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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Receivables [Abstract]

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, 2012								December 31, 2011								September 30, 2011
		Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Commercial and industrial		$	541,130				17.37	%		$	547,942				18.19	%		$	542,189				18.17	%
Oil & gas production & equipment			131,642				4.22				115,786				3.84				109,272				3.66
Agriculture			83,146				2.67				86,297				2.86				73,021				2.45
State and political subdivisions:
Taxable			7,786				0.25				6,939				0.23				7,079				0.24
Tax-exempt			13,749				0.44				17,070				0.57				12,192				0.41
Real estate:
Construction			211,505				6.79				207,953				6.90				258,182				8.65
Farmland			114,043				3.66				103,923				3.45				97,041				3.25
One to four family residences			674,457				21.64				655,134				21.74				655,007				21.95
Multifamily residential properties			50,659				1.63				37,734				1.25				37,173				1.24
Commercial			1,026,097				32.93				960,074				31.86				908,207				30.43
Consumer			241,864				7.76				252,331				8.37				260,718				8.74
Other (not classified above)			20,018				0.64				22,315				0.74				24,033				0.81
Total loans		$	3,116,096				100.00	%		$	3,013,498				100.00	%		$	2,984,114				100.00	%
Loans held for sale (included above).		$	15,479							$	12,126							$	13,066

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.

Accounting policies related to appraisals, nonaccruals and charge-offs are disclosed in Footnote (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Nonperforming and Restructured Assets

Nonaccrual loans, accruing loans past due 90 days or more, 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 $953,000 for the nine months ended September 30, 2012 and approximately $860,000 for the nine months ended September 30, 2011.

At September 30, 2012, troubled debt restructurings were primarily due to the principal deferral restructuring from one customer. This loan was evaluated by management and determined to be well collateralized. Additionally, none of the concessions granted involved a principal reduction or a change from the current market rate of interest. Collateral value will be monitored periodically to evaluate possible impairment. The Company charges interest on principal balances outstanding during deferral periods. As a result, the current and future financial effects of the recorded balance of loans considered to be restructured were not considered to be material.

The following is a summary of nonperforming and restructured assets:

		September 30, 2012				December 31, 2011				September 30, 2011
		(Dollars in thousands)
Past due 90 days or more and still accruing		$	731			$	798			$	1,413
Nonaccrual			22,101				21,187				24,088
Other acquired loans covered by escrow			—				—				4,951
Restructured			17,784				1,041				1,059
Total nonperforming and restructured loans			40,616				23,026				31,511
Other real estate owned and repossessed assets			9,796				16,640				16,723
Total nonperforming and restructured assets		$	50,412			$	39,666			$	48,234
Nonperforming and restructured loans to total loans			1.30	%			0.76	%			1.06	%
Nonperforming and restructured assets to total assets			0.86	%			0.71	%			0.88	%

The other acquired loans covered by escrow listed above were a part of the loan portfolio of 1^st Bank Oklahoma that were acquired in the third quarter of 2011 and were covered by an escrow agreement whereby a portion of the purchase price was set aside to reimburse the Company for potential future losses. These loans were recorded at fair value at the acquisition date and were classified as nonperforming loans at September 30, 2011. As of December 31, 2011, these loans were reclassified to performing status. The loan escrow was terminated effective June 30, 2012 pursuant to a negotiated settlement.

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.

		September 30, 2012
		(Dollars in thousands)
Non-residential real estate		$	9,324
Residential real estate			4,179
Non-consumer non-real estate			2,527
Consumer non-real estate			138
Other loans			2,221
Acquired loans			3,712
Total		$	22,101

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				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, 2012
Non-residential real estate		$	1,561			$	2,425			$	3,986			$	1,145,584			$	1,149,570			$	349
Residential real estate			3,693				1,170				4,863				732,935				737,798				98
Non-consumer non-real estate			4,233				135				4,368				729,538				733,906				7
Consumer non-real estate			2,050				230				2,280				205,463				207,743				170
Other loans			1,706				1,447				3,153				147,329				150,482				43
Acquired loans			1,219				1,061				2,280				134,317				136,597				64
Total		$	14,462			$	6,468			$	20,930			$	3,095,166			$	3,116,096			$	731
As of September 30, 2011
Non-residential real estate		$	2,269			$	542			$	2,811			$	1,026,738			$	1,029,549			$	1
Residential real estate			4,462				1,723				6,185				689,731				695,916				225
Non-consumer non-real estate			2,077				374				2,451				690,059				692,510				149
Consumer non-real estate			2,594				354				2,948				198,684				201,632				310
Other loans			2,749				3,492				6,241				152,302				158,543				108
Acquired loans			1,108				1,913				3,021				202,943				205,964				620
Total		$	15,259			$	8,398			$	23,657			$	2,960,457			$	2,984,114			$	1,413

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 September 30, 2012
Non-residential real estate		$	27,593			$	26,434			$	1,813			$	26,733
Residential real estate			5,664				5,136				1,374				5,333
Non-consumer non-real estate			3,144				2,539				677				1,745
Consumer non-real estate			447				424				77				364
Other loans			2,420				2,265				264				1,975
Acquired loans			12,872				10,684				71				11,451
Total		$	52,140			$	47,482			$	4,276			$	47,601
As of September 30, 2011
Non-residential real estate		$	9,285			$	8 ,671			$	978			$	9,835
Residential real estate			6,520				5,871				1,520				6,351
Non-consumer non-real estate			1,584				1,286				358				1,676
Consumer non-real estate			215				180				47				204
Other loans			3,888				3,794				342				4,296
Acquired loans			5,609				4,286				100				2,229
Total		$	27,101			$	24,088			$	3,345			$	24,591

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 September 30, 2012
Non-residential real estate		$	984,606			$	127,768			$	27,523			$	9,673			$	—			$	1,149,570
Residential real estate			636,564				81,970				14,667				4,597				—				737,798
Non-consumer non-real estate			644,066				80,863				6,500				2,477				—				733,906
Consumer non-real estate			195,242				10,185				1,965				349				2				207,743
Other loans			146,037				2,726				887				832				—				150,482
Acquired loans			103,411				24,243				5,006				3,898				39				136,597
Total		$	2,709,926			$	327,755			$	56,548			$	21,826			$	41			$	3,116,096
As of September 30, 2011
Non-residential real estate		$	881,622			$	107,228			$	32,223			$	8,476			$	—			$	1,029,549
Residential real estate			602,621				72,095				14,805				6,395				—				695,916
Non-consumer non-real estate			620,123				63,375				7,881				1,131				—				692,510
Consumer non-real estate			189,895				8,950				2,380				407				—				201,632
Other loans			151,336				2,608				1,874				2,725				—				158,543
Acquired loans			151,103				35,609				8,264				10,891				97				205,964
Total		$	2,596,700			$	289,865			$	67,427			$	30,025			$	97			$	2,984,114

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.

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)
Three Months Ended September 30, 2012
Allowance for credit losses:
Balance at June 30, 2012		$	14,349			$	10,006			$	8,558			$	2,282			$	1,854			$	387			$	37,436
Charge-offs			(30	)			(157	)			(119	)			(117	)			(24	)			(53	)			(500	)
Recoveries			17				9				19				42				2				—				89
Net charge-offs			(13	)			(148	)			(100	)			(75	)			(22	)			(53	)			(411	)
Provisions charged to operations			(453	)			(137	)			712				162				6				(57	)			233
Balance at September 30, 2012		$	13,883			$	9,721			$	9,170			$	2,369			$	1,838			$	277			$	37,258
Nine Months Ended September 30, 2012
Allowance for credit losses:
Balance at December 31, 2011		$	13,948			$	9,764			$	9,156			$	2,315			$	1,886			$	587			$	37,656
Charge-offs			(158	)			(288	)			(449	)			(308	)			(231	)			(129	)			(1,563	)
Recoveries			48				118				144				157				33				11				511
Net charge-offs			(110	)			(170	)			(305	)			(151	)			(198	)			(118	)			(1,052	)
Provisions charged to operations			45				127				319				205				150				(192	)			654
Balance at September 30, 2012		$	13,883			$	9,721			$	9,170			$	2,369			$	1,838			$	277			$	37,258
Allowance for credit losses-ending balances:
Individually evaluated for impairment		$	2,396			$	2,305			$	1,692			$	315			$	220			$	—			$	6,928
Collectively evaluated for impairment			11,487				7,416				7,478				2,054				1,618				277				30,330
Balance at September 30, 2012		$	13,883			$	9,721			$	9,170			$	2,369			$	1,838			$	277			$	37,258
Loans-ending balances:
Individually evaluated for impairment		$	37,195			$	19,264			$	8,976			$	2,316			$	264			$	—			$	68,015
Collectively evaluated for impairment			1,112,375				718,534				724,930				205,427				150,218				127,654				3,039,138
Loans acquired with deteriorated credit quality			—				—				—				—				—				8,943				8,943
Balance at September 30, 2012		$	1,149,570			$	737,798			$	733,906			$	207,743			$	150,482			$	136,597			$	3,116,096

		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)
Three Months Ended September 30, 2011
Allowance for credit losses:
Balance at June 30, 2011		$	13,651			$	9,380			$	9,334			$	2,237			$	1,712			$	778			$	37,092
Charge-offs			(67	)			(21	)			(210	)			(72	)			(121	)			(138	)			(629	)
Recoveries			7				20				46				24				2				9				108
Net charge-offs			(60	)			(1	)			(164	)			(48	)			(119	)			(129	)			(521	)
Provisions charged to operations			290				472				(460	)			136				156				291				885
Balance at September 30, 2011		$	13,881			$	9,851			$	8,710			$	2,325			$	1,749			$	940			$	37,456
Nine Months Ended September 30, 2011
Allowance for credit losses:
Balance at December 31, 2010		$	13,142			$	8,957			$	9,587			$	2,301			$	1,758			$	—			$	35,745
Charge-offs			(336	)			(522	)			(394	)			(400	)			(243	)			(469	)			(2,364	)
Recoveries			23				115				130				92				9				20				389
Net charge-offs			(313	)			(407	)			(264	)			(308	)			(234	)			(449	)			(1,975	)
Provisions charged to operations			1,052				1,301				(613	)			332				225				1,389				3,686
Balance at September 30, 2011		$	13,881			$	9,851			$	8,710			$	2,325			$	1,749			$	940			$	37,456
Allowance for credit losses-ending balances:
Individually evaluated for impairment		$	3,351			$	2,681			$	1,528			$	318			$	232			$	—			$	8,110
Collectively evaluated for impairment			10,530				7,170				7,182				2,007				1,517				940				29,346
Balance at September 30, 2011		$	13,881			$	9,851			$	8,710			$	2,325			$	1,749			$	940			$	37,456
Loans-ending balances:
Individually evaluated for impairment		$	40,700			$	21,200			$	9,012			$	2,787			$	257			$	—			$	73,956
Collectively evaluated for impairment			988,849				674,716				683,498				198,845				158,286				186,712				2,890,906
Loans acquired with deteriorated credit quality			—				—				—				—				—				19,252				19,252
Balance at September 30, 2011		$	1,029,549			$	695,916			$	692,510			$	201,632			$	158,543			$	205,964			$	2,984,114

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 during the periods presented are summarized as follows:

		Nine Months Ended September 30,
		2012				2011
		(Dollars in thousands)
Other real estate owned		$	1,633			$	3,831
Repossessed assets			664				1,096
Total		$	2,297			$	4,927

X

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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