Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses Categories of loans at September 30, 2019 and December 31, 2018 include: September 30, 2019 December 31, 2018 (Dollars in thousands) Commercial $ 1,312,647 $ 1,134,414 Energy 396,132 358,283 Commercial real estate 993,153 846,561 Construction and land development 527,582 440,032 Residential real estate 365,435 246,275 Equity lines of credit 22,192 20,286 Consumer installment 21,552 23,528 Gross loans 3,638,693 3,069,379 Less: Allowance for loan losses 42,995 37,826 Less: Net deferred loan fees and costs 8,901 8,632 Net loans $ 3,586,797 $ 3,022,921 The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the loan balance is not collectible. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of its ability to collect the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers unclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process and loan categories. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. The following tables summarize the activity in the allowance for loan losses by portfolio segment and disaggregated based on the Company’s impairment methodology. The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments: Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) Three months ended September 30, 2019 Allowance for loan losses Beginning balance $ 22,975 $ 7,300 $ 7,533 $ 2,602 $ 2,138 $ 155 $ 149 $ 42,852 Provision charged to expense 3,535 1,077 (249 ) 414 82 5 (14 ) 4,850 Charge-offs (1,700 ) (3,000 ) — — — — (8 ) (4,708 ) Recoveries 1 — — — — — — 1 Ending balance $ 24,811 $ 5,377 $ 7,284 $ 3,016 $ 2,220 $ 160 $ 127 $ 42,995 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) Three months ended September 30, 2018 Allowance for loan losses Beginning balance $ 11,739 $ 7,957 $ 6,584 $ 2,530 $ 1,103 $ 170 $ 114 $ 30,197 Provision charged to expense 1,102 1,184 315 137 261 4 (3 ) 3,000 Charge-offs (97 ) — — — — — — (97 ) Recoveries 439 — — — — — 1 440 Ending balance $ 13,183 $ 9,141 $ 6,899 $ 2,667 $ 1,364 $ 174 $ 112 $ 33,540 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) Nine months ended September 30, 2019 Allowance for loan losses Beginning balance $ 16,584 $ 10,262 $ 6,755 $ 2,475 $ 1,464 $ 159 $ 127 $ 37,826 Provision charged to expense 11,166 (2,461 ) 529 541 756 1 18 10,550 Charge-offs (2,954 ) (3,000 ) — — — — (19 ) (5,973 ) Recoveries 15 576 — — — — 1 592 Ending balance $ 24,811 $ 5,377 $ 7,284 $ 3,016 $ 2,220 $ 160 $ 127 $ 42,995 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) Nine months ended September 30, 2018 Allowance for loan losses Beginning balance $ 11,378 $ 7,726 $ 4,668 $ 1,200 $ 905 $ 122 $ 92 $ 26,091 Provision charged to expense 2,031 2,671 2,231 1,467 459 77 64 9,000 Charge-offs (681 ) (1,256 ) — — — (25 ) (45 ) (2,007 ) Recoveries 455 — — — — — 1 456 Ending balance $ 13,183 $ 9,141 $ 6,899 $ 2,667 $ 1,364 $ 174 $ 112 $ 33,540 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) September 30, 2019 Ending balance Individually evaluated for impairment $ 10,398 $ 854 $ 343 $ — $ 219 $ — $ — $ 11,814 Collectively evaluated for impairment $ 14,413 $ 4,523 $ 6,941 $ 3,016 $ 2,001 $ 160 $ 127 $ 31,181 Allocated to loans: Individually evaluated for impairment $ 66,162 $ 10,226 $ 16,544 $ — $ 2,537 $ — $ — $ 95,469 Collectively evaluated for impairment $ 1,246,485 $ 385,906 $ 976,609 $ 527,582 $ 362,898 $ 22,192 $ 21,552 $ 3,543,224 Ending balance $ 1,312,647 $ 396,132 $ 993,153 $ 527,582 $ 365,435 $ 22,192 $ 21,552 $ 3,638,693 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Equity Lines of Credit Consumer Installment Total (Dollars in thousands) December 31, 2018 Ending balance Individually evaluated for impairment $ 5,814 $ 3,108 $ 473 $ — $ 5 $ — $ — $ 9,400 Collectively evaluated for impairment $ 10,770 $ 7,154 $ 6,282 $ 2,475 $ 1,459 $ 159 $ 127 $ 28,426 Allocated to loans: Individually evaluated for impairment $ 78,147 16,250 $ 15,227 $ — $ 2,027 $ — $ — $ 111,651 Collectively evaluated for impairment $ 1,056,267 $ 342,033 $ 831,334 $ 440,032 $ 244,248 $ 20,286 $ 23,528 $ 2,957,728 Ending balance $ 1,134,414 $ 358,283 $ 846,561 $ 440,032 $ 246,275 $ 20,286 $ 23,528 $ 3,069,379 Credit Risk Profile The Company analyzes its loan portfolio based on an internal rating category (grades 1 - 8), portfolio segment and payment activity. These categories are utilized to develop the associated allowance for loan losses. A description of the loan grades and segments follows: Loan Grades • Pass & Watch (risk rating 1 - 4) - Considered satisfactory. Includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected. • Special Mention (risk rating 5) - Borrowers generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification. • Substandard (risk rating 6) - Credits generally exhibit a well-defined weakness(es) that jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. • Doubtful (risk rating 7) - Credits which exhibit weaknesses inherent in a substandard credit with the added characteristic that these weaknesses make collection or liquidation in full highly questionable and improbable based on existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined. • Loss (risk rating 8) - Credits which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted. Loan Portfolio Segments • Commercial - Includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. Repayment is primarily from the cash flow of a borrower’s principal business operation. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. • Energy - Includes loans to oil and natural gas customers for use in financing working capital needs, exploration and production activities, and acquisitions. The loans in this category are repaid primarily from the conversion of crude oil and natural gas to cash. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. • Commercial Real Estate - Loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the company’s market areas. • Construction and Land Development - Loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the company’s market areas. • Residential Real Estate - The loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within or outside the company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over many borrowers. • Equity Lines of Credit - The loans are revolving lines of credit extended to consumers secured through a first or second mortgage on their personal residence. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans may be impacted by economic conditions within the company’s market areas that may impact either property values or a borrower’s personal income. • Consumer Installment - The loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment comes from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower. The following tables present the credit risk profile of the Company’s loan portfolio based on an internal rating category (grades 1 - 8), portfolio segment and payment activity: Pass & Watch Special Mention Substandard Doubtful Loss Total (Dollars in thousands) September 30, 2019 Commercial $ 1,217,280 $ 29,350 $ 66,017 $ — $ — $ 1,312,647 Energy 378,533 10,342 2,580 4,677 — 396,132 Commercial real estate 976,262 7,529 8,402 960 — 993,153 Construction and land development 527,582 — — — — 527,582 Residential real estate 362,625 273 2,537 — — 365,435 Equity lines of credit 22,192 — — — — 22,192 Consumer installment 21,552 — — — — 21,552 $ 3,506,026 $ 47,494 $ 79,536 $ 5,637 $ — $ 3,638,693 Pass & Watch Special Mention Substandard Doubtful Loss Total (Dollars in thousands) December 31, 2018 Commercial $ 1,056,505 $ — $ 73,824 $ 4,085 $ — $ 1,134,414 Energy 339,720 5,376 13,187 — — 358,283 Commercial real estate 831,290 6,950 7,209 1,112 — 846,561 Construction and land development 440,032 — — — — 440,032 Residential real estate 244,178 70 2,027 — — 246,275 Equity lines of credit 20,286 — — — — 20,286 Consumer installment 23,528 — — — — 23,528 $ 2,955,539 $ 12,396 $ 96,247 $ 5,197 $ — $ 3,069,379 The Company evaluates the loan risk grading system definitions, portfolio segment definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year. Loan Portfolio Aging Analysis The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2019 and December 31, 2018 : 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Total Past Due Current Total Loans Receivable Loans >= 90 Days and Accruing (Dollars in thousands) September 30, 2019 Commercial $ 42,039 $ 2,785 $ 1,101 $ 45,925 $ 1,266,722 $ 1,312,647 $ — Energy 7,122 — 5,319 12,441 383,691 396,132 642 Commercial real estate 317 — 93 410 992,743 993,153 — Construction and land development 12,345 — — 12,345 515,237 527,582 — Residential real estate 68 — 2,012 2,080 363,355 365,435 — Equity lines of credit — — — — 22,192 22,192 — Consumer installment 50 — — 50 21,502 21,552 — $ 61,941 $ 2,785 $ 8,525 $ 73,251 $ 3,565,442 $ 3,638,693 $ 642 30-59 Days Past Due 60-89 Days Past Due 90 Days or More Total Past Due Current Total Loans Receivable Loans >= 90 Days and Accruing (Dollars in thousands) December 31, 2018 Commercial $ 1,040 $ — $ 4,137 $ 5,177 $ 1,129,237 $ 1,134,414 $ — Energy 1,994 — 9,218 11,212 347,071 358,283 — Commercial real estate — 425 2,253 2,678 843,883 846,561 — Construction and land development — — — — 440,032 440,032 — Residential real estate 28 194 — 222 246,053 246,275 — Equity lines of credit — — — — 20,286 20,286 — Consumer installment — — — — 23,528 23,528 — $ 3,062 $ 619 $ 15,608 $ 19,289 $ 3,050,090 $ 3,069,379 $ — Impaired Loans A loan is considered impaired, in accordance with the impairment accounting guidance (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 nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. The intent of concessions is to maximize collection. Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. The following tables present impaired loans for the periods ended September 30, 2019 and December 31, 2018 : Unpaid Recorded Balance Principal Balance Specific Allowance (Dollars in thousands) September 30, 2019 Loans without a specific valuation Commercial $ 25,770 $ 25,770 $ — Energy 2,969 2,969 — Commercial real estate 12,501 12,501 — Construction and land development — — — Residential real estate 2,195 2,195 — Equity lines of credit — — — Consumer installment — — — Loans with a specific valuation Commercial 40,392 40,392 10,398 Energy 7,257 7,257 854 Commercial real estate 4,043 4,043 343 Construction and land development — — — Residential real estate 342 342 219 Equity lines of credit — — — Consumer installment — — — Total Commercial 66,162 66,162 10,398 Energy 10,226 10,226 854 Commercial real estate 16,544 16,544 343 Construction and land development — — — Residential real estate 2,537 2,537 219 Equity lines of credit — — — Consumer installment — — — $ 95,469 $ 95,469 $ 11,814 Unpaid Recorded Balance Principal Balance Specific Allowance (Dollars in thousands) December 31, 2018 Loans without a specific valuation Commercial $ 40,151 $ 40,151 $ — Energy 2,789 2,789 — Commercial real estate 7,059 7,059 — Construction and land development — — — Residential real estate 1,964 1,964 — Equity lines of credit — — — Consumer installment — — — Loans with a specific valuation Commercial 37,996 37,996 5,814 Energy 13,461 13,461 3,108 Commercial real estate 8,168 8,168 473 Construction and land development — — — Residential real estate 63 63 5 Equity lines of credit — — — Consumer installment — — — Total Commercial 78,147 78,147 5,814 Energy 16,250 16,250 3,108 Commercial real estate 15,227 15,227 473 Construction and land development — — — Residential real estate 2,027 2,027 5 Equity lines of credit — — — Consumer installment — — — $ 111,651 $ 111,651 $ 9,400 The table below shows interest income recognized during the three- and nine- month periods ended September 30, 2019 and September 30, 2018 for impaired loans held at the end of each period: Three months ended Nine months ended September 30, September 30, 2019 2018 2019 2018 (Dollars in thousands) Commercial $ 386 $ 402 $ 862 $ 1,110 Energy 98 93 324 369 Commercial real estate 200 88 613 291 Construction and land development — — — — Residential real estate 8 17 17 52 Equity lines of credit — — — — Consumer installment — — — — Total interest income recognized $ 692 $ 600 $ 1,816 $ 1,822 The table below shows the average balance of impaired loans during the three- and nine- month periods ended September 30, 2019 and September 30, 2018 by loan category for impaired loans held at the end of each period: Three months ended Nine months ended September 30, September 30, 2019 2018 2019 (Dollars in thousands) Commercial $ 54,410 $ 27,671 $ 49,265 $ 26,849 Energy 13,623 17,683 15,091 18,992 Commercial real estate 16,690 8,055 16,528 8,101 Construction and land development — — — — Residential real estate 2,538 2,046 2,354 2,059 Equity lines of credit — — — — Consumer installment — — — — Total average impaired loans $ 87,261 $ 55,455 $ 83,238 $ 56,001 Non-accrual Loans Nonperforming loans are loans for which the Company does not record interest income. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date, if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following table presents the Company’s non-accrual loans at September 30, 2019 and December 31, 2018 : September 30, 2019 December 31, 2018 (Dollars in thousands) Commercial $ 34,201 $ 4,781 Energy 4,677 9,219 Commercial real estate 2,680 3,517 Construction and land development — — Residential real estate 2,068 301 Equity lines of credit — — Consumer installment — — Total non-accrual loans $ 43,626 $ 17,818 Troubled Debt Restructurings Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. The modification of terms typically includes the extension of maturity, reduction or deferment of monthly payment, or reduction of the stated interest rate. The table below presents loans restructured during the three- and nine- months ended September 30, 2019 and 2018 , including the post-modification outstanding balance and the type of concession made: Three Months Ended Nine Months Ended September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018 (Dollars in thousands) Commercial - Deferred payment $ — $ — $ — $ 61 - Reduction of monthly payment — — 994 — - Extension of maturity date — — 30,005 300 Energy - Reduction of monthly payment — — — 2,972 Commercial real estate - Reduction of monthly payment — — 3,767 — - Interest rate reduction — 1,153 — 2,256 Total troubled debt restructurings $ — $ 1,153 $ 34,766 $ 5,589 As of September 30, 2019 and December 31, 2018 , the Company had $896 thousand and $0 , respectively, in commitments to borrowers whose terms have been modified in troubled debt restructurings. As of September 30, 2019, the modifications related to the troubled debt restructurings above did not impact the allowance for loan losses because the loans were previously impaired and evaluated on an individual basis or enough collateral was obtained to provide an additional commitment. The restructured loans had a total specific valuation allowance of $8.8 million and $2.4 million as of September 30, 2019 and December 31, 2018 , respectively. The balance of restructured loans is provided below as of September 30, 2019 and December 31, 2018 . In addition, the balance of those loans that are in default at any time during the past twelve months at September 30, 2019 and December 31, 2018 is provided below: September 30, 2019 December 31, 2018 Number of Loans Outstanding Balance Balance 90 days past due at any time during previous 12 months (1) Number of Loans Outstanding Balance Balance 90 days past due at any time during previous 12 months (1) (Dollars in thousands) Commercial 7 $ 36,865 $ — 6 $ 5,022 $ 55 Energy 2 2,969 — 2 3,631 — Commercial real estate 3 4,947 — 2 1,382 — Construction and land development — — — — — — Residential real estate — — — 1 237 — Equity lines of credit — — — — — — Consumer installment — — — — — — Total restructured loans 12 $ 44,781 $ — 11 $ 10,272 $ 55 (1) Default is considered to mean 90 days or more past due as to interest or principal. |