Loans Held for Investment and Allowance for Credit Losses on Loans | ( 4 ) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES ON LOANS In connection with our adoption of ASU 2016-13, changes were made to our primary portfolio segments to align with the methodology applied in determining the allowance under CECL. Loans held for investment are summarized by portfolio segment as follows: March 31, 2020 December 31, 2019 Amount Amount (Dollars in thousands) BancFirst Real estate: Commercial real estate owner occupied $ 633,406 $ 621,188 Commercial real estate non-owner occupied 911,682 851,200 Construction and development < 60 months 254,204 287,138 Construction residential real estate < 60 months 200,895 189,480 Residential real estate first lien 850,854 834,849 Residential real estate all other 184,848 187,647 Farmland 255,082 246,988 Commercial and agricultural non-real estate 1,710,368 1,499,404 Consumer non-real estate 356,768 359,529 Other loans 156,952 154,015 Pegasus Bank 474,845 430,705 Total (1) $ 5,989,904 $ 5,662,143 (1) Excludes accrued interest receivable of $27.4 million at March 31, 2020 and December 31, 2019, that is recorded in accrued interest receivable and other assets. BancFirst’s loans are mostly to customers within Oklahoma and approximately 55% 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 agricultural non-real estate loan category includes reserve based energy loans and a small percentage of loans to companies that provide ancillary services to the energy industry, such as transportation, preparation contractors and equipment manufacturers. The balance of reserve based energy loans was approximately $248 million at March 31, 2020 and approximately $210 million at December 31, 2019. The balance of the ancillary services energy loans was approximately $116 million at March 31, 2020 and approximately $110 million at December 31, 2019. Pegasus Bank’s loans are mostly to customers within Texas and approximately $248 million or 52% of the loans are secured by real estate at March 31, 2020. Pegasus Bank’s commercial and agricultural non-real estate loan were approximately $198 million at March 31, 2020 and approximately $172 million at December 31, 2019. Pegasus Bank’s reserve based energy loans were approximately $77 million at March 31, 2020 and approximately $44 million at December 31, 2019. Accounting policies related to appraisals, and charge-offs are disclosed in Note (1) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Nonperforming and Restructured Assets The following is a summary of restructured assets and other real estate owned and repossessed assets: March 31, December 31, 2020 2019 (Dollars in thousands) Restructured $ 3,158 $ 18,010 Other real estate owned and repossessed assets $ 6,001 $ 6,073 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. Nonaccrual loans Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $332,000 for the three months ended March 31, 2020 and approximately $544,000 for the three months ended March 31, 2019. The following table is a summary of amounts included in nonaccrual loans, segregated by portfolio segment. Residential real estate refers to one-to-four family real estate. March 31, 2020 (Dollars in thousands) BancFirst Real estate: Commercial real estate owner occupied $ 2,503 Commercial real estate non-owner occupied 465 Construction and development < 60 months 155 Construction residential real estate < 60 months 380 Residential real estate first lien 3,657 Residential real estate all other 838 Farmland 2,687 Commercial and agricultural non-real estate 32,530 Consumer non-real estate 174 Other loans 1,522 Pegasus Bank 270 Total $ 45,181 December 31, 2019 (Dollars in thousands) BancFirst Real estate: Non-residential real estate owner occupied $ 2,275 Non-residential real estate other 1,815 Residential real estate permanent mortgage 1,206 Residential real estate all other 3,060 Non-consumer non-real estate 2,915 Consumer non-real estate 264 Other loans 1,083 Acquired loans 4,496 Pegasus Bank 851 Total $ 17,965 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 our loans held for investment: 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 March 31, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 933 $ 12 $ 2,548 $ 3,493 $ 629,913 $ 633,406 $ 192 Commercial real estate non-owner occupied 513 38 188 739 910,943 911,682 — Construction and development < 60 months 1,696 — 129 1,825 252,379 254,204 — Construction residential real estate < 60 months 182 181 238 601 200,294 200,895 39 Residential real estate first lien 7,093 1,895 3,622 12,610 838,244 850,854 1,685 Residential real estate all other 1,226 149 829 2,204 182,644 184,848 130 Farmland 1,025 467 3,451 4,943 250,139 255,082 1,406 Commercial and agricultural non-real estate 5,173 811 4,093 10,077 1,700,291 1,710,368 1,451 Consumer non-real estate 2,638 724 640 4,002 352,766 356,768 545 Other loans 3,356 479 5,537 9,372 147,580 156,952 4,617 Pegasus Bank — — 270 270 474,575 474,845 — Total $ 23,835 $ 4,756 $ 21,545 $ 50,136 $ 5,939,768 $ 5,989,904 $ 10,065 As of December 31, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 1,600 $ 967 $ 5,159 $ 7,726 $ 699,690 $ 707,416 $ 3,799 Non-residential real estate other 971 — 1,228 2,199 1,134,976 1,137,175 — Residential real estate permanent mortgage 4,705 973 2,215 7,893 332,679 340,572 1,660 Residential real estate other 4,496 1,028 2,541 8,065 912,767 920,832 549 Non-consumer non-real estate 2,290 1,446 1,763 5,499 1,448,894 1,454,393 354 Consumer other 2,829 858 592 4,279 358,075 362,354 491 Other loans 1,670 8 4,613 6,291 147,724 154,015 4,426 Acquired loans 2,167 1,376 3,447 6,990 147,691 154,681 555 Pegasus Bank — — 851 851 429,854 430,705 — Total $ 20,728 $ 6,656 $ 22,409 $ 49,793 $ 5,612,350 $ 5,662,143 $ 11,834 Credit Quality Indicators The Company considers credit quality indicators to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical credit 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, 2019. The Company’s revolving loans that are converted to term loans are not material and therefore have not been presented. The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades: Term Loans Amortized Cost Basis by Origination Year 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total (Dollars in thousands) Three Months Ended March 31, 2020 BancFirst Commercial real estate owner occupied Grade 1 $25,303 $133,035 $92,854 $60,998 $48,931 $133,987 $10,456 $505,564 Grade 2 8,430 31,499 13,264 12,042 12,038 35,219 3,224 115,716 Grade 3 56 40 641 1,052 497 2,668 3,547 8,501 Grade 4 — 370 849 — 398 1,541 467 3,625 Total commercial real estate owner occupied loans 33,789 164,944 107,608 74,092 61,864 173,415 17,694 633,406 Commercial real estate non-owner occupied Grade 1 95,360 173,469 133,346 72,705 98,735 110,808 14,231 698,654 Grade 2 11,131 69,801 18,589 24,363 12,846 57,175 3,801 197,706 Grade 3 1,698 4,030 7,213 782 44 971 142 14,880 Grade 4 — 95 191 — — 156 — 442 Total commercial real estate non-owner occupied loans 108,189 247,395 159,339 97,850 111,625 169,110 18,174 911,682 Construction and development < 60 months Grade 1 42,312 101,895 28,665 36,294 3,112 4,490 10,045 226,813 Grade 2 12,019 9,018 1,732 869 172 581 404 24,795 Grade 3 34 2,211 195 — — — — 2,440 Grade 4 — 75 39 26 — — — 140 Grade 5 16 — — — — — — 16 Total construction and development < 60 months 54,381 113,199 30,631 37,189 3,284 5,071 10,449 254,204 Construction residential real estate < 60 months Grade 1 38,515 120,390 385 23 40 35 5,174 164,562 Grade 2 9,101 21,755 950 — — 487 171 32,464 Grade 3 649 2,597 203 — — — — 3,449 Grade 4 — 133 287 — — — — 420 Total construction residential real estate < 60 months 48,265 144,875 1,825 23 40 522 5,345 200,895 Residential real estate first lien Grade 1 64,808 217,000 100,098 79,709 59,462 176,542 — 697,619 Grade 2 6,678 29,159 25,294 14,288 14,068 41,068 — 130,555 Grade 3 2,333 2,468 1,621 1,796 2,330 7,303 — 17,851 Grade 4 126 596 707 257 937 2,143 — 4,766 Grade 5 — — — — 51 12 — 63 Total residential real estate first lien 73,945 249,223 127,720 96,050 76,848 227,068 — 850,854 Residential real estate all other Grade 1 6,151 20,055 14,680 10,701 7,350 15,475 36,405 110,817 Grade 2 1,282 2,441 1,640 1,918 494 3,384 58,583 69,742 Grade 3 25 850 1,002 288 194 436 288 3,083 Grade 4 53 46 74 45 — 727 94 1,039 Grade 5 97 70 — — — — — 167 Total residential real estate all other 7,608 23,462 17,396 12,952 8,038 20,022 95,370 184,848 Farmland Grade 1 13,825 35,940 24,768 18,410 16,773 37,822 7,733 155,271 Grade 2 6,615 35,533 7,464 7,565 6,670 10,788 9,347 83,982 Grade 3 540 834 5,337 1,132 589 1,715 3,540 13,687 Grade 4 — — 777 660 399 55 251 2,142 Total farmland 20,980 72,307 38,346 27,767 24,431 50,380 20,871 255,082 Commercial and agricultural non-real estate Grade 1 200,458 306,072 154,484 122,613 60,696 53,613 466,220 1,364,156 Grade 2 38,024 61,920 32,778 10,825 6,101 29,242 103,820 282,710 Grade 3 8,868 5,720 2,836 1,833 4,610 1,458 5,976 31,301 Grade 4 26,587 1,221 903 2,529 111 290 437 32,078 Grade 5 — 83 — — — — 40 123 Total commercial and agricultural non-real estate 273,937 375,016 191,001 137,800 71,518 84,603 576,493 1,710,368 Consumer non-real estate Grade 1 45,588 160,489 74,136 27,553 11,129 4,973 6,821 330,689 Grade 2 2,927 10,459 5,900 1,963 1,026 444 284 23,003 Grade 3 99 915 665 303 176 156 14 2,328 Grade 4 7 267 254 70 62 86 2 748 Total consumer non-real estate 48,621 172,130 80,955 29,889 12,393 5,659 7,121 356,768 Other loans Grade 1 6,050 29,014 29,762 22,628 21,756 16,142 21,851 147,203 Grade 2 — — 17 3,080 1,183 3,121 867 8,268 Grade 3 — — 24 — — 1,346 — 1,370 Grade 4 — — — 12 28 71 — 111 Total other loans 6,050 29,014 29,803 25,720 22,967 20,680 22,718 156,952 Pegasus Bank Grade 1 35,067 79,582 43,442 30,012 16,926 45,404 80,175 330,608 Grade 2 15,439 33,869 11,062 27,708 4,209 8,887 41,516 142,690 Grade 3 — — — — — 1,277 — 1,277 Grade 4 — — — — 270 — — 270 Total Pegasus Bank 50,506 113,451 54,504 57,720 21,405 55,568 121,691 474,845 Total loans held for investment $726,271 $1,705,016 $839,128 $597,052 $414,413 $812,098 $895,926 $5,989,904 Allowance for Credit Losses Methodology On January 1, 2020, the Company adopted ASU 2016-13, which replaces the incurred loss methodology for determining its provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. See Note (1) for additional information regarding the factors that influenced the Company’s current estimate of expected credit losses. Upon adoption, the allowance for credit losses was decreased by $3.2 million, with no impact to the consolidated statement of income. Subsequent to the adoption of ASU 2016-13, the Company recorded a $19.6 million provision for credit losses for the first quarter of 2020 utilizing the newly adopted CECL methodology, a significant increase from prior quarters. The increase resulted primarily from the anticipated impact on our loan portfolio resulting from the economic outlook related to the COVID-19 pandemic and the decline in energy prices and to a lesser degree, loan growth during the quarter. Prolonged low energy prices will not only have a direct impact on the energy portfolio; it will have an indirect effect on the economies of Oklahoma and the Dallas, Texas market, including higher unemployment, with a residual effect on land values and real estate prices. The following table details activity in the allowance for credit losses on 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. Allowance for Credit Losses Balance at beginning of period Impact of CECL adoption Initial allowance on loans purchased with credit deterioration Charge- offs Recoveries Net charge-offs Provision for credit losses on loans Balance at end of period (Dollars in thousands) Three Months Ended March 31, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 5,625 $ (2,806 ) $ 432 $ — $ — $ — $ 1,293 $ 4,544 Commercial real estate non-owner occupied 8,358 (5,507 ) — — — — 3,084 5,935 Construction and development < 60 months 2,214 (1,056 ) — (3 ) — (3 ) (19 ) 1,136 Construction residential real estate < 60 months 1,933 (778 ) — (1 ) — (1 ) 464 1,618 Residential real estate first lien 8,692 (3,831 ) 7 (152 ) 2 (150 ) 1,474 6,192 Residential real estate all other 2,767 (1,408 ) — (25 ) 27 2 931 2,292 Farmland 2,821 (1,408 ) 1 — — — 374 1,788 Commercial and agricultural non-real estate 15,345 11,849 62 (87 ) 17 (70 ) 10,090 37,276 Consumer non-real estate 3,252 (622 ) — (321 ) 57 (264 ) 1,019 3,385 Other loans 2,632 (116 ) — — 2 2 233 2,751 Pegasus Bank 599 2,488 — (571 ) 7 (564 ) 640 3,163 Total $ 54,238 $ (3,195 ) $ 502 $ (1,160 ) $ 112 $ (1,048 ) $ 19,583 $ 70,080 Allowance for Credit Losses Balance at beginning of period Charge- offs Recoveries Net charge-offs Provision for credit losses on loans Balance at end of period (Dollars in thousands) Three Months Ended March 31, 2019 BancFirst Real estate: Non-residential real estate owner occupied $ 6,328 $ (6 ) $ 1 $ (5 ) $ 332 $ 6,655 Non-residential real estate other 11,027 (6 ) — (6 ) 341 11,362 Residential real estate permanent mortgage 3,261 (63 ) 5 (58 ) 58 3,261 Residential real estate all other 10,673 (52 ) 2 (50 ) 423 11,046 Non-consumer non-real estate 13,151 (70 ) 67 (3 ) 1,261 14,409 Consumer non-real estate 3,065 (120 ) 71 (49 ) 56 3,072 Other loans 2,423 — 35 35 (50 ) 2,408 Acquired loans 1,461 (26 ) 4 (22 ) (737 ) 702 Total $ 51,389 $ (343 ) $ 185 $ (158 ) $ 1,684 $ 52,915 Purchased Credit Deteriorated Loans The Company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows: Loans acquired with deteriorated credit quality (Dollars in thousands) As of March 31, 2020 Purchase price of loans at acquisition $ 1,761 Allowance for credit losses at acquisition 502 Par value of acquired loans at acquisition $ 2,263 Collateral Dependent Loans A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows: Collateral Type Real Estate Business Assets Energy Reserves Other Assets (Dollars in thousands) As of March 31, 2020 BancFirst Real estate: Commercial real estate owner occupied $ 821 $ — $ — $ — Commercial real estate non-owner occupied 1,012 — — — Construction and development < 60 months 17 — — — Construction residential real estate < 60 months 199 — — — Residential real estate first lien 1,590 — — — Residential real estate all other 3,042 — — — Farmland 1,112 — — — Commercial and agricultural non-real estate — 3,081 28,604 801 Consumer non-real estate — — — 38 Other loans — 25 — — Pegasus Bank 1,277 — — — Total collateral-dependent loans held for investment $ 9,070 $ 3,106 $ 28,604 $ 839 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: Three Months Ended March 31, 2020 2019 (Dollars in thousands) Other real estate owned $ 2,342 $ 591 Repossessed assets 318 301 Total $ 2,660 $ 892 |