Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses Categories of loans at March 31, 2020 and December 31, 2019 include: March 31, 2020 December 31, 2019 (Dollars in thousands) Commercial $ 1,355,723 $ 1,356,817 Energy 398,797 408,573 Commercial real estate 1,084,684 1,024,041 Construction and land development 625,145 628,418 Residential real estate 503,702 398,695 Consumer 43,118 45,163 Gross loans 4,011,169 3,861,707 Less: Allowance for loan losses 51,458 56,896 Less: Net deferred loan fees and costs 8,718 9,463 Net loans $ 3,950,993 $ 3,795,348 Allowance for Loan Losses 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 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 Consumer Total (Dollars in thousands) Three months ended March 31, 2020 Allowance for loan losses Beginning balance $ 35,864 $ 6,565 $ 8,085 $ 3,516 $ 2,546 320 $ 56,896 Provision charged to expense 3,271 2,313 4,538 1,505 2,141 182 13,950 Charge-offs (18,077) (1,279) — — — (104) (19,460) Recoveries 71 — — — — 1 72 Ending balance $ 21,129 $ 7,599 $ 12,623 $ 5,021 $ 4,687 $ 399 $ 51,458 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Consumer Total (Dollars in thousands) Three months ended March 31, 2019 Allowance for loan losses Beginning balance $ 16,584 $ 10,262 $ 6,755 $ 2,475 $ 1,464 $ 286 $ 37,826 Provision charged to expense 5,163 (3,748) 716 110 583 26 2,850 Charge-offs (1,254) — — — — (10) (1,264) Recoveries 13 576 — — — — 589 Ending balance $ 20,506 $ 7,090 $ 7,471 $ 2,585 $ 2,047 $ 302 $ 40,001 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Consumer Total (Dollars in thousands) March 31, 2020 Ending balance Individually evaluated for impairment $ 3,228 $ 1,224 $ 1,449 $ — $ 189 $ — $ 6,090 Collectively evaluated for impairment $ 17,901 $ 6,375 $ 11,174 $ 5,021 $ 4,498 $ 399 $ 45,368 Allocated to loans: Individually evaluated for impairment $ 71,983 $ 15,703 $ 14,840 $ — $ 5,654 $ 254 $ 108,434 Collectively evaluated for impairment $ 1,283,740 $ 383,094 $ 1,069,844 $ 625,145 $ 498,048 $ 42,864 $ 3,902,735 Ending balance $ 1,355,723 $ 398,797 $ 1,084,684 $ 625,145 $ 503,702 $ 43,118 $ 4,011,169 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate Consumer Total (Dollars in thousands) December 31, 2019 Ending balance Individually evaluated for impairment $ 19,942 $ 1,949 $ 210 $ — $ 197 $ — $ 22,298 Collectively evaluated for impairment $ 15,922 $ 4,616 $ 7,875 $ 3,516 $ 2,349 $ 320 $ 34,598 Allocated to loans: Individually evaluated for impairment $ 70,876 9,744 $ 10,492 $ — $ 2,388 $ — $ 93,500 Collectively evaluated for impairment $ 1,285,941 $ 398,829 $ 1,013,549 $ 628,418 $ 396,307 $ 45,163 $ 3,768,207 Ending balance $ 1,356,817 $ 408,573 $ 1,024,041 $ 628,418 $ 398,695 $ 45,163 $ 3,861,707 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 weaknesses 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 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. Energy loans are typically collateralized with the underlying oil and gas reserves. • 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 borrower’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 borrower’s market areas. • Residential Real Estate - The loans are generally secured by owner-occupied 1-4 family residences or multifamily properties. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers or underlying tenants. Credit risk in these loans can be impacted by economic conditions within or outside the borrower’s market areas that might impact either property values, a borrower’s personal income, or residents’ income. • Consumer - The loan portfolio consists of revolving lines of credit and various term loans such as automobile loans and loans for other personal purposes. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the borrower’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) March 31, 2020 Commercial $ 1,234,385 $ 49,459 $ 71,879 $ — $ — $ 1,355,723 Energy 370,614 12,628 12,294 3,261 — 398,797 Commercial real estate 1,058,543 14,985 10,329 827 — 1,084,684 Construction and land development 625,145 — — — — 625,145 Residential real estate 496,236 1,791 5,675 — — 503,702 Consumer 42,864 — 254 — — 43,118 $ 3,827,787 $ 78,863 $ 100,431 $ 4,088 $ — $ 4,011,169 Pass & Watch Special Mention Substandard Doubtful Loss Total (Dollars in thousands) December 31, 2019 Commercial $ 1,258,952 $ 27,069 $ 70,796 $ — $ — $ 1,356,817 Energy 392,233 9,460 2,340 4,540 — 408,573 Commercial real estate 1,007,921 9,311 5,866 943 — 1,024,041 Construction and land development 628,418 — — — — 628,418 Residential real estate 394,495 1,789 2,411 — — 398,695 Consumer 45,163 — — — — 45,163 $ 3,727,182 $ 47,629 $ 81,413 $ 5,483 $ — $ 3,861,707 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 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 March 31, 2020 and December 31, 2019: 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) March 31, 2020 Commercial $ 5,135 $ 469 $ 10,062 $ 15,666 $ 1,340,057 $ 1,355,723 $ — Energy — 5,612 3,314 8,926 389,871 398,797 — Commercial real estate 4,092 — 4,586 8,678 1,076,006 1,084,684 — Construction and land development — — — — 625,145 625,145 — Residential real estate 3,707 269 1,920 5,896 497,806 503,702 — Consumer — 254 — 254 42,864 43,118 — $ 12,934 $ 6,604 $ 19,882 $ 39,420 $ 3,971,749 $ 4,011,169 $ — 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, 2019 Commercial $ 1,091 $ 276 $ 30,911 $ 32,278 $ 1,324,539 $ 1,356,817 $ 37 Energy 2,340 — 4,593 6,933 401,640 408,573 53 Commercial real estate 316 — 4,589 4,905 1,019,136 1,024,041 4,501 Construction and land development 196 — — 196 628,222 628,418 — Residential real estate 2,347 — 1,919 4,266 394,429 398,695 — Consumer 2 254 — 256 44,907 45,163 — $ 6,292 $ 530 $ 42,012 $ 48,834 $ 3,812,873 $ 3,861,707 $ 4,591 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 March 31, 2020 and December 31, 2019: Unpaid Recorded Balance Principal Balance Specific Allowance (Dollars in thousands) March 31, 2020 Loans without a specific valuation Commercial $ 60,048 $ 60,077 $ — Energy 3,462 7,741 — Commercial real estate 8,492 8,622 — Construction and land development — — — Residential real estate 5,409 5,430 — Consumer 254 254 — Loans with a specific valuation Commercial 11,935 23,341 3,228 Energy 12,241 12,241 1,224 Commercial real estate 6,348 6,474 1,449 Construction and land development — — — Residential real estate 245 244 189 Consumer — — — Total Commercial 71,983 83,418 3,228 Energy 15,703 19,982 1,224 Commercial real estate 14,840 15,096 1,449 Construction and land development — — — Residential real estate 5,654 5,674 189 Consumer 254 254 — $ 108,434 $ 124,424 $ 6,090 Unpaid Recorded Balance Principal Balance Specific Allowance (Dollars in thousands) December 31, 2019 Loans without a specific valuation Commercial $ 35,846 $ 35,846 $ — Energy 2,864 2,864 — Commercial real estate 9,464 9,464 — Construction and land development — — — Residential real estate 2,139 2,139 — Consumer — — — Loans with a specific valuation Commercial 35,030 40,030 19,942 Energy 6,880 9,880 1,949 Commercial real estate 1,028 1,028 210 Construction and land development — — — Residential real estate 249 249 197 Consumer — — — Total Commercial 70,876 75,876 19,942 Energy 9,744 12,744 1,949 Commercial real estate 10,492 10,492 210 Construction and land development — — — Residential real estate 2,388 2,388 197 Consumer — — — $ 93,500 $ 101,500 $ 22,298 The table below shows interest income recognized during the three month periods ended March 31, 2020 and March 31, 2019 for impaired loans held at the end of each period: Three months ended March 31, 2020 2019 (Dollars in thousands) Commercial $ 910 $ 1,285 Energy 122 152 Commercial real estate 123 254 Construction and land development — — Residential real estate 40 11 Consumer — — Total interest income recognized $ 1,195 $ 1,702 The table below shows the three month average balance of impaired loans as of March 31, 2020 and 2019 by loan category for impaired loans held at the end of each period: Three months ended March 31, 2020 2019 (Dollars in thousands) Commercial $ 86,626 $ 77,698 Energy 16,976 15,986 Commercial real estate 14,927 14,073 Construction and land development — — Residential real estate 5,230 2,157 Consumer 254 — Total average impaired loans $ 124,013 $ 109,914 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 by loan category at March 31, 2020 and December 31, 2019: March 31, 2020 December 31, 2019 (Dollars in thousands) Commercial $ 10,352 $ 32,130 Energy 8,265 4,540 Commercial real estate 5,443 1,063 Construction and land development — — Residential real estate 1,941 1,942 Consumer 254 — Total non-accrual loans $ 26,255 $ 39,675 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, excluding loans restructured as a result of the COVID-19 pandemic, during the three months ended March 31, 2020 and 2019, including the post-modification outstanding balance and the type of concession made: Three Months Ended March 31, 2020 March 31, 2019 (Dollars in thousands) Commercial - Interest rate reduction $ 3,171 $ — - Reduction of monthly payment — 4,761 Energy - Extension of maturity date 2,340 — Total troubled debt restructurings $ 5,511 $ 4,761 As of March 31, 2020 and December 31, 2019, the Company had $556 thousand and $934 thousand, respectively, in unfunded commitments to borrowers whose terms have been modified in troubled debt restructurings. As of March 31, 2020, 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 balance of restructured loans, excluding loans restructured as a result of the COVID-19 pandemic, is provided below as of March 31, 2020 and December 31, 2019. In addition, the balance of those loans that are in default at any time during the past twelve months at March 31, 2020 and December 31, 2019 is provided below: March 31, 2020 December 31, 2019 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 6 $ 9,966 $ 842 7 $ 31,770 $ 831 Energy 3 5,100 — 2 2,864 — Commercial real estate 3 4,772 — 3 4,909 — Construction and land development — — — — — — Residential real estate 1 3,000 — — — — Consumer — — — — — — Total restructured loans 13 $ 22,838 $ 842 12 $ 39,543 $ 831 (1) Default is considered to mean 90 days or more past due as to interest or principal. The restructured loans above had a total specific valuation allowance of $2 million and $18 million as of March 31, 2020 and December 31, 2019, respectively. |