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, 2016 2015 Amount Percent Amount Percent (Dollars in thousands) Commercial and financial: Commercial and industrial $ 828,260 18.82 % $ 795,803 18.80 % Oil & gas production and equipment 84,228 1.91 87,304 2.06 Agriculture 144,751 3.29 150,620 3.56 State and political subdivisions: Taxable 33,793 0.77 17,605 0.42 Tax-exempt 47,283 1.07 33,575 0.79 Real estate: Construction 420,884 9.57 403,664 9.54 Farmland 197,872 4.50 184,707 4.36 One to four family residences 846,360 19.24 821,251 19.41 Multifamily residential properties 57,806 1.31 65,477 1.55 Commercial 1,426,643 32.42 1,356,430 32.05 Consumer 279,704 6.36 283,636 6.70 Other (not classified above) 32,648 0.74 31,976 0.76 Total loans $ 4,400,232 100.00 % $ 4,232,048 100.00 % The Company’s commercial and industrial loan category includes a small percentage of loans to companies that provide ancillary services to the oil and gas industry, such as transportation, preparation contractors and equipment manufacturers. The balance of these loans at December 31, 2016 was approximately $56 million. 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, 2016 2015 (Dollars in thousands) Past due 90 days or more and still accruing $ 1,962 $ 1,841 Nonaccrual 31,798 30,096 Restructured 1,713 15,143 Total nonperforming and restructured loans 35,473 47,080 Other real estate owned and repossessed assets 3,866 8,214 Total nonperforming and restructured assets $ 39,339 $ 55,294 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 2016, $2.0 million in 2015 and $1.2 million in 2014. Restructured loans at December 31, 2015 consisted primarily of one relationship restructured in prior periods to defer certain principal payments. This relationship was re-evaluated by management and removed from restructured loans in 2016 due to sustained improvement in financial condition, performance and the commercially reasonable nature of its structure. 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, 2016 2015 (Dollars in thousands) Real estate: Non-residential real estate owner occupied $ 713 $ 261 Non-residential real estate other 5,688 3,957 Residential real estate permanent mortgage 1,116 656 Residential real estate all other 5,089 1,833 Commercial and financial: Non-consumer non-real estate 4,464 10,159 Consumer non-real estate 265 312 Other loans 8,370 9,381 Acquired loans 6,093 3,537 Total $ 31,798 $ 30,096 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, 2016 Real estate: Non-residential real estate owner occupied $ 2,255 $ 96 $ 150 $ 2,501 $ 569,130 $ 571,631 $ — Non-residential real estate other 611 16 418 1,045 1,122,351 1,123,396 — Residential real estate permanent mortgage 2,742 649 1,273 4,664 320,749 325,413 513 Residential real estate all other 2,559 531 1,416 4,506 743,723 748,229 369 Commercial and financial: Non-consumer non-real estate 1,269 1,628 741 3,638 1,047,547 1,051,185 608 Consumer non-real estate 2,046 760 419 3,225 280,652 283,877 274 Other loans 5,345 958 7,775 14,078 127,404 141,482 45 Acquired loans 825 310 408 1,543 153,476 155,019 153 Total $ 17,652 $ 4,948 $ 12,600 $ 35,200 $ 4,365,032 $ 4,400,232 $ 1,962 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 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, 2016 Real estate: Non-residential real estate owner occupied $ 894 $ 806 $ 101 $ 825 Non-residential real estate other 7,742 5,688 574 5,854 Residential real estate permanent mortgage 1,878 1,683 124 1,612 Residential real estate all other 5,871 5,614 1,538 5,445 Commercial and financial: Non-consumer non-real estate 12,015 6,272 1,457 6,478 Consumer non-real estate 686 650 133 788 Other loans 9,799 8,415 1,870 8,062 Acquired loans 8,780 6,581 — 6,041 Total $ 47,665 $ 35,709 $ 5,797 $ 35,105 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 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, 2016 Real estate: Non-residential real estate owner occupied $ 464,504 $ 89,978 $ 16,220 $ 929 $ — $ 571,631 Non-residential real estate other 933,743 169,561 14,404 5,688 — 1,123,396 Residential real estate permanent mortgage 284,893 32,889 5,987 1,644 — 325,413 Residential real estate all other 614,338 119,018 9,382 5,491 — 748,229 Commercial and financial: Non-consumer non-real estate 856,318 170,865 19,101 4,901 — 1,051,185 Consumer non-real estate 263,442 17,154 2,640 641 — 283,877 Other loans 132,254 5,376 1,514 2,338 — 141,482 Acquired loans 92,946 42,668 12,888 6,517 — 155,019 Total $ 3,642,438 $ 647,509 $ 82,136 $ 28,149 $ — $ 4,400,232 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 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, 2016 Real estate: Non-residential real estate owner occupied $ 4,661 $ (11 ) $ 3 $ (8 ) $ 949 $ 5,602 Non-residential real estate other 9,921 (9 ) 6 (3 ) 875 10,793 Residential real estate permanent mortgage 3,148 (208 ) 55 (153 ) 134 3,129 Residential real estate all other 6,725 (181 ) 21 (160 ) 2,057 8,622 Commercial and financial: Non-consumer non-real estate 11,754 (2,921 ) 122 (2,799 ) 3,466 12,421 Consumer non-real estate 2,642 (1,088 ) 159 (929 ) 1,091 2,804 Other loans 2,648 (388 ) 17 (371 ) 1,768 4,045 Acquired loans 167 (101 ) 32 (69 ) 1,179 1,277 Total $ 41,666 $ (4,907 ) $ 415 $ (4,492 ) $ 11,519 $ 48,693 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 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, 2016 December 31, 2015 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 $ 716 $ 4,886 $ 323 $ 4,338 Non-residential real estate other 1,119 9,674 323 9,598 Residential real estate permanent mortgage 422 2,707 399 2,749 Residential real estate all other 2,160 6,462 839 5,886 Commercial and financial: Non-consumer non-real estate 3,317 9,104 3,365 8,389 Consumer non-real estate 478 2,326 445 2,197 Other loans 1,812 2,233 291 2,357 Acquired loans 495 782 — 167 Total $ 10,519 $ 38,174 $ 5,985 $ 35,681 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, 2016 December 31, 2015 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 $ 17,149 $ 554,482 $ — $ 8,619 $ 494,278 $ — Non-residential real estate other 20,092 1,103,304 — 8,608 1,102,152 — Residential real estate permanent mortgage 7,631 317,782 — 7,543 325,058 — Residential real estate all other 14,873 733,356 — 10,803 665,886 — Commercial and financial: Non-consumer non-real estate 24,002 1,027,183 — 22,983 961,779 — Consumer non-real estate 3,203 280,674 — 2,416 266,453 — Other loans 2,254 139,228 — 2,323 160,293 — Acquired loans 13,459 135,616 5,944 7,889 177,871 7,094 Total $ 102,663 $ 4,291,625 $ 5,944 $ 71,184 $ 4,153,770 $ 7,094 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, 2016 2015 2014 (Dollars in thousands) Other real estate owned $ 2,553 $ 2,139 $ 3,573 Repossessed assets 1,402 1,098 1,209 Total $ 3,955 $ 3,237 $ 4,782 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 Balance End of the Period (Dollars in thousands) 2016 $ 37,577 $ 16,133 $ (26,224 ) $ 27,486 2015 25,019 22,330 (9,772 ) 37,577 2014 27,134 22,521 (24,636 ) 25,019 |