(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:


	December 31,
	2013					2012
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	605,672		17.88	%	$	559,274		17.25	%
Oil & gas production & equipment		96,907		2.86			154,380		4.76
Agriculture		111,323		3.29			93,274		2.88
State and political subdivisions:
Taxable		10,217		0.30			9,412		0.29
Tax-exempt		11,073		0.33			13,194		0.41
Real estate:
Construction		284,808		8.41			226,102		6.97
Farmland		132,512		3.91			125,033		3.86
One to four family residences		703,903		20.78			669,230		20.64
Multifamily residential properties		60,080		1.77			50,721		1.56
Commercial		1,097,484		32.40			1,068,445		32.95
Consumer		250,588		7.40			253,002		7.80
Other (not classified above)		22,579		0.67			20,360		0.63

Total loans	$	3,387,146		100.00	%	$	3,242,427		100.00	%

Loans held for sale (included above)	$	6,469				$	11,257

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.

Nonperforming and Restructured Assets

The following is a summary of nonperforming and restructured assets:


	December 31,
	2013			2012
	(Dollars in thousands)
Past due 90 days or more and still accruing	$	1,179		$	537
Nonaccrual		14,390			20,549
Restructured		17,624			17,866

Total nonperforming and restructured loans		33,193			38,952
Other real estate owned and repossessed assets		8,386			9,566

Total nonperforming and restructured assets	$	41,579		$	48,518

Nonperforming and restructured loans to total loans		0.98	%		1.20	%

Nonperforming and restructured assets to total assets		0.69	%		0.81	%

Nonaccrual loans, accruing loans past due 90 days or more, and restructured loans are shown in the table above. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.5 million in 2013, $1.3 million in 2012 and $1.1 million in 2011.

Restructured loans consisted primarily of one loan restructured to defer principal payments. The 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. The 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.

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.


	December 31,
	2013		2012
	(Dollars in thousands)
Non-residential real estate owner occupied	$	595	$	350
Non-residential real estate other		6,270		9,528
Residential real estate primary mortgage		718		506
Residential real estate all other		1,521		3,244
Non-consumer non-real estate		1,192		1,464
Consumer non-real estate		176		137
Other loans		1,407		2,519
Acquired loans		2,511		2,801

Total	$	14,390	$	20,549

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


	Age Analysis of Past Due Loans
	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 December 31, 2013
Non-residential real estate owner occupied	$	411	$	316	$	727	$	454,305	$	455,032	$	96
Non-residential real estate other.		5,660		1,543		7,203		856,179		863,382		2
Residential real estate primary mortgage		2,566		789		3,355		262,625		265,980		275
Residential real estate all other		2,370		1,272		3,642		564,231		567,873		184
Non-consumer non-real estate		1,240		1,047		2,287		793,028		795,315		125
Consumer non-real estate		2,428		392		2,820		225,515		228,335		279
Other loans		2,562		1,244		3,806		141,550		145,356		—
Acquired loans		1,801		593		2,394		63,479		65,873		218

Total	$	19,038	$	7,196	$	26,234	$	3,360,912	$	3,387,146	$	1,179

As of December 31, 2012
Non-residential real estate owner occupied	$	911	$	207	$	1,118	$	479,536	$	480,654	$	64
Non-residential real estate other		3,453		2,124		5,577		736,014		741,591		—
Residential real estate primary mortgage		2,488		560		3,048		245,849		248,897		131
Residential real estate all other		2,176		653		2,829		503,207		506,036		116
Non-consumer non-real estate		1,672		298		1,970		783,153		785,123		28
Consumer non-real estate		2,624		179		2,803		218,944		221,747		136
Other loans		1,348		1,266		2,614		147,283		149,897		—
Acquired loans		1,481		533		2,014		106,468		108,482		62

Total	$	16,153	$	5,820	$	21,973	$	3,220,454	$	3,242,427	$	537

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. 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, 2013
Non-residential real estate owner occupied	$	877	$	752	$	28	$	881
Non-residential real estate other.		24,964		23,351		2,161		23,816
Residential real estate primary mortgage		1,253		1,025		58		1,170
Residential real estate all other		2,214		1,803		361		1,857
Non-consumer non-real estate		1,801		1,459		388		1,553
Consumer non-real estate		628		611		139		455
Other loans		1,545		1,464		219		1,602
Acquired loans		9,848		7,861		124		7,928

Total	$	43,130	$	38,326	$	3,478	$	39,262

As of December 31, 2012
Non-residential real estate owner occupied	$	596	$	535	$	24	$	1,557
Non-residential real estate other		27,502		26,147		2,187		21,726
Residential real estate primary mortgage		1,297		1,084		43		1,123
Residential real estate all other		4,172		3,829		1,285		4,062
Non-consumer non-real estate		1,949		1,539		439		1,641
Consumer non-real estate		419		398		87		357
Other loans		2,957		2,561		344		2,323
Acquired loans.		11,080		9,080		83		9,730

Total	$	49,972	$	45,173	$	4,492	$	42,519

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 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, 2013
Non-residential real estate owner occupied	$	382,798	$	66,139	$	5,446	$	649	$	—	$	455,032
Non-residential real estate other		711,081		125,617		20,309		6,375		—		863,382
Residential real estate primary mortgage		233,924		24,882		6,081		1,093		—		265,980
Residential real estate all other		475,421		82,571		8,238		1,643		—		567,873
Non-consumer non-real estate		691,772		97,812		4,462		1,269		—		795,315
Consumer non-real estate		214,153		11,819		1,931		431		1		228,335
Other loans		141,787		2,558		772		239		—		145,356
Acquired loans		47,220		11,980		3,766		2,907		—		65,873

Total	$	2,898,156	$	423,378	$	51,005	$	14,606	$	1	$	3,387,146

As of December 31, 2012
Non-residential real estate owner occupied	$	409,187	$	65,303	$	5,750	$	414	$	—	$	480,654
Non-residential real estate other		611,060		99,929		21,360		9,242		—		741,591
Residential real estate primary mortgage		208,254		34,038		5,925		680		—		248,897
Residential real estate all other		440,623		52,526		9,457		3,430		—		506,036
Non-consumer non-real estate		684,740		92,784		6,084		1,515		—		785,123
Consumer non-real estate		209,182		10,305		1,904		356		—		221,747
Other loans		145,239		2,575		1,172		911		—		149,897
Acquired loans.		83,015		18,124		4,478		2,865		—		108,482

Total	$	2,791,300	$	375,584	$	56,130	$	19,413	$	—	$	3,242,427

Allowance for Loan Losses Methodology

The allowance for loan losses (“ALL”) 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 ALL 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 ALL 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 ALL in the near term.

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)
As of December 31, 2013
Non-residential real estate owner occupied	$	5,104	$	(3	)	$	20	$	17		$	(294	)	$	4,827
Non-residential real estate other		9,865		(19	)		12		(7	)		1,168			11,026
Residential real estate primary mortgage		2,781		(162	)		32		(130	)		174			2,825
Residential real estate all other		7,034		(209	)		33		(176	)		(150	)		6,708
Non-consumer non-real estate		9,385		(217	)		175		(42	)		(366	)		8,977
Consumer non-real estate		2,451		(597	)		225		(372	)		477			2,556
Other loans		1,885		(300	)		75		(225	)		331			1,991
Acquired loans		220		(53	)		39		(14	)		(82	)		124

Total	$	38,725	$	(1,560	)	$	611	$	(949	)	$	1,258		$	39,034

As of December 31, 2012
Non-residential real estate owner occupied	$	5,300	$	(96	)	$	3	$	(93	)	$	(103	)	$	5,104
Non-residential real estate other		8,648		(195	)		53		(142	)		1,359			9,865
Residential real estate primary mortgage		2,734		(222	)		85		(137	)		184			2,781
Residential real estate all other		7,030		(394	)		49		(345	)		349			7,034
Non-consumer non-real estate		9,156		(590	)		171		(419	)		648			9,385
Consumer non-real estate		2,315		(509	)		194		(315	)		451			2,451
Other loans		1,886		(265	)		34		(231	)		230			1,885
Acquired loans		587		(373	)		24		(349	)		(18	)		220

Total	$	37,656	$	(2,644	)	$	613	$	(2,031	)	$	3,100		$	38,725

The following table details the amount of ALL by class of loans for the period presented, on the basis of the impairment methodology used by the Company.


	December 31, 2013				December 31, 2012
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
	(Dollars in thousands)
Non-residential real estate owner occupied	$	231	$	4,596	$	238	$	4,866
Non-residential real estate other		2,449		8,577		2,521		7,344
Residential real estate primary mortgage		243		2,582		278		2,503
Residential real estate all other		994		5,714		2,025		5,009
Non-consumer non-real estate		966		8,011		1,403		7,982
Consumer non-real estate		334		2,222		287		2,164
Other loans		252		1,739		253		1,632
Acquired loans		—		124		—		220

Total	$	5,469	$	33,565	$	7,005	$	31,720

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
	December 31, 2013						December 31, 2012
	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)
Non-residential real estate owner occupied	$	6,095	$	448,937	$	—	$	6,163	$	474,491	$	—
Non-residential real estate other		26,684		836,698		—		30,602		710,989		—
Residential real estate primary mortgage		7,174		258,806		—		6,605		242,292		—
Residential real estate all other.		9,881		557,992		—		12,887		493,149		—
Non-consumer non-real estate		5,731		789,584		—		7,599		777,524		—
Consumer non-real estate		2,362		225,972		—		2,260		219,487		—
Other loans		317		145,039		—		235		149,662		—
Acquired loans		—		59,200		6,674		—		101,139		7,343

Total	$	58,244	$	3,322,228	$	6,674	$	66,351	$	3,168,733	$	7,343

The following table is a summary of amounts included in the ALL 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 2013, 2012 or 2011.


	Year Ended December 31,
	2013		2012		2011
	(Dollars in thousands)
Allowance for loss on impaired loans	$	2,661	$	3,252	$	2,779
Recorded balance of impaired loans		12,647		12,313		13,437
Average recorded investment		12,480		12,875		11,974

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:


	Year Ended December 31,
	2013		2012		2011
	(Dollars in thousands)
Other real estate owned	$	1,710	$	2,543	$	5,091
Repossessed assets		1,171		1,034		1,460

Total	$	2,881	$	3,577	$	6,551

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)
2013	$	29,030	$	11,979	$	(13,875	)	$	27,134
2012		25,264		24,706		(20,940	)		29,030
2011		21,287		8,162		(4,185	)		25,264