Loans Held for Investment and Allowance for Credit Losses on Loans

3 Months Ended

Mar. 31, 2020

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