429
Total loans, including held for sale		1,877,132		1,779,429
Less allowance for loan losses		(27,546)		(26,106)
Total loans, net	$	1,849,586	$	1,753,323

Concentrations of Credit. At December 31, 2016, $608.6 million, or 32%, and $423.8 million, or 23%, of our loans consisted of loans to individuals and businesses in the real estate and healthcare industries, respectively. We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans.

Loans Held for Sale. We had loans which were held for sale of $4.4 million and $7.5 million at December 31, 2016 and 2015, respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of the one-to-four family residential loans and loan servicing rights, if not retained, are primarily sold to one investor. These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan.

Loan Servicing. We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $460.1 million and $432.3 million at December 31, 2016 and 2015, respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income.

Nonperforming / Past Due Loans. The following table shows the recorded investment in loans on nonaccrual status.



	At December 31,
(Dollars in thousands)	2016		2015
Real estate mortgage:
Commercial	$	6,471	$	3,543
One-to-four family residential		2,766		1,729
Real estate construction:
Commercial		522		562
One-to-four family residential		448		448
Commercial		5,949		13,491
Other consumer		111		85
Total nonaccrual loans	$	16,267	$	19,858

If interest on nonaccrual loans had been accrued, the interest income as reported in the accompanying Consolidated Statements of Operations would have increased by approximately $1.0 million, $0.8 million, and $0.7 million, for 2016, 2015, and 2014, respectively.

Net cumulative charge-offs against nonaccrual loans at December 31, 2016 and 2015 were $3.3 million and $6.1 million, respectively.

The following table shows the delinquency status of past due loans at the end of the respective reporting period.



			90 days and								Recorded loans
	30-89 days		greater		Total past				Total		> 90 days and
(Dollars in thousands)	past due		past due		due		Current		loans		accruing
At December 31, 2016
Real estate mortgage:
Commercial	$	24	$	6,472	$	6,496	$	875,575	$	882,071	$	-
One-to-four family residential		631		2,903		3,534		195,589		199,123		138
Real estate construction:
Commercial		-		522		522		198,591		199,113		-
One-to-four family residential		-		448		448		20,498		20,946		-
Commercial		2,530		6,142		8,672		547,576		556,248		193
Other		359		123		482		19,149		19,631		12
Total	$	3,544	$	16,610	$	20,154	$	1,856,978	$	1,877,132	$	343


At December 31, 2015
Real estate mortgage:
Commercial	$	272	$	3,992	$	4,264	$	934,198	$	938,462	$	449
One-to-four family residential		549		1,777		2,326		159,632		161,958		48
Real estate construction:
Commercial		-		493		493		128,577		129,070		-
One-to-four family residential		-		517		517		20,820		21,337		-
Commercial		278		13,491		13,769		493,404		507,173		-
Other		65		88		153		21,276		21,429		3
Total	$	1,164	$	20,358	$	21,522	$	1,757,907	$	1,779,429	$	500

Impaired Loans. The following table presents loans individually evaluated for impairment by class of loans at the end of the respective reporting period.



	With No Specific Allowance				With A Specific Allowance
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Investment		Balance		Allowance
At December 31, 2016
Commercial real estate	$	1,536	$	3,057	$	6,053	$	6,529	$	2,219
One-to-four family residential		1,188		1,535		1,593		1,698		63
Real estate construction		762		926		207		245		40
Commercial		1,032		2,861		4,963		7,480		1,346
Other		111		115		-		-		-
Total	$	4,629	$	8,494	$	12,816	$	15,952	$	3,668

At December 31, 2015
Commercial real estate	$	12,166	$	15,747	$	10,940	$	10,940	$	1,575
One-to-four family residential		1,688		2,195		185		186		11
Real estate construction		1,078		1,327		-		-		-
Commercial		4,095		5,430		9,844		15,968		2,526
Other		85		94		-		-		-
Total	$	19,112	$	24,793	$	20,969	$	27,094	$	4,112

The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2016, 2015, and 2014.



	As of and for the year ended December 31,
	2016				2015				2014
	Average				Average				Average
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Commercial real estate	$	7,394	$	750	$	25,044	$	970	$	30,257	$	968
One-to-four family residential		3,448		15		2,323		1		2,764		1
Real estate construction		1,050		14		997		-		222		-
Commercial		6,905		96		8,527		215		7,718		68
Other		52		3		51		-		16		-
Total	$	18,848	$	878	$	36,942	$	1,186	$	40,977	$	1,037

Included in interest income recognized on impaired loans are $0.9 million, $1.2 million, and $1.0 million, for December 31, 2016, 2015, and 2014, respectively.

Troubled Debt Restructurings. The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months.

When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment.

Troubled debt restructured loans outstanding as of December 31, 2016 and 2015 are as follows:



	At December 31, 2016				At December 31, 2015
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	1,118	$	475	$	19,563	$	448
One-to-four family residential		15		46		13		48
Commercial		45		3,323		659		5,796
Total	$	1,178	$	3,844	$	20,235	$	6,292

At December 31, 2016 and 2015, we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring.

Loans modified as troubled debt restructurings that occurred during the year ended December 31, 2016 and 2015 are shown in the following tables:


	For the year ended December 31,
	2016				2015
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		1	$	164		-	$	-
Commercial		1		24		1		5,511
Total		2	$	188		1	$	5,511

The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant.

As of December 31, 2016 and 2015, there were no loans modified as a troubled debt restructuring which subsequently defaulted. Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.

Credit Quality Indicators. To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings:

Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as 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. These loans are considered nonperforming.

Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of December 31, 2016 and 2015, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows:



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2016
Grade:
Pass	$	857,290	$	192,395	$	210,780	$	498,039	$	19,518	$	1,778,022
Special Mention		4,479		1,983		7,720		24,639		-		38,821
Substandard		20,302		4,745		1,559		33,175		113		59,894
Doubtful		-		-		-		395		-		395
Total	$	882,071	$	199,123	$	220,059	$	556,248	$	19,631	$	1,877,132

At December 31, 2015
Grade:
Pass	$	902,034	$	157,912	$	148,811	$	480,928	$	21,284	$	1,710,969
Special Mention		5,916		29		586		2,941		50		9,522
Substandard		30,512		4,017		1,010		18,848		95		54,482
Doubtful		-		-		-		4,456		-		4,456
Total	$	938,462	$	161,958	$	150,407	$	507,173	$	21,429	$	1,779,429

Allowance for Loan Losses. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method as of December 31, 2016, 2015 and 2014.



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2016
Balance at beginning of period	$	12,716	$	700	$	2,533	$	9,965	$	192	$	26,106
Loans charged-off		(193)		(134)		-		(6,148)		(522)		(6,997)
Recoveries		400		77		-		3,079		112		3,668
Provision (credit) for loan losses		(416)		520		969		3,162		534		4,769
Balance at end of period	$	12,507	$	1,163	$	3,502	$	10,058	$	316	$	27,546

Allowance for loan losses ending balance:
Individually evaluated for impairment	$	2,219	$	63	$	-	$	1,346	$	-	$	3,628
Collectively evaluated for impairment		10,288		1,100		3,462		8,712		316		23,878
Acquired with deteriorated credit quality		-		-		40		-		-		40
Total ending allowance balance	$	12,507	$	1,163	$	3,502	$	10,058	$	316	$	27,546

Loans receivable ending balance:
Individually evaluated for impairment	$	6,606	$	1,766	$	390	$	5,357	$	-	$	14,119
Collectively evaluated for impairment		872,997		196,123		219,015		550,615		19,631		1,858,381
Acquired with deteriorated credit quality		2,468		1,234		654		276		-		4,632
Total ending loans balance	$	882,071	$	199,123	$	220,059	$	556,248	$	19,631	$	1,877,132



	Commercial		1-4 Family		Real Estate
	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2015
Balance at beginning of period	$	13,678	$	712	$	4,159	$	9,614	$	289	$	28,452
Loans charged-off		(489)		(20)		(21)		(628)		(193)		(1,351)
Recoveries		282		558		47		1,479		205		2,571
Provision (credit) for loan losses		(755)		(550)		(1,652)		(500)		(109)		(3,566)
Balance at end of period	$	12,716	$	700	$	2,533	$	9,965	$	192	$	26,106

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	1,575	$	11	$	-	$	2,526	$	-	$	4,112
Collectively evaluated for impairment		11,141		689		2,533		7,439		192		21,994
Acquired with deteriorated credit quality		-		-		-		-		-		-
Total ending allowance balance	$	12,716	$	700	$	2,533	$	9,965	$	192	$	26,106

Loans receivable ending balance:
Individually evaluated for impairment	$	20,332	$	695	$	391	$	13,396	$	47	$	34,861
Collectively evaluated for impairment		913,242		159,672		149,344		493,026		21,370		1,736,654
Acquired with deteriorated credit quality		4,888		1,591		672		751		12		7,914
Total ending loans balance	$	938,462	$	161,958	$	150,407	$	507,173	$	21,429	$	1,779,429


	Commercial		1-4 Family		Real Estate
	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2014
Balance at beginning of period	$	18,854	$	850	$	5,523	$	10,985	$	451	$	36,663
Loans charged-off		(1,400)		(289)		(655)		(4,014)		(558)		(6,916)
Recoveries		3,733		213		-		1,119		264		5,329
Provision (credit) for loan losses		(7,509)		(62)		(709)		1,524		132		(6,624)
Balance at end of period	$	13,678	$	712	$	4,159	$	9,614	$	289	$	28,452

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	2,047	$	-	$	-	$	1,822	$	-	$	3,869
Collectively evaluated for impairment		11,631		712		4,159		7,792		289		24,583
Acquired with deteriorated credit quality		-		-		-		-		-		-
Total ending allowance balance	$	13,678	$	712	$	4,159	$	9,614	$	289	$	28,452

Loans receivable ending balance:
Individually evaluated for impairment	$	23,907	$	538	$	104	$	13,560	$	2	$	38,111
Collectively evaluated for impairment		725,635		75,598		196,905		336,818		21,953		1,356,909
Acquired with deteriorated credit quality		3,429		1,395		114		32		1		4,971
Total ending loans balance	$	752,971	$	77,531	$	197,123	$	350,410	$	21,956	$	1,399,991