Loans and Allowance for Loan Losses | ( 4 ) LOANS AND ALLOWANCE FOR LOAN LOSSES The following is a schedule of loans outstanding by category: September 30, 2019 December 31, 2018 Amount Percent Amount Percent (Dollars in thousands) BancFirst Commercial and financial: Commercial and industrial $ 1,098,602 19.60 % $ 1,032,787 20.76 % Oil & gas production and equipment 143,083 2.55 94,729 1.90 Agriculture 130,150 2.32 136,313 2.74 State and political subdivisions: Taxable 71,521 1.28 76,211 1.53 Tax-exempt 52,261 0.93 48,415 0.97 Real estate: Construction 464,341 8.28 451,224 9.07 Farmland 242,181 4.32 219,241 4.41 One to four family residences 1,010,237 18.02 979,170 19.68 Multifamily residential properties 114,558 2.04 65,949 1.33 Commercial 1,480,898 26.41 1,506,937 30.28 Consumer 355,923 6.35 328,069 6.59 Other (not classified above) 50,909 0.91 36,931 0.74 Pegasus Bank 392,144 6.99 — — Total loans $ 5,606,808 100.00 % $ 4,975,976 100.00 % BancFirst ’s loans are mostly to customers within Oklahoma and approximately 59 % 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. BancFirst’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 $83 million at September 30, 2019 and approximately $60 million at December 31, 2018. Pegasus Bank’s loans are mostly to customers within Texas and approximately $209 million or 53% of the loans are secured by real estate. Pegasus Bank’s commercial and industrial loans were approximately $160 million, of which approximately $40 million were loans to companies in the oil and gas industry. Accounting policies related to appraisals, nonaccruals and charge-offs are disclosed in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Nonperforming and Restructured Assets The following is a summary of nonperforming and restructured assets: September 30, December 31, 2019 2018 (Dollars in thousands) Past due 90 days or more and still accruing $ 11,215 $ 1,916 Nonaccrual 19,995 22,603 Restructured 17,504 13,188 Total nonperforming and restructured loans 48,714 37,707 Other real estate owned and repossessed assets 7,055 6,873 Total nonperforming and restructured assets $ 55,769 $ 44,580 Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.4 million for the nine months ended September 30, 2019 and approximately $1.7 million for the nine months ended September 30, 2018. 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. September 30, 2019 December 31, 2018 (Dollars in thousands) BancFirst Real estate: Non-residential real estate owner occupied $ 2,082 $ 838 Non-residential real estate other 1,718 187 Residential real estate permanent mortgage 1,291 954 Residential real estate all other 6,142 5,488 Commercial and financial: Non-consumer non-real estate 3,171 5,682 Consumer non-real estate 412 437 Other loans 368 490 Acquired loans 3,932 8,527 Pegasus Bank 879 — Total $ 19,995 $ 22,603 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 September 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 1,325 $ 935 $ 4,859 $ 7,119 $ 678,852 $ 685,971 $ 3,808 Non-residential real estate other 1,066 — 73 1,139 1,189,409 1,190,548 — Residential real estate permanent mortgage 1,387 1,166 1,930 4,483 334,943 339,426 1,297 Residential real estate all other 2,633 665 5,694 8,992 882,771 891,763 442 Commercial and financial: Non-consumer non-real estate 1,642 665 2,358 4,665 1,419,409 1,424,074 420 Consumer non-real estate 1,899 695 578 3,172 355,152 358,324 376 Other loans 683 737 4,340 5,760 149,582 155,342 4,340 Acquired loans 1,529 989 2,088 4,606 164,610 169,216 532 Pegasus Bank — 879 — 879 391,265 392,144 — Total $ 12,164 $ 6,731 $ 21,920 $ 40,815 $ 5,565,993 $ 5,606,808 $ 11,215 As of December 31, 2018 BancFirst 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 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 period ended September 30, 2019 and September 30, 2018, 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 September 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 12,817 $ 12,566 $ 450 $ 9,352 Non-residential real estate other 3,873 3,593 279 2,501 Residential real estate permanent mortgage 3,060 2,768 254 2,422 Residential real estate all other 7,752 7,483 3,264 6,801 Commercial and financial: Non-consumer non-real estate 11,853 11,237 923 11,131 Consumer non-real estate 959 826 108 718 Other loans 4,917 4,708 94 424 Acquired loans 6,108 4,603 2 7,199 Pegasus Bank 2,989 2,190 — 1,089 Total $ 54,328 $ 49,974 $ 5,374 $ 41,637 As of December 31, 2018 BancFirst 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 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 disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Pegasus Bank Credit Quality Indicators Pegasus Bank categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Pegasus Bank analyzes loans individually by classifying the loans as to credit risk. Pegasus Bank uses the following definitions for risk ratings: Pass Loans classified as a pass are loans with low to average risk. These loans are included in grade 1 and 2 for the purposes of the following table: Special Mention Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of Pegasus Bank’s credit position at some future date. These loans are included in grade 3 for the purposes of the following table: Substandard Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Pegasus Bank will sustain some loss if the deficiencies are not corrected. These loans are included in grade 4 for the purposes of the following table: Doubtful Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. These loans, if any, would be included in grade 5 for the purposes of the following table: 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 September 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 531,883 $ 125,467 $ 26,082 $ 2,539 $ — $ 685,971 Non-residential real estate other 896,692 264,421 28,669 766 — 1,190,548 Residential real estate permanent mortgage 288,714 41,332 7,104 2,225 51 339,426 Residential real estate all other 697,825 172,253 14,986 6,699 — 891,763 Commercial and financial: Non-consumer non-real estate 1,136,324 256,992 28,590 2,168 — 1,424,074 Consumer non-real estate 333,508 21,608 2,410 798 — 358,324 Other loans 149,914 3,878 1,528 22 — 155,342 Acquired loans 98,685 59,027 7,223 4,067 214 169,216 Pegasus Bank 258,497 131,458 1,310 879 — 392,144 Total $ 4,392,042 $ 1,076,436 $ 117,902 $ 20,163 $ 265 $ 5,606,808 As of December 31, 2018 BancFirst 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 Allowance for Loan Losses Methodology The allowance for loan losses (“ALL”) methodology is disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 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) Three Months Ended September 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 6,887 $ (2 ) $ 1 $ (1 ) $ 72 $ 6,958 Non-residential real estate other 11,287 (35 ) 33 (2 ) 478 11,763 Residential real estate permanent mortgage 3,325 (63 ) 2 (61 ) 97 3,361 Residential real estate all other 11,721 (29 ) 2 (27 ) 507 12,201 Commercial and financial: Non-consumer non-real estate 15,232 (244 ) 49 (195 ) 347 15,384 Consumer non-real estate 3,234 (287 ) 66 (221 ) 261 3,274 Other loans 2,449 — 9 9 189 2,647 Acquired loans 973 (1,517 ) 53 (1,464 ) 767 276 Pegasus Bank — — 24 24 40 64 Total $ 55,108 $ (2,177 ) $ 239 $ (1,938 ) $ 2,758 $ 55,928 Nine Months Ended September 30, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 6,328 $ (11 ) $ 2 $ (9 ) $ 639 $ 6,958 Non-residential real estate other 11,027 (57 ) 34 (23 ) 759 11,763 Residential real estate permanent mortgage 3,261 (130 ) 11 (119 ) 219 3,361 Residential real estate all other 10,673 (224 ) 29 (195 ) 1,723 12,201 Commercial and financial: Non-consumer non-real estate 13,151 (401 ) 201 (200 ) 2,433 15,384 Consumer non-real estate 3,065 (569 ) 175 (394 ) 603 3,274 Other loans 2,423 — 87 87 137 2,647 Acquired loans 1,461 (1,713 ) 206 (1,507 ) 322 276 Pegasus Bank — — 24 24 40 64 Total $ 51,389 $ (3,105 ) $ 769 $ (2,336 ) $ 6,875 $ 55,928 ALL Balance at beginning of period Charge- offs Recoveries Net charge-offs Provisions charged to operations Balance at end of period (Dollars in thousands) Three Months Ended September 30, 2018 BancFirst Real estate: Non-residential real estate owner occupied $ 6,426 $ (179 ) $ 15 $ (164 ) $ 164 $ 6,426 Non-residential real estate other 10,705 (8 ) — (8 ) (49 ) 10,648 Residential real estate permanent mortgage 3,307 (39 ) — (39 ) 43 3,311 Residential real estate all other 10,123 (71 ) 95 24 274 10,421 Commercial and financial: Non-consumer non-real estate 15,069 (343 ) 7 (336 ) (337 ) 14,396 Consumer non-real estate 2,839 (294 ) 70 (224 ) 298 2,913 Other loans 2,328 — 6 6 88 2,422 Acquired loans 1,403 (337 ) 6 (331 ) 266 1,338 Total $ 52,200 $ (1,271 ) $ 199 $ (1,072 ) $ 747 $ 51,875 Nine Months Ended September 30, 2018 BancFirst Real estate: Non-residential real estate owner occupied $ 6,195 $ (198 ) $ 16 $ (182 ) $ 413 $ 6,426 Non-residential real estate other 10,519 (9 ) 39 30 99 10,648 Residential real estate permanent mortgage 3,226 (101 ) 26 (75 ) 160 3,311 Residential real estate all other 9,672 (312 ) 101 (211 ) 960 10,421 Commercial and financial: Non-consumer non-real estate 15,334 (652 ) 30 (622 ) (316 ) 14,396 Consumer non-real estate 2,793 (738 ) 194 (544 ) 664 2,913 Other loans 2,481 (2 ) 30 28 (87 ) 2,422 Acquired loans 1,446 (530 ) 29 (501 ) 393 1,338 Total $ 51,666 $ (2,542 ) $ 465 $ (2,077 ) $ 2,286 $ 51,875 The following table details the amount of ALL by class of loans for the period presented, detailed on the basis of the impairment methodology used by the Company. ALL September 30, 2019 December 31, 2018 Individually evaluated for impairment Collectively evaluated for impairment Individually evaluated for impairment Collectively evaluated for impairment (Dollars in thousands) BancFirst Real estate: Non-residential real estate owner occupied $ 1,110 $ 5,848 $ 669 $ 5,659 Non-residential real estate other 1,152 10,611 1,119 9,908 Residential real estate permanent mortgage 556 2,805 505 2,756 Residential real estate all other 4,379 7,822 3,413 7,260 Commercial and financial: Non-consumer non-real estate 3,185 12,199 2,114 11,037 Consumer non-real estate 355 2,919 374 2,691 Other loans 17 2,630 65 2,358 Acquired loans — 276 — 1,461 Pegasus Bank — 64 — — Total $ 10,754 $ 45,174 $ 8,259 $ 43,130 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 September 30, 2019 December 31, 2018 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) BancFirst Real estate: Non-residential real estate owner occupied $ 28,622 $ 657,349 $ — $ 17,846 $ 608,775 $ — Non-residential real estate other 29,435 1,161,113 — 25,333 1,120,795 — Residential real estate permanent mortgage 9,380 330,046 — 9,026 319,676 — Residential real estate all other 21,685 870,078 — 21,285 806,219 — Commercial and financial: Non-consumer non-real estate 30,626 1,393,448 — 19,432 1,264,222 — Consumer non-real estate 3,208 355,116 — 3,093 323,769 — Other loans 175 155,167 — 209 141,700 — Acquired loans 10,504 157,761 951 22,132 265,084 7,380 Pegasus Bank — 389,955 2,189 — — — Total $ 133,635 $ 5,470,033 $ 3,140 $ 118,356 $ 4,850,240 $ 7,380 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. Such transfers during the periods presented, are summarized as follows: Nine Months Ended September 30, 2019 2018 (Dollars in thousands) Other real estate owned $ 2,972 $ 2,944 Repossessed assets 946 842 Total $ 3,918 $ 3,786 |