Loans and Allowance for Loan Losses | Loans and Allowance for Loan Losses Categories of loans at June 30, 2020 and December 31, 2019 include: June 30, 2020 December 31, 2019 (Dollars in thousands) Commercial $ 1,284,919 $ 1,356,817 Energy 390,346 408,573 Commercial real estate 1,141,277 1,024,041 Construction and land development 661,691 628,418 Residential real estate 536,270 398,695 Paycheck Protection Program (“PPP”) 369,022 — Consumer 45,716 45,163 Gross loans 4,429,241 3,861,707 Less: Allowance for loan losses 71,185 56,896 Less: Net deferred loan fees and costs 16,017 9,463 Net loans $ 4,342,039 $ 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 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 all loans on accrual 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 Company evaluates the loan risk grading system definitions, portfolio segment definitions, and allowance for loan loss methodology on an ongoing basis. During the quarter ended June 30, 2020, the Company distinguished between performing and nonperforming substandard loans, as previously discussed in Note 1: Nature of Operations and Summary of Significant Accounting Policies. In addition, the Company separated out PPP loans that are 100% guaranteed by the Small Business Administration (“SBA”). No additional changes to loan definitions, segmentation, and Allowance for Loan Losses (“ALLL”) methodology occurred during the second quarter of 2020. 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 PPP Consumer Total (Dollars in thousands) Three months ended June 30, 2020 Allowance for loan losses Beginning balance $ 21,129 $ 7,599 $ 12,623 $ 5,021 $ 4,687 $ — $ 399 $ 51,458 Provision charged to expense 5,499 10,773 4,276 (2) 370 — 84 21,000 Charge-offs (87) (1,000) — — (189) — — (1,276) Recoveries 2 — — — — — 1 3 Ending balance $ 26,543 $ 17,372 $ 16,899 $ 5,019 $ 4,868 $ — $ 484 $ 71,185 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate PPP Consumer Total (Dollars in thousands) Three months ended June 30, 2019 Allowance for loan losses Beginning balance $ 20,506 $ 7,090 $ 7,471 $ 2,585 $ 2,047 $ — $ 302 $ 40,001 Provision charged to expense 2,468 210 62 17 91 — 2 2,850 Charge-offs — — — — — — (1) (1) Recoveries 1 — — — — — 1 2 Ending balance $ 22,975 $ 7,300 $ 7,533 $ 2,602 $ 2,138 $ — $ 304 $ 42,852 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate PPP Consumer Total (Dollars in thousands) Six months ended June 30, 2020 Allowance for loan losses Beginning balance $ 35,864 $ 6,565 $ 8,085 $ 3,516 $ 2,546 $ — $ 320 $ 56,896 Provision charged to expense 8,771 13,085 8,814 1,503 2,511 — 266 34,950 Charge-offs (18,165) (2,278) — — (189) — (104) (20,736) Recoveries 73 — — — — — 2 75 Ending balance $ 26,543 $ 17,372 $ 16,899 $ 5,019 $ 4,868 $ — $ 484 $ 71,185 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate PPP Consumer Total (Dollars in thousands) Six months ended June 30, 2019 Allowance for loan losses Beginning balance $ 16,584 $ 10,262 $ 6,755 $ 2,475 $ 1,464 $ — $ 286 $ 37,826 Provision charged to expense 7,631 (3,538) 778 127 674 — $ 28 5,700 Charge-offs (1,254) — — — — — (11) (1,265) Recoveries 14 576 — — — — 1 591 Ending balance $ 22,975 $ 7,300 $ 7,533 $ 2,602 $ 2,138 $ — $ 304 $ 42,852 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate PPP Consumer Total (Dollars in thousands) June 30, 2020 Period end allowance for loan losses allocated to: Individually evaluated for impairment $ 2,933 $ 1,942 $ 1,704 $ — $ 413 $ — $ — $ 6,992 Collectively evaluated for impairment $ 23,610 $ 15,430 $ 15,195 $ 5,019 $ 4,455 $ — $ 484 $ 64,193 Ending balance $ 26,543 $ 17,372 $ 16,899 $ 5,019 $ 4,868 $ — $ 484 $ 71,185 Allocated to loans: Individually evaluated for impairment $ 11,831 $ 15,532 $ 10,909 $ — $ 6,981 $ — $ 249 $ 45,502 Collectively evaluated for impairment $ 1,273,088 $ 374,814 $ 1,130,368 $ 661,691 $ 529,289 $ 369,022 $ 45,467 $ 4,383,739 Ending balance $ 1,284,919 $ 390,346 $ 1,141,277 $ 661,691 $ 536,270 $ 369,022 $ 45,716 $ 4,429,241 Commercial Energy Commercial Real Estate Construction and Land Development Residential Real Estate PPP Consumer Total (Dollars in thousands) December 31, 2019 Period end allowance for loan losses allocated to: 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 Ending balance $ 35,864 $ 6,565 $ 8,085 $ 3,516 $ 2,546 $ — $ 320 $ 56,896 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 internal rating categories (grades 1 - 8), portfolio segmentation 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 (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 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. Substandard loans include both performing and nonperforming loans and are broken out in the table below. • 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. • PPP - The loans were established by the CARES Act which authorized forgivable loans to small businesses to pay their employees during the COVID-19 pandemic. The program requires all loan terms to be the same for everyone. The loans are 100 percent guaranteed by the SBA and repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval. • 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 categories (grades 1 - 8), portfolio segmentation, and payment activity: Pass Special Mention Substandard Substandard Doubtful Loss Total (Dollars in thousands) June 30, 2020 Commercial $ 1,143,316 $ 53,411 $ 77,226 $ 7,662 $ 3,304 $ — $ 1,284,919 Energy 210,557 71,837 92,568 10,997 4,387 — 390,346 Commercial real estate 1,069,590 39,332 25,355 6,187 813 — 1,141,277 Construction and land development 655,200 5,330 1,161 — — — 661,691 Residential real estate 528,510 540 3,285 3,935 — — 536,270 PPP 369,022 — — — — — 369,022 Consumer 45,467 — — 249 — — 45,716 $ 4,021,662 $ 170,450 $ 199,595 $ 29,030 $ 8,504 $ — $ 4,429,241 Pass Special Mention Substandard Substandard Doubtful Loss Total (Dollars in thousands) December 31, 2019 Commercial $ 1,258,952 $ 27,069 $ 38,666 $ 32,130 $ — $ — $ 1,356,817 Energy 392,233 9,460 2,340 — 4,540 — 408,573 Commercial real estate 1,007,921 9,311 5,746 120 943 — 1,024,041 Construction and land development 628,418 — — — — — 628,418 Residential real estate 394,495 1,789 469 1,942 — — 398,695 PPP — — — — — — — Consumer 45,163 — — — — — 45,163 $ 3,727,182 $ 47,629 $ 47,221 $ 34,192 $ 5,483 $ — $ 3,861,707 Loan Portfolio Aging Analysis The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of June 30, 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) June 30, 2020 Commercial $ 4,645 $ 3,391 $ 7,315 $ 15,351 $ 1,269,568 $ 1,284,919 $ — Energy — 16,918 4,440 21,358 368,988 390,346 — Commercial real estate 8,009 230 4,481 12,720 1,128,557 1,141,277 — Construction and land development 194 — — 194 661,497 661,691 — Residential real estate 1,357 — 3,915 5,272 530,998 536,270 220 PPP — — — — 369,022 369,022 — Consumer — 137 — 137 45,579 45,716 — $ 14,205 $ 20,676 $ 20,151 $ 55,032 $ 4,374,209 $ 4,429,241 $ 220 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 — PPP — — — — — — — 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 loans individually evaluated for impairment, including all restructured and formerly restructured loans, for the periods ended June 30, 2020 and December 31, 2019: Unpaid Recorded Balance Principal Balance Specific Allowance (Dollars in thousands) June 30, 2020 Loans without a specific valuation Commercial $ 70 $ 70 $ — Energy — — — Commercial real estate 763 854 — Construction and land development — — — Residential real estate 5,404 5,404 — PPP — — — Consumer 249 249 — Loans with a specific valuation Commercial 11,761 29,710 2,933 Energy 15,532 18,244 1,942 Commercial real estate 10,146 10,146 1,704 Construction and land development — — — Residential real estate 1,577 1,577 413 PPP — — — Consumer — — — Total Commercial 11,831 29,780 2,933 Energy 15,532 18,244 1,942 Commercial real estate 10,909 11,000 1,704 Construction and land development — — — Residential real estate 6,981 6,981 413 PPP — — — Consumer 249 249 — $ 45,502 $ 66,254 $ 6,992 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 — PPP — — — 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 PPP — — — 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 PPP — — — Consumer — — — $ 93,500 $ 101,500 $ 22,298 The table below shows interest income recognized during the three and six month periods ended June 30, 2020 and 2019 for impaired loans, including all restructured and formerly restructured loans, held at the end of each period: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Dollars in thousands) Commercial $ 27 $ 781 $ 88 $ 1,564 Energy 46 53 210 109 Commercial real estate 58 278 135 532 Construction and land development — — — 1 Residential real estate 35 10 74 21 PPP — — — — Consumer — — — — Total interest income recognized $ 166 $ 1,122 $ 507 $ 2,227 The table below shows the three and six month average balance of impaired loans as of June 30, 2020 and 2019 by loan category for impaired loans, including all restructured and formerly restructured loans, held at the end of each period: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 (Dollars in thousands) Commercial $ 11,793 $ 50,732 $ 19,002 $ 74,259 Energy 16,798 12,534 17,527 13,850 Commercial real estate 10,958 13,779 11,044 14,661 Construction and land development — 50 — 25 Residential real estate 7,171 2,665 6,953 2,428 PPP — — — — Consumer 251 — 253 — Total average impaired loans $ 46,971 $ 79,760 $ 54,779 $ 105,223 Non-accrual Loans Nonperforming loans are loans for which the Company does not record interest income. The accrual of interest on 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 June 30, 2020 and December 31, 2019: June 30, 2020 December 31, 2019 (Dollars in thousands) Commercial $ 10,966 $ 32,130 Energy 15,384 4,540 Commercial real estate 7,000 1,063 Construction and land development — — Residential real estate 3,935 1,942 PPP — — Consumer 249 — Total non-accrual loans $ 37,534 $ 39,675 Troubled Debt Restructurings Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession, excluding loan modifications as a result of the COVID-19 pandemic. 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 and six months ended June 30, 2020 and 2019, including the post-modification outstanding balance and the type of concession made: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2020 2019 2020 2019 (Dollars in thousands) Commercial - Interest rate reduction $ — $ — $ 3,171 $ — - Reduction of monthly payment — — — 994 - Extension of maturity date — 30,005 — 30,005 Energy - Extension of maturity date — — 2,340 — Commercial real estate - Reduction of monthly payment — — — 3,767 Residential real estate - Payment deferral 65 — 65 — Total troubled debt restructurings during applicable period $ 65 $ 30,005 $ 5,576 $ 34,766 As of June 30, 2020 and December 31, 2019, the Company had $749 thousand and $934 thousand, respectively, in unfunded commitments to borrowers whose terms have been modified in TDRs. For the three and six-month periods ended June 30, 2020, the modifications related to the TDRs 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 June 30, 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 June 30, 2020 and December 31, 2019 is provided below: June 30, 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 $ 9,657 $ 842 7 $ 31,770 $ 831 Energy 3 4,032 — 2 2,864 — Commercial real estate 3 4,749 — 3 4,909 — Construction and land development — — — — — — Residential real estate 2 3,065 — — — — PPP — — — — — — Consumer — — — — — — Total troubled debt restructured loans 14 $ 21,503 $ 842 12 $ 39,543 $ 831 (1) Default is considered to mean 90 days or more past due as to interest or principal. The TDRs above had an allowance of $3 million and $18 million as of June 30, 2020 and December 31, 2019, respectively. |