Loans and Allowance for Loan Losses | (5) LOANS AND ALLOWANCE FOR LOAN LOSSES The following is a schedule of loans outstanding by category: December 31, 2015 2014 Amount Percent Amount Percent (Dollars in thousands) Commercial and financial: Commercial and industrial $ 795,803 18.80 % $ 745,106 19.35 % Oil & gas production and equipment 87,304 2.06 104,940 2.72 Agriculture 150,620 3.56 132,830 3.45 State and political subdivisions: Taxable 17,605 0.42 20,431 0.53 Tax-exempt 33,575 0.79 20,952 0.54 Real estate: Construction 403,664 9.54 356,621 9.26 Farmland 184,707 4.36 149,507 3.88 One to four family residences 821,251 19.41 766,362 19.90 Multifamily residential properties 65,477 1.55 66,766 1.73 Commercial 1,356,430 32.05 1,191,477 30.94 Consumer 283,636 6.70 267,179 6.94 Other (not classified above) 31,976 0.76 29,227 0.76 Total loans $ 4,232,048 100.00 % $ 3,851,398 100.00 % The Company’s loans are mostly to customers within Oklahoma and over 65% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual 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. There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. As a lender, the Company faces the risk that a significant number of its borrowers will fail to pay their loans when due. If borrower defaults cause losses in excess of the Company’s allowance for loan losses, it could have an adverse effect on the Company’s business, profitability, and financial condition. Loans secured by real estate, including farmland, multifamily, commercial, one to four family residential and construction and development loans, have been a large portion of the Company’s loan portfolio. The Company is subject to risk of future market fluctuations in property values relating to these loans. In addition, multi-family and commercial real estate (“CRE”) loans represent the majority of the Company’s real estate loans outstanding. A decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of the Company’s borrowers to repay their loans on a timely basis, which could have a negative impact on the Company’s financial condition and results of operation. The Company attempts to manage this risk through rigorous loan underwriting standards. During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. Nonperforming and Restructured Assets The following is a summary of nonperforming and restructured assets: December 31, 2015 2014 (Dollars in thousands) Past due 90 days or more and still accruing $ 1,841 $ 1,135 Nonaccrual 30,096 16,410 Restructured 15,143 16,515 Total nonperforming and restructured loans 47,080 34,060 Other real estate owned and repossessed assets 8,214 8,079 Total nonperforming and restructured assets $ 55,294 $ 42,139 Nonaccrual loans, accruing loans past due 90 days or more, and restructured loans are shown in the table above. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.0 million in 2015, $1.2 million in 2014 and $1.5 million in 2013. Restructured loans consisted primarily of one relationship restructured to defer principal payments. The relationship was evaluated by management and determined to be well collateralized. Additionally, none of the concessions granted involved a principal reduction or a change from the current market rate of interest. The collateral value is monitored periodically to evaluate possible impairment. The Company charges interest on principal balances outstanding during deferral periods. As a result, 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. December 31, 2015 2014 (Dollars in thousands) Real estate: Non-residential real estate owner occupied $ 261 $ 296 Non-residential real estate other 3,957 5,126 Residential real estate permanent mortgage 656 681 Residential real estate all other 1,833 1,796 Commercial and financial: Non-consumer non-real estate 10,159 1,556 Consumer non-real estate 312 250 Other loans 9,381 1,659 Acquired loans 3,537 5,046 Total $ 30,096 $ 16,410 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 December 31, 2015 Real estate: Non-residential real estate owner occupied $ 441 $ 179 $ 183 $ 803 $ 502,094 $ 502,897 $ — Non-residential real estate other 1,149 108 568 1,825 1,108,935 1,110,760 521 Residential real estate permanent mortgage 2,840 636 648 4,124 328,477 332,601 493 Residential real estate all other 2,842 609 824 4,275 672,414 676,689 193 Commercial and financial: Non-consumer non-real estate 2,278 161 187 2,626 982,136 984,762 152 Consumer non-real estate 2,237 772 349 3,358 265,511 268,869 278 Other loans 3,565 295 1,761 5,621 156,995 162,616 132 Acquired loans 1,052 71 918 2,041 190,813 192,854 72 Total $ 16,404 $ 2,831 $ 5,438 $ 24,673 $ 4,207,375 $ 4,232,048 $ 1,841 As of December 31, 2014 Real estate: Non-residential real estate owner occupied $ 635 $ — $ 269 $ 904 $ 482,731 $ 483,635 $ 70 Non-residential real estate other 377 317 825 1,519 952,484 954,003 — Residential real estate permanent mortgage 2,010 758 544 3,312 304,267 307,579 172 Residential real estate all other 1,820 194 1,488 3,502 633,586 637,088 387 Commercial and financial: Non-consumer non-real estate 841 71 793 1,705 965,002 966,707 24 Consumer non-real estate 1,914 711 330 2,955 244,810 247,765 215 Other loans 1,858 916 741 3,515 149,469 152,984 — Acquired loans 1,815 997 1,304 4,116 97,521 101,637 267 Total $ 11,270 $ 3,964 $ 6,294 $ 21,528 $ 3,829,870 $ 3,851,398 $ 1,135 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. 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 December 31, 2015 Real estate: Non-residential real estate owner occupied $ 507 $ 383 $ 14 $ 446 Non-residential real estate other 21,068 19,052 357 19,655 Residential real estate permanent mortgage 1,401 1,209 81 1,125 Residential real estate all other 2,498 2,235 242 1,958 Commercial and financial: Non-consumer non-real estate 13,897 10,312 2,062 11,786 Consumer non-real estate 738 715 181 652 Other loans 10,722 9,513 331 10,335 Acquired loans 6,295 4,248 — 4,564 Total $ 57,126 $ 47,667 $ 3,268 $ 50,521 As of December 31, 2014 Real estate: Non-residential real estate owner occupied $ 521 $ 448 $ 15 $ 453 Non-residential real estate other 23,154 21,164 1,364 21,522 Residential real estate permanent mortgage 1,095 880 85 1,042 Residential real estate all other 2,480 2,270 299 2,273 Commercial and financial: Non-consumer non-real estate 1,895 1,580 431 1,646 Consumer non-real estate 664 648 138 602 Other loans 2,101 1,659 228 1,512 Acquired loans 10,933 7,708 — 8,082 Total $ 42,843 $ 36,357 $ 2,560 $ 37,132 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 as follows: Grade 1 – Acceptable - Loans graded 1 represent reasonable and satisfactory credit risk which requires normal attention and supervision. Capacity to repay through primary and/or secondary sources is not questioned. Grade 2 – Acceptable - Increased Attention - This category consists of loans that have credit characteristics deserving management’s close attention. These potential weaknesses could result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date. Such credit characteristics include loans to highly leveraged borrowers in cyclical industries, adverse financial trends which could potentially weaken repayment capacity, loans that have fundamental structure deficiencies, loans lacking secondary sources of repayment where prudent, and loans with deficiencies in essential documentation, including financial information. Grade 3 – Loans with Problem Potential - This category consists of performing loans which are considered to exhibit problem potential. Loans in this category would generally include, but not be limited to, borrowers with a weakened financial condition or poor performance history, past dues, loans restructured to reduce payments to an amount that is below market standards and/or loans with severe documentation problems. In general, these loans have no identifiable loss potential in the near future, however; the possibility of a loss developing is heightened. Grade 4 - Problem Loans/Assets – Nonperforming - This category consists of nonperforming loans/assets which are considered to be problems. Nonperforming loans are described as being 90 days and over past due and still accruing, and loans that are nonaccrual. The government guaranteed portion of Small Business Administration (“SBA”) loans is excluded. Grade 5 - Loss Potential - This category consists of loans/assets which are considered to possess loss potential. While the loss may not occur in the current year, management expects that loans/assets in this category will ultimately result in a loss, unless substantial improvement occurs. Grade 6 - Charge Off - This category consists of loans that are considered uncollectible and other assets with little or no value. 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 December 31, 2015 Real estate: Non-residential real estate owner occupied $ 417,529 $ 76,749 $ 8,304 $ 315 $ — $ 502,897 Non-residential real estate other 945,993 156,159 4,580 4,028 — 1,110,760 Residential real estate permanent mortgage 295,265 29,793 6,315 1,228 — 332,601 Residential real estate all other 554,007 111,879 9,109 1,694 — 676,689 Commercial and financial: Non-consumer non-real estate 821,394 140,384 12,687 10,297 — 984,762 Consumer non-real estate 251,994 14,433 1,779 662 1 268,869 Other loans 153,416 5,851 872 2,477 — 162,616 Acquired loans 165,305 12,566 11,049 3,858 76 192,854 Total $ 3,604,903 $ 547,814 $ 54,695 $ 24,559 $ 77 $ 4,232,048 As of December 31, 2014 Real estate: Non-residential real estate owner occupied $ 402,706 $ 75,555 $ 5,008 $ 366 $ — $ 483,635 Non-residential real estate other 795,209 133,542 20,126 5,126 — 954,003 Residential real estate permanent mortgage 272,411 27,855 6,369 944 — 307,579 Residential real estate all other 529,555 99,214 6,146 2,173 — 637,088 Commercial and financial: Non-consumer non-real estate 821,094 117,457 26,550 1,606 — 966,707 Consumer non-real estate 233,424 12,229 1,548 564 — 247,765 Other loans 147,758 4,261 601 173 191 152,984 Acquired loans 46,465 36,951 12,651 5,206 364 101,637 Total $ 3,248,622 $ 507,064 $ 78,999 $ 16,158 $ 555 $ 3,851,398 Allowance for Loan Losses Methodology The allowance for loan losses (“ALL”) is determined by a calculation based on segmenting the loans into the following categories: (1) adversely graded loans [Grades 3, 4 and 5] that have a specific reserve allocation; (2) loans without a specific reserve segmented by loans secured by real estate other than one to four family residential property, loans secured by one to four family residential property, commercial, industrial and agricultural loans not secured by real estate, consumer purpose loans not secured by real estate, and loans over 60 days past due that are not otherwise Grade 3, 4, or 5; (3) Grade 2 loans; (4) Grade 1 loans and (5) loans held for sale which are excluded. The ALL is calculated as the sum of the following: (1) the total dollar amount of specific reserve allocations; (2) the dollar amount derived by multiplying each segment of adversely graded loans without a specific reserve allocation times its respective reserve factor; (3) the dollar amount derived by multiplying Grade 2 loans and Grade 1 loans (less certain exclusions) times the respective reserve factor; and (4) other adjustments as deemed appropriate and documented by the Senior Loan Committee or Board of Directors. The amount of the ALL is an estimate based upon factors which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated ALL in the near term. 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) As of December 31, 2015 Real estate: Non-residential real estate owner occupied $ 4,406 $ (37 ) $ 1 $ (36 ) $ 291 $ 4,661 Non-residential real estate other 9,616 (708 ) 2 (706 ) 1,011 9,921 Residential real estate permanent mortgage 2,948 (222 ) 40 (182 ) 382 3,148 Residential real estate all other 6,269 (138 ) 17 (121 ) 577 6,725 Commercial and financial: Non-consumer non-real estate 12,771 (3,799 ) 199 (3,600 ) 2,583 11,754 Consumer non-real estate 2,404 (626 ) 124 (502 ) 740 2,642 Other loans 2,359 (1,109 ) 16 (1,093 ) 1,382 2,648 Acquired loans 116 (686 ) 28 (658 ) 709 167 Total $ 40,889 $ (7,325 ) $ 427 $ (6,898 ) $ 7,675 $ 41,666 As of December 31, 2014 Real estate: Non-residential real estate owner occupied $ 4,827 $ (42 ) $ 102 $ 60 $ (481 ) $ 4,406 Non-residential real estate other 11,026 (29 ) 49 20 (1,430 ) 9,616 Residential real estate permanent mortgage 2,825 (207 ) 78 (129 ) 252 2,948 Residential real estate all other 6,708 (171 ) 32 (139 ) (300 ) 6,269 Commercial and financial: Non-consumer non-real estate 8,977 (564 ) 70 (494 ) 4,288 12,771 Consumer non-real estate 2,556 (687 ) 203 (484 ) 332 2,404 Other loans 1,991 (351 ) 149 (202 ) 570 2,359 Acquired loans 124 (568 ) 719 151 (159 ) 116 Total $ 39,034 $ (2,619 ) $ 1,402 $ (1,217 ) $ 3,072 $ 40,889 The following table details the amount of ALL by class of loans for the period presented, on the basis of the impairment methodology used by the Company. ALL December 31, 2015 December 31, 2014 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 $ 323 $ 4,338 $ 202 $ 4,204 Non-residential real estate other 323 9,598 1,518 8,098 Residential real estate permanent mortgage 399 2,749 407 2,541 Residential real estate all other 839 5,886 743 5,526 Commercial and financial: Non-consumer non-real estate 3,365 8,389 4,671 8,100 Consumer non-real estate 445 2,197 372 2,032 Other loans 291 2,357 214 2,145 Acquired loans — 167 — 116 Total $ 5,985 $ 35,681 $ 8,127 $ 32,762 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 December 31, 2015 December 31, 2014 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 $ 8,619 $ 494,278 $ — $ 5,374 $ 478,261 $ — Non-residential real estate other 8,608 1,102,152 — 25,251 928,752 — Residential real estate permanent mortgage 7,543 325,058 — 7,313 300,266 — Residential real estate all other 10,803 665,886 — 8,319 628,769 — Commercial and financial: Non-consumer non-real estate 22,983 961,779 — 28,156 938,551 — Consumer non-real estate 2,416 266,453 — 2,112 245,653 — Other loans 2,323 160,293 — 233 152,751 — Acquired loans — 177,871 14,983 — 83,416 18,221 Total $ 63,295 $ 4,153,770 $ 14,983 $ 76,758 $ 3,756,419 $ 18,221 Transfers from Loans Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow. Transfers from loans to other real estate owned and repossessed assets during the periods presented are summarized as follows: Year ended December 31, 2015 2014 2013 (Dollars in thousands) Other real estate owned $ 2,139 $ 3,573 $ 1,710 Repossessed assets 1,098 1,209 1,171 Total $ 3,237 $ 4,782 $ 2,881 Related Party Loans The Company has made loans in the ordinary course of business to the executive officers and directors of the Company and to certain affiliates of these executive officers and directors. Management believes that all such loans were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not represent more than a normal risk of collectability or present other unfavorable features. A summary of these loans is as follows: Year Ended December 31, Balance Beginning of the Period Additions Collections/ Terminations Period (Dollars in thousands) 2015 $ 25,019 $ 22,330 $ (9,772 ) $ 37,577 2014 27,134 22,521 (24,636 ) 25,019 2013 29,030 11,979 (13,875 ) 27,134 |