(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:


	December 31,
	2011					2010
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	547,942		18.19	%	$	549,050		19.53	%
Oil & gas production & equipment		115,786		3.84			94,535		3.36
Agriculture		86,297		2.86			87,879		3.13
State and political subdivisions:
Taxable		6,939		0.23			9,627		0.34
Tax-exempt		17,070		0.57			10,301		0.37
Real estate:
Construction		207,953		6.90			230,367		8.19
Farmland		103,923		3.45			93,137		3.31
One to four family residences		655,134		21.74			608,786		21.65
Multifamily residential properties		37,734		1.25			31,257		1.11
Commercial		960,074		31.86			797,564		28.36
Consumer		252,331		8.37			273,277		9.73
Other		22,315		0.74			26,184		0.92

Total loans	$	3,013,498		100.00	%	$	2,811,964		100.00	%

Loans held for sale (included above)	$	12,126				$	11,776

Student loans held for investment (included above)	$	46,651				$	57,375

The Company's loans are mostly to customers within Oklahoma and over 60% 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.

As of December 31, 2011 and 2010, the Company had no student loans held for sale. Student loans held for investment are included in the table above. Student loans are classified as consumer loans in the preceding table and valued at the lower of cost or market. On March 21, 2010, Congress passed student loan reform legislation centralizing student lending in a governmental agency, which as of June 30, 2010 resulted in an end to the student loan programs provided by the Company. During October 2010 the Company sold student loans held for sale of approximately $144.5 million.

Appraisal Policy

An updated appraisal of the collateral is obtained when a loan is first identified as a problem loan. Appraisals are reviewed annually and are updated as needed, or are updated more frequently if significant changes are believed to have occurred in the collateral or market conditions. Other real estate owned appraisals are consistent with this policy.

Nonaccrual Policy

The Company does not accrue interest on (1) any loan upon which a default of principal or interest has existed for a period of ninety (90) days or over unless the collateral margin or guarantor support are such that full collection of principal and interest are not in doubt, and an orderly plan for collection is in process; and (2) any other loan for which it is expected full collection of principal and interest is not probable.

A nonaccrual loan may be restored to an accrual status when none of its principal and interest is past due and unpaid or otherwise becomes well secured and in the process of collection and when prospects for future contractual payments are no longer in doubt. With the exception of a formal debt forgiveness agreement, no loan which has had principal charged-off shall be restored to accrual status unless the charged-off principal has been recovered.

Charge-off Policy

When a loan deteriorates to the point that the account officer or the Loan Committee concludes it no longer represents a viable asset, it will be charged off. Similarly, any portion of a loan that is deemed to no longer be a viable asset will be charged off. A loan will not be charged off unless such action has been approved by the branch President.

Nonperforming and Restructured Assets

Nonaccrual loans, accruing loans past due more than 90 days, and restructured loans are shown in the table below. Had nonaccrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income of approximately $1.1 million in 2011, $1.0 million in 2010 and $1.4 million in 2009.

The following is a summary of nonperforming and restructured assets:


	December 31,
	2011			2010
	(Dollars in thousands)
Past due over 90 days and still accruing	$	798		$	1,096
Nonaccrual		21,187			26,701
Restructured		1,041			294

Total nonperforming and restructured loans		23,026			28,091
Other real estate owned and repossessed assets		16,640			23,179

Total nonperforming and restructured assets	$	39,666		$	51,270

Nonperforming and restructured loans to total loans		0.76	%		1.00	%

Nonperforming and restructured assets to total assets		0.71	%		1.01	%

Loans are segregated into classes based upon the nature of the collateral and the borrower. These classes are used to estimate the credit risk component in 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,
	2011		2010
	(Dollars in thousands)
Non-residential real estate	$	8,576	$	11,343
Residential real estate		4,798		7,033
Non-consumer non-real estate		1,214		1,586
Consumer non-real estate		161		297
Other loans		3,247		4,574
Acquired loans		3,191		1,868

Total	$	21,187	$	26,701

The following table presents an age analysis of past due loans, segregated by class of loans:


	Age Analysis of Past Due Receivables
	30-89 Days Past Due		Greater than 90 Days		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(Dollars in thousands)
As of December 31, 2011
Non-residential real estate	$	18,678	$	755	$	19,433	$	1,031,765	$	1,051,198	$	—
Residential real estate		4,760		1,769		6,529		688,094		694,623		375
Non-consumer non-real estate		2,424		252		2,676		724,014		726,690		24
Consumer non-real estate		2,416		254		2,670		197,546		200,216		241
Other loans		2,366		2,774		5,140		153,903		159,043		60
Acquired loans		2,325		963		3,288		178,440		181,728		98

Total	$	32,969	$	6,767	$	39,736	$	2,973,762	$	3,013,498	$	798

As of December 31, 2010
Non-residential real estate	$	3,806	$	2,150	$	5,956	$	905,782	$	911,738	$	559
Residential real estate		4,625		3,018		7,643		665,245		672,888		212
Non-consumer non-real estate		4,844		729		5,573		690,674		696,247		39
Consumer non-real estate		2,240		168		2,408		196,666		199,074		94
Other loans		3,402		4,075		7,477		147,826		155,303		—
Acquired loans		1,528		1,635		3,163		173,551		176,714		192

Total	$	20,445	$	11,775	$	32,220	$	2,779,744	$	2,811,964	$	1,096

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 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. When it is not deemed necessary to allocate a specific valuation allowance to an impaired loan, the loan nevertheless will have an allowance based on a historically adequate percentage determined for the class of loans.

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, 2011
Non-residential real estate	$	9,311	$	8,576	$	952	$	9,583
Residential real estate		5,526		4,798		1,331		6,040
Non-consumer non-real estate		1,535		1,214		282		1,584
Consumer non-real estate		196		161		24		195
Other loans		3,345		3,247		405		4,086
Acquired loans		4,513		3,191		20		3,289

Total	$	24,426	$	21,187	$	3,014	$	24,777

As of December 31, 2010
Non-residential real estate	$	12,364	$	11,343	$	1,046	$	20,975
Residential real estate		7,861		7,033		1,770		6,363
Non-consumer non-real estate		2,492		1,586		451		1,804
Consumer non-real estate		308		297		102		291
Other loans		4,644		4,574		143		3,605
Acquired loans		1,967		1,868		—		525

Total	$	29,636	$	26,701	$	3,512	$	33,563

Credit Risk Monitoring and Loan Grading

The Company employs several means to monitor the 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.

Loans are subject to an internal risk grading system which indicates the risk and acceptability of that loan. 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 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, 2011
Non-residential real estate	$	907,687	$	104,614	$	30,519	$	8,378	$	—	$	1,051,198
Residential real estate		599,337		74,480		15,567		5,239		—		694,623
Non-consumer non-real estate		626,735		91,497		7,399		1,059		—		726,690
Consumer non-real estate		188,180		9,229		2,431		376		—		200,216
Other loans		152,798		2,546		1,653		2,046		—		159,043
Acquired loans		131,534		37,192		9,581		3,421		—		181,728

Total	$	2,606,271	$	319,558	$	67,150	$	20,519	$	—	$	3,013,498

As of December 31, 2010
Non-residential real estate	$	782,616	$	89,501	$	29,159	$	10,462	$	—	$	911,738
Residential real estate		578,003		74,737		12,833		7,315		—		672,888
Non-consumer non-real estate		595,071		87,400		11,707		2,069		—		696,247
Consumer non-real estate		188,919		7,865		2,098		189		3		199,074
Other loans		146,750		3,054		1,542		3,957		—		155,303
Acquired loans		135,000		30,406		9,416		1,892		—		176,714

Total	$	2,426,359	$	292,963	$	66,755	$	25,884	$	3	$	2,811,964

Allowance for Loan Losses Methodology

The allowance for loan losses ("ALLL") 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 1-4 family residential property, loans secured by 1-4 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 ALLL 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 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 ALLL 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 ALLL in the near term.

Changes in the ALLL are summarized as follows:


	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	35,745		$	36,383		$	34,290

Charge-offs		(3,097	)		(4,180	)		(8,953	)
Recoveries		493			588			657

Net charge-offs		(2,604	)		(3,592	)		(8,296	)

Provisions charged to operations		4,515			2,954			10,389

Balance at end of period	$	37,656		$	35,745		$	36,383

The following table details activity in the ALLL 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.


	ALLL
	Non-Residential Real Estate			Residential Real Estate			Non- Consumer Non-Real Estate			Consumer Non-Real Estate			Other Loans			Acquired Loans			Total
	(Dollars in thousands)
As of December 31, 2011
Allowance for loan losses:
Balance at December 31, 2010	$	13,142		$	8,957		$	9,587		$	2,301		$	1,758		$	—		$	35,745
Charge-offs		(353	)		(752	)		(524	)		(652	)		(270	)		(546	)		(3,097	)
Recoveries		23			141			156			120			28			25			493

Net charge-offs		(330	)		(611	)		(368	)		(532	)		(242	)		(521	)		(2,604	)
Provisions charged to operations		1,136			1,418			(63	)		546			370			1,108			4,515

Balance at December 31, 2011	$	13,948		$	9,764		$	9,156		$	2,315		$	1,886		$	587		$	37,656

Ending balances:
Individually evaluated for impairment	$	3,295		$	2,636		$	1,445		$	328		$	254		$	—		$	7,958
Collectively evaluated for impairment		10,653			7,128			7,711			1,987			1,632			587			29,698

Balance at December 31, 2011	$	13,948		$	9,764		$	9,156		$	2,315		$	1,886		$	587		$	37,656

Loans—ending balances:
Individually evaluated for impairment	$	38,897		$	20,806		$	8,458		$	2,807		$	261		$	—		$	71,229
Collectively evaluated for impairment		1,012,301			673,817			718,232			197,409			158,782			168,726			2,929,267
Loans acquired with deteriorated credit quality		—			—			—			—			—			13,002			13,002

Balance at December 31, 2011	$	1,051,198		$	694,623		$	726,690		$	200,216		$	159,043		$	181,728		$	3,013,498

As of December 31, 2010
Allowance for loan losses:
Balance at December 31, 2009	$	14,044		$	8,963		$	9,454		$	2,441		$	1,481		$	—		$	36,383
Charge-offs..		(1,687	)		(1,102	)		(477	)		(520	)		(241	)		(153	)		(4,180	)
Recoveries		72			71			213			118			48			66			588

Net charge-offs.		(1,615	)		(1,031	)		(264	)		(402	)		(193	)		(87	)		(3,592	)
Provisions charged to operations		713			1,025			397			262			470			87			2,954

Balance at December 31, 2010	$	13,142		$	8,957		$	9,587		$	2,301		$	1,758		$	—		$	35,745

Ending balances:
Individually evaluated for impairment	$	3,986		$	1,874		$	2,261		$	321		$	242		$	—		$	8,684
Collectively evaluated for impairment		9,156			7,083			7,326			1,980			1,516			—			27,061

Balance at December 31, 2010	$	13,142		$	8,957		$	9,587		$	2,301		$	1,758		$	—		$	35,745

Loans—ending balances:
Individually evaluated for impairment	$	40,566		$	19,987		$	10,517		$	2,613		$	447		$	—		$	74,130
Collectively evaluated for impairment		871,172			652,901			685,730			196,461			154,856			165,406			2,726,526
Loans acquired with deteriorated credit quality		—			—			—			—			—			11,308			11,308

Balance at December 31, 2010	$	911,738		$	672,888		$	696,247		$	199,074		$	155,303		$	176,714		$	2,811,964

The following table is a summary of amounts included in the ALLL for impaired loans with specific reserves and the recorded balance of the related loans. No material amounts of interest income were collected on impaired loans with specific reserves for 2011, 2010 or 2009.


	Year Ended December 31,
	2011		2010		2009
	(Dollars in thousands)
Allowance for loss on impaired loans	$	2,779	$	3,040	$	1,782
Recorded balance of impaired loans		13,437		10,510		7,423
Average recorded investment.		11,974		8,967		9,412

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 are summarized as follows:


	Year Ended December 31,
	2011		2010
	(Dollars in thousands)
Other real estate owned	$	5,091	$	17,651
Repossessed assets		1,460		1,190

Total	$	6,551	$	18,841

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)
2011	$	21,287	$	8,162	$	(4,185	)	$	25,264
2010	$	20,222	$	36,968	$	(35,903	)	$	21,287
2009	$	21,918	$	35,132	$	(36,828	)	$	20,222