Loans And Allowance For Loan Losses | NOTE 3 : LOANS AND ALLOWANCE FOR LOAN LOSSES We extend commercial and consumer credit primarily to customers in the states of Oklahom a, Texas, Kansas, and Colorado. Our commercial lending operations are concentrated in Oklahoma City, Tulsa, Dallas, San Antonio, Wichita, and other metropolitan markets in Oklahoma, Texas , Kansas, and Colorado . As a result, the collect a bility of our loan portfolio can be affected by changes in the economic conditions in those states and markets . Please see “Note 9: Operating Segments” in the Notes to Unaudited Consolidated Financial Statements for more detail regarding loans by market. At June 30, 2017 and December 31, 2016 , substantially all of our l oans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government. Our loan classifications were as follows: (Dollars in thousands) At June 30, 2017 At December 31, 2016 Real estate mortgage: Commercial $ 961,085 $ 882,071 One-to-four family residential 241,140 199,123 Real estate construction: Commercial 182,620 199,113 One-to-four family residential 14,523 20,946 Commercial 554,094 556,248 Installment and consumer 18,172 19,631 1,971,634 1,877,132 Less: Allowance for loan losses (27,318) (27,546) Total loans, net 1,944,316 1,849,586 Less: Loans held for sale (included above) (6,036) (4,386) Net loans receivable $ 1,938,280 $ 1,845,200 Concentrations of Cred it . At June 30, 2017 , $662.6 million, or 34% , and $ 429.5 million, or 22 %, o f our loan s consisted of loans to individuals and businesses in the real estate and healthca re industries, respectively . We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans. Loans Held for Sale . We had loans held for sale of $ 6.0 million and $ 4.4 million at June 30, 2017 and December 31, 2016 , respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value. A substantial portion of our one-to-four family residential loans and loan servicing rights are sold to one buyer. These mortgage loans are generally sold within a one -month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. These loans are available for sale in the secondary market. Loan Servicing . We earn fees for servicing real estate mortgages and other loans owned by others. The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned. The unpaid principal balance of real estate mortgage loans serviced for others totaled $ 463.8 million and $ 460.6 million at June 30, 2017 and December 31, 2016 , respectively. Loan servicing rights are capitalized based on estimated fair value at the point of origination. The servicing rights are amortized over the period of estimated net servicing income. Acquired Loan s . On October 9, 2015, we completed the acquisition of First Commercial Bancshares (“Bancshares”) by merging Bancshares with and into us (the “Merger”). In connection with the Merger, First Commercial Bank was merged with and into Bank SNB, with Bank SNB being the surviving bank. We evaluated $200.0 million of the loans purchased in conjunction with the merger in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs , and those loans were recorded with a $4.5 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $7.8 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , and were recorded with a $3.3 million discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows. Changes in the carrying amounts and accretable yields for the ACS 310-30 loans that were acquired were as follows for the three and six months ended June 30, 2017 and June 30, 2016 : For the three months ended June 30, 2017 2016 Carrying Carrying Accretable amount Accretable amount (Dollars in thousands) Yield of loans Yield of loans Balance at beginning of period $ 487 $ 3,817 $ 742 $ 7,288 Payments received - (572) - (286) Net charge-offs (2) (623) (11) (196) Accretion (9) 896 (48) - Balance at end of period $ 476 $ 3,518 $ 683 $ 6,806 For the six months ended June 30, 2017 2016 Carrying Carrying Accretable amount Accretable amount (Dollars in thousands) Yield of loans Yield of loans Balance at beginning of period $ 630 $ 4,632 $ 807 $ 7,914 Payments received - (1,387) - (790) Net charge-offs (2) (623) (11) (318) Accretion (152) 896 (113) - Balance at end of period $ 476 $ 3,518 $ 683 $ 6,806 Nonperforming / Past Due Loans . We identify past due loans based on contractual terms on a loan-by-loan basis and generally place loans, except for consumer loans, on nonaccrual when any portion of the principal or intere st is ninety d ays past due and collateral is insufficient to discharge the debt in full. Interest accrual may also be discontinued earlier if, in management’s opinion, collection is unlikely. Generally, past due consumer installment loans are not placed on nonaccrual but are charged-off when they are four months past due. Accrued interest is written off when a loan is placed on nonaccrual status. Subsequent interest income is recorded when cash receipts are received from the borrower and collectability of the principal amount is reasonably assured. Under generally accepted accounting principles and instructions to reports of condition and income of banking regulators, a nonaccrual loan may be returned to accrual status: (i) when none of its principal and interest is due and unpaid, repayment is expected, and there has been a sustained period (at least six months) of repayment performance; (ii) when the loan is well-secured, there is a sustained period of performance and repayment within a reasonable period is reasonably assured; or (iii) when the loan otherwise becomes well-secured and in the process of collection. Loans that have been restructured because of weakened financial positions of the borrowers also may be returned to accrual status if repayment is reasonably assured under the revised terms and there has been a sustained period of repayment performance. Management strives to carefully monitor credit quality and to identify loans that may become nonperforming. At any time, however, there are loans included in the portfolio that will result in losses to us t hat have not been identified as nonperformi ng or potential problem loans. Because the loan portfolio contains a significant number of commercial (including energy banking credits) and commercial real estate loans with relatively large balances , the unexpected deterioration of one or a few such loans may cause a significant increase in nonperforming assets and may lead to a material increase in charge-offs and the provision for loan losses in future periods. The following table shows the recorded investment in loans on nonaccrual status: (Dollars in thousands) At June 30, 2017 At December 31, 2016 Real estate mortgage: Commercial $ 6,694 $ 6,471 One-to-four family residential 2,752 2,766 Real estate construction: Commercial 132 522 One-to-four family residential 447 448 Commercial 12,883 5,949 Other consumer 21 111 Total nonaccrual loans $ 22,929 $ 16,267 During the first six months of 2017 , $0.2 million of interest income was received on nonaccruing loans . If interest on all nonaccrual loans had been accrued for the six months ended June 30, 2017 , additional interest income of $ 0.5 million would have been recorded. The following table shows an age analysis of past due loans at June 30, 2017 and December 31, 2016: December 31, 2016 90 days + Recorded loans 30-89 days past due and Total past Total > 90 days and (Dollars in thousands) past due nonaccrual due Current loans accruing At June 30, 2017 Real estate mortgage: Commercial $ 285 $ 6,694 $ 6,979 $ 954,106 $ 961,085 $ - One-to-four family residential 1,192 2,797 3,989 237,151 241,140 45 Real estate construction: Commercial - 132 132 182,488 182,620 - One-to-four family residential - 447 447 14,076 14,523 - Commercial 498 12,884 13,382 540,712 554,094 1 Other 134 106 240 17,932 18,172 85 Total $ 2,109 $ 23,060 $ 25,169 $ 1,946,465 $ 1,971,634 $ 131 At December 31, 2016 Real estate mortgage: Commercial $ 24 $ 6,472 $ 6,496 $ 875,575 $ 882,071 $ - One-to-four family residential 631 2,903 3,534 195,589 199,123 138 Real estate construction: Commercial - 522 522 198,591 199,113 - One-to-four family residential - 448 448 20,498 20,946 - Commercial 2,530 6,142 8,672 547,576 556,248 193 Other 359 123 482 19,149 19,631 12 Total $ 3,544 $ 16,610 $ 20,154 $ 1,856,978 $ 1,877,132 $ 343 Impaired Loans . A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Each loan deemed to be impaired (loans on nonaccrual status and greater than $100,000, and all troubled debt restructurings) is evaluated on an individual basis using the discounted present value of expected cash flows based on the loan’s initial effective interest rate, the fair value of collateral, or the market value of the loan. Smaller balance and homogeneous loans, including mortgage and consumer loans, are collectively evaluated for impairment. Interest payments on impaired loans are applied to principal until collectability of the principal amount is reasonably assured, and, at that time, interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. Impaired loans as of June 30, 2017 and December 31, 2016 are shown in the following table: With No Specific Allowance With A Specific Allowance Unpaid Unpaid Recorded Principal Recorded Principal Related (Dollars in thousands) Investment Balance Investment Balance Allowance At June 30, 2017 Commercial real estate $ 7,789 $ 8,473 $ - $ - $ - One-to-four family residential 2,769 3,162 - - - Real estate construction 579 781 - - - Commercial 477 1,450 12,408 16,034 2,461 Other 21 26 - - - Total $ 11,635 $ 13,892 $ 12,408 $ 16,034 $ 2,461 At December 31, 2016 Commercial real estate $ 1,536 $ 3,057 $ 6,053 $ 6,529 $ 2,219 One-to-four family residential 1,188 1,535 1,593 1,698 63 Real estate construction 762 926 207 245 40 Commercial 1,032 2,861 4,963 7,480 1,346 Other 111 115 - - - Total $ 4,629 $ 8,494 $ 12,816 $ 15,952 $ 3,668 The average recorded investment of loans classified as impaired and the interest income recognized on those loans for the six months ended June 30, 2017 and June 30, 2016 are shown in the following table: As of and for the six months ended June 30, 2017 2016 Average Average Recorded Interest Recorded Interest (Dollars in thousands) Investment Income Investment Income Commercial real estate $ 3,430 $ 97 $ 17,365 $ 871 One-to-four family residential 3,183 34 3,627 12 Real estate construction 651 - 1,408 - Commercial 9,342 94 13,274 32 Other 26 - 77 - Total $ 16,632 $ 225 $ 35,751 $ 915 Troubled Debt Restructurings. Our loan portfolio also includes certain lo ans that have been modified in troubled debt restructuring s , where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Troubled debt restructurings are classified as impaired at the time of restructuring and are then further classified as nonperforming, potential problem, or performing restructured, as applicable. Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months. When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to the evaluation done with respect to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans. If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance. Troubled debt restructured loans outstanding as of June 30, 2017 and December 31, 2016 were as follows: At June 30, 2017 At December 31, 2016 (Dollars in thousands) Accruing Nonaccrual Accruing Nonaccrual Commercial real estate $ 1,095 $ 107 $ 1,118 $ 475 One-to-four family residential 17 - 15 46 Commercial 2 7,335 45 3,323 Total $ 1,114 $ 7,442 $ 1,178 $ 3,844 At June 30, 2017 and December 31, 2016, we had no significant commitments to lend additional funds to debtors whose loan terms had been modified in a troubled debt restructuring. There were three commercial loans modified as troubled debt restructurings that occurred during the three months ended June 30, 2017 and none for the three months ended June 30, 2016. There were three commercial loans modified as troubled debt restructurings that occurred during the six months ended June 30, 2017 and one commercial loan modified as a troubled debt restructuring for the six months ended June 30, 2016. Loans modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2017 and June 30, 2016 are shown in the following table: For the three months ended June 30, 2017 2016 Number of Recorded Number of Recorded (Dollars in thousands) Modifications Investment Modifications Investment Commercial 3 $ 4,174 - $ - Total 3 $ 4,174 - $ - For the six months ended June 30, 2017 2016 Number of Recorded Number of Recorded (Dollars in thousands) Modifications Investment Modifications Investment Commercial 3 $ 4,174 1 $ 26 Total 3 $ 4,174 1 $ 26 The modifications of loans identified as troubled debt restructurings primarily related to payment reductions, payment extensions, and/or reductions in the interest rate. The financial impact of troubled debt restructurings is not significant. There were no loans modified as a troubled debt restructuring that subsequently defaulted during the three or six months ended June 30, 2017 or June 30, 2016 . Default, for this purpose, is deemed to occur when a loan is 90 days o r more past due or transferred to nonaccrual and is within twelve months of restructuring . Credit Quality Indicators . To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This analysis is performed on a quarterly basis. We use the following definitions for risk ratings: Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics 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 are considered nonperforming. Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans. As of June 30, 2017 and December 31, 2016, based on the most recent analysis performed as of those dates, the risk category of loans by class was as follows: Commercial 1-4 Family Real Estate (Dollars in thousands) Real Estate Residential Construction Commercial Other Total At June 30, 2017 Grade: Pass $ 919,620 $ 235,040 $ 185,916 $ 502,838 $ 18,151 $ 1,861,565 Special Mention 25,711 2,154 10,059 20,522 - 58,446 Substandard 15,754 3,946 1,168 29,730 21 50,619 Doubtful - - - 1,004 - 1,004 Total $ 961,085 $ 241,140 $ 197,143 $ 554,094 $ 18,172 $ 1,971,634 At December 31, 2016 Grade: Pass $ 857,290 $ 192,395 $ 210,780 $ 498,039 $ 19,518 $ 1,778,022 Special Mention 4,479 1,983 7,720 24,639 - 38,821 Substandard 20,302 4,745 1,559 33,175 113 59,894 Doubtful - - - 395 - 395 Total $ 882,071 $ 199,123 $ 220,059 $ 556,248 $ 19,631 $ 1,877,132 Allowance for Loan Losses . The allowance for loan losses is a reserve established through the provision for loan losses charged to operations. Loan amounts which are determined to be uncollectible are charged against this allowance, and recoveries, if any, are added to the allowance. The appropriate amount of the allowance is based on periodic review and evaluation of the loan portfolio and quarterly assessments of the probable losses inherent in the loan portfolio . The amount of the loan loss provision for a period is based solely upon the amount needed to cause the allowance to reach the level deemed appropriate after the effects of net charge-offs for the period. Management believes the level of the allowance is appropriate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is determined in accordance with regulatory guidelines and generally accepted accounting principles and is comprised of two primary components, specific and general. There is no one factor, or group of factors, that produces the amount of an appropriate allowance for loan losses, as the methodology for assessing the allowance for loan losses makes use of evaluations of individual impaired loans along with other factors and analysis of loan categories. This assessment is highly qualitative and relies upon judgments and estimates by management. The specific allowance is recorded based on the result of an evaluation consistent with ASC 310.10.35, Receivables: Subsequent Measurement , for each impaired loan. Collateral dependent loans are evaluated for impairment based upon the fair value of the collateral. The amount and level of the impairment allowance is ultimately determined by management’s estimate of the amount of expected future cash flows or, if the loan is collateral dependent, on the value of collateral, which may vary from period to period depending on changes in the financial condition of the borrower or changes in the estimated value of the collateral. Charge-offs against the allowance for impaired loans are made when and to the extent loans are deemed uncollectible. Any portion of a collateral dependent impaired loan in excess of the fair value of the collateral that is determined to be uncollectible is charged off. The general component of the allowance is calculated based on ASC 450, Contingencies . Loans not evaluated for specific allowance are segmented into loan pools by type of loan . Commercial real estate pools are further segmented by market type for non-owner occupied and owner occupied collateral. Our primary markets are Oklahoma, Texas, Kansas, and Colorado. Estimated allowances are based on historical loss trends with adjustments factored in based on qualitative risk factors both internal and external to us . The historical loss trend is determined by loan pool and segmentation and is based on the actual loss history experienced by us over the most recent three years. The qualitative risk factors include, but are not limited to, economic and business conditions, changes in lending staff, lending policies and procedures, quality of loan review, changes in the nature and volume of the portfolios, loss and recovery trends, asset quality trends, and legal and regulatory considerations. Independent appraisals on real estate collateral securing loans are obtained at origination. New appraisals are obtained periodically and following discovery of factors that may significantly affect the value of the collateral. Appraisals typically are received within 30 days of request. Results of appraisals on nonperforming and potential problem loans are reviewed promptly upon receipt and considered in the determination of the allowance for loan losses. We are not aware of any significant time lapses in the process that have resulted, or would result in, a significant delay in determination of a credit weakness, the identification of a loan as nonperforming, or the measurement of an impairment. The following tables show the balance in the allowance for loan losses and the recorded investment in loans for the dates indicated by portfolio classification disaggregated on the basis of impairment evaluation method. Commercial 1-4 Family Real Estate (Dollars in thousands) Real Estate Residential Construction Commercial Other Total At June 30, 2017 Balance at beginning of fiscal year $ 12,507 $ 1,163 $ 3,502 $ 10,058 $ 316 $ 27,546 Loans charged-off (2,029) (3) - (2,165) (201) (4,398) Recoveries 216 75 5 317 52 665 Provision for loan losses 1,632 136 (566) 2,193 110 3,505 Balance at end of period $ 12,326 $ 1,371 $ 2,941 $ 10,403 $ 277 $ 27,318 Allowance for loan losses ending balance: Individually evaluated for impairment $ - $ - $ - $ 2,461 $ - $ 2,461 Collectively evaluated for impairment 12,326 1,371 2,941 7,942 277 24,857 Acquired with deteriorated credit quality - - - - - - Total ending allowance balance $ 12,326 $ 1,371 $ 2,941 $ 10,403 $ 277 $ 27,318 Loans receivable ending balance: Individually evaluated for impairment $ 7,011 $ 1,871 $ - $ 12,408 $ - $ 21,290 Collectively evaluated for impairment 952,524 238,120 196,514 541,496 18,172 1,946,826 Acquired with deteriorated credit quality 1,550 1,149 629 190 - 3,518 Total ending loans balance $ 961,085 $ 241,140 $ 197,143 $ 554,094 $ 18,172 $ 1,971,634 Commercial 1-4 Family Real Estate (Dollars in thousands) Real Estate Residential Construction Commercial Other Total At June 30, 2016 Balance at beginning of fiscal year $ 12,716 $ 700 $ 2,533 $ 9,965 $ 192 $ 26,106 Loans charged-off (3) (83) - (3,801) (376) (4,263) Recoveries 234 54 - 311 49 648 Provision for loan losses (2,234) 362 647 5,194 416 4,385 Balance at end of period $ 10,713 $ 1,033 $ 3,180 $ 11,669 $ 281 $ 26,876 Allowance for loan losses ending balances: Individually evaluated for impairment $ 281 $ 116 $ - $ 2,915 $ - $ 3,312 Collectively evaluated for impairment 9,961 917 3,140 8,754 281 23,053 Acquired with deteriorated credit quality 471 - 40 - - 511 Total ending allowance balance $ 10,713 $ 1,033 $ 3,180 $ 11,669 $ 281 $ 26,876 Loans receivable ending balance: Individually evaluated for impairment $ 13,192 $ 2,187 $ 754 $ 13,880 $ 38 $ 30,051 Collectively evaluated for impairment 844,739 180,213 194,646 544,221 20,702 1,784,521 Acquired with deteriorated credit quality 4,356 1,293 752 371 33 6,805 Total ending loans balance $ 862,287 $ 183,693 $ 196,152 $ 558,472 $ 20,773 $ 1,821,377 |