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, 2018 2017 Amount Percent Amount Percent (Dollars in thousands) Commercial and financial: Commercial and industrial $ 1,032,787 20.76 % $ 995,207 21.08 % Oil & gas production and equipment 94,729 1.90 95,574 2.02 Agriculture 136,313 2.74 141,249 2.99 State and political subdivisions: Taxable 76,211 1.53 73,827 1.56 Tax-exempt 48,415 0.97 48,626 1.03 Real estate: Construction 451,224 9.07 437,277 9.26 Farmland 219,241 4.41 195,162 4.13 One to four family residences 979,170 19.68 875,766 18.55 Multifamily residential properties 65,949 1.33 46,030 0.98 Commercial 1,506,937 30.28 1,487,927 31.51 Consumer 328,069 6.59 284,373 6.02 Other (not classified above) 36,931 0.74 40,977 0.87 Total loans $ 4,975,976 100.00 % $ 4,721,995 100.00 % The Company’s loans are mostly to customers within Oklahoma and approximately 65% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual and related 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. 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 was approximately $60 million at December 31, 2018 and approximately $81 million at December 31, 2017. 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, 2018 2017 (Dollars in thousands) Past due 90 days or more and still accruing $ 1,916 $ 2,893 Nonaccrual 22,603 31,943 Restructured 13,188 4,720 Total nonperforming and restructured loans 37,707 39,556 Other real estate owned and repossessed assets 6,873 4,424 Total nonperforming and restructured assets $ 44,580 $ 43,980 Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.3 million in 2018, $1.8 million in 2017 and $2.0 million in 2016. The Company charges interest on principal balances outstanding on restructured loans during deferral periods. 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, 2018 2017 (Dollars in thousands) Real estate: Non-residential real estate owner occupied $ 838 $ 1,108 Non-residential real estate other 187 9,809 Residential real estate permanent mortgage 954 781 Residential real estate all other 5,488 3,980 Commercial and financial: Non-consumer non-real estate 5,682 7,785 Consumer non-real estate 437 250 Other loans 490 5,596 Acquired loans 8,527 2,634 Total $ 22,603 $ 31,943 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, 2018 Real estate: Non-residential real estate owner occupied $ 5,114 $ 810 $ 43 $ 5,967 $ 620,654 $ 626,621 $ — Non-residential real estate other 2,772 32 114 2,918 1,143,210 1,146,128 — Residential real estate permanent mortgage 2,448 653 693 3,794 324,908 328,702 430 Residential real estate all other 1,728 292 2,799 4,819 822,685 827,504 612 Commercial and financial: Non-consumer non-real estate 3,620 702 833 5,155 1,278,499 1,283,654 282 Consumer non-real estate 1,991 565 559 3,115 323,747 326,862 325 Other loans 322 158 178 658 141,251 141,909 — Acquired loans 5,240 1,669 4,936 11,845 282,751 294,596 267 Total $ 23,235 $ 4,881 $ 10,155 $ 38,271 $ 4,937,705 $ 4,975,976 $ 1,916 As of December 31, 2017 Real estate: Non-residential real estate owner occupied $ 998 $ 68 $ 977 $ 2,043 $ 639,575 $ 641,618 $ 84 Non-residential real estate other 2,905 271 2,112 5,288 1,121,303 1,126,591 432 Residential real estate permanent mortgage 2,211 403 977 3,591 326,743 330,334 584 Residential real estate all other 1,739 749 1,377 3,865 781,790 785,655 973 Commercial and financial: Non-consumer non-real estate 2,210 706 1,785 4,701 1,279,704 1,284,405 403 Consumer non-real estate 2,085 670 293 3,048 285,872 288,920 194 Other loans 506 103 3,916 4,525 139,920 144,445 — Acquired loans 753 192 713 1,658 118,369 120,027 223 Total $ 13,407 $ 3,162 $ 12,150 $ 28,719 $ 4,693,276 $ 4,721,995 $ 2,893 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. During the year ended December 31, 2018 no material amount of interest income was recognized on impaired loans subsequent to their classification as impaired. During the year ended December 31, 2017, $2.3 million 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, 2018 Real estate: Non-residential real estate owner occupied $ 7,126 $ 6,933 $ 202 $ 7,739 Non-residential real estate other 949 757 50 6,057 Residential real estate permanent mortgage 1,789 1,545 127 1,650 Residential real estate all other 7,177 6,862 2,433 7,154 Commercial and financial: Non-consumer non-real estate 18,507 10,977 881 12,140 Consumer non-real estate 928 829 131 846 Other loans 710 490 35 481 Acquired loans 12,846 9,864 2 11,050 Total $ 50,032 $ 38,257 $ 3,861 $ 47,117 As of December 31, 2017 Real estate: Non-residential real estate owner occupied $ 2,011 $ 1,945 $ 141 $ 1,858 Non-residential real estate other 10,323 10,240 496 3,975 Residential real estate permanent mortgage 1,745 1,542 146 1,440 Residential real estate all other 5,837 5,549 2,135 5,258 Commercial and financial: Non-consumer non-real estate 18,101 11,158 2,412 11,131 Consumer non-real estate 545 514 127 541 Other loans 6,092 5,595 178 7,439 Acquired loans 4,737 3,145 12 3,539 Total $ 49,391 $ 39,688 $ 5,647 $ 35,181 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, 2018 Real estate: Non-residential real estate owner occupied $ 451,059 $ 157,715 $ 16,949 $ 898 $ — $ 626,621 Non-residential real estate other 932,454 188,341 25,146 187 — 1,146,128 Residential real estate permanent mortgage 279,870 39,806 7,401 1,625 — 328,702 Residential real estate all other 644,217 162,003 15,232 6,052 — 827,504 Commercial and financial: Non-consumer non-real estate 1,000,089 264,134 15,128 4,303 — 1,283,654 Consumer non-real estate 302,217 21,600 2,255 790 — 326,862 Other loans 136,132 5,542 116 119 — 141,909 Acquired loans 156,008 109,075 20,884 8,284 345 294,596 Total $ 3,902,046 $ 948,216 $ 103,111 $ 22,258 $ 345 $ 4,975,976 As of December 31, 2017 Real estate: Non-residential real estate owner occupied $ 520,641 $ 105,696 $ 13,852 $ 1,429 $ — $ 641,618 Non-residential real estate other 931,295 178,282 14,290 2,724 — 1,126,591 Residential real estate permanent mortgage 289,200 33,033 6,352 1,749 — 330,334 Residential real estate all other 621,401 149,201 9,418 5,635 — 785,655 Commercial and financial: Non-consumer non-real estate 1,018,172 234,884 24,322 6,997 30 1,284,405 Consumer non-real estate 268,826 17,499 2,038 557 — 288,920 Other loans 136,617 5,668 1,203 957 — 144,445 Acquired loans 65,685 34,418 17,113 2,811 — 120,027 Total $ 3,851,837 $ 758,681 $ 88,588 $ 22,859 $ 30 $ 4,721,995 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, 2018 Real estate: Non-residential real estate owner occupied $ 6,195 $ (282 ) $ 17 $ (265 ) $ 398 $ 6,328 Non-residential real estate other 10,519 (93 ) 41 (52 ) 560 11,027 Residential real estate permanent mortgage 3,226 (174 ) 26 (148 ) 183 3,261 Residential real estate all other 9,672 (395 ) 106 (289 ) 1,290 10,673 Commercial and financial: Non-consumer non-real estate 15,334 (2,257 ) 92 (2,165 ) (18 ) 13,151 Consumer non-real estate 2,793 (1,066 ) 245 (821 ) 1,093 3,065 Other loans 2,481 (16 ) 361 345 (403 ) 2,423 Acquired loans 1,446 (720 ) 36 (684 ) 699 1,461 Total $ 51,666 $ (5,003 ) $ 924 $ (4,079 ) $ 3,802 $ 51,389 As of December 31, 2017 Real estate: Non-residential real estate owner occupied $ 5,602 $ (74 ) $ 6 $ (68 ) $ 661 $ 6,195 Non-residential real estate other 10,793 (47 ) 16 (31 ) (243 ) 10,519 Residential real estate permanent mortgage 3,129 (373 ) 25 (348 ) 445 3,226 Residential real estate all other 8,622 (330 ) 66 (264 ) 1,314 9,672 Commercial and financial: Non-consumer non-real estate 12,421 (1,344 ) 1,033 (311 ) 3,224 15,334 Consumer non-real estate 2,804 (913 ) 180 (733 ) 722 2,793 Other loans 4,045 (3,727 ) 23 (3,704 ) 2,140 2,481 Acquired loans 1,277 (157 ) 77 (80 ) 249 1,446 Total $ 48,693 $ (6,965 ) $ 1,426 $ (5,539 ) $ 8,512 $ 51,666 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, 2018 December 31, 2017 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 $ 669 $ 5,659 $ 656 $ 5,539 Non-residential real estate other 1,119 9,908 751 9,768 Residential real estate permanent mortgage 505 2,756 483 2,743 Residential real estate all other 3,413 7,260 2,761 6,911 Commercial and financial: Non-consumer non-real estate 2,114 11,037 4,651 10,683 Consumer non-real estate 374 2,691 429 2,364 Other loans 65 2,358 133 2,348 Acquired loans — 1,461 12 1,434 Total $ 8,259 $ 43,130 $ 9,876 $ 41,790 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, 2018 December 31, 2017 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 $ 17,846 $ 608,775 $ — $ 15,281 $ 626,337 $ — Non-residential real estate other 25,333 1,120,795 — 17,013 1,109,578 — Residential real estate permanent mortgage 9,026 319,676 — 8,100 322,234 — Residential real estate all other 21,285 806,219 — 15,052 770,603 — Commercial and financial: Non-consumer non-real estate 19,432 1,264,222 — 31,349 1,253,056 — Consumer non-real estate 3,093 323,769 — 2,600 286,320 — Other loans 209 141,700 — 764 143,681 — Acquired loans 22,132 265,084 7,380 14,464 100,106 5,457 Total $ 118,356 $ 4,850,240 $ 7,380 $ 104,623 $ 4,611,915 $ 5,457 Non-Cash Transfers from Loans and Premises and Equipment Transfers from loans and premises and equipment 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 and premises and equipment to other real estate owned and repossessed assets during the periods presented are summarized as follows: Year ended December 31, 2018 2017 2016 (Dollars in thousands) Other real estate owned $ 5,437 $ 2,889 $ 2,553 Repossessed assets 1,122 1,242 1,402 Total $ 6,559 $ 4,131 $ 3,955 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) 2018 $ 24,001 $ 7,986 $ (12,096 ) $ 19,891 2017 27,486 7,350 (10,835 ) 24,001 2016 37,577 16,133 (26,224 ) 27,486 |