Loans Held for Investment and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2022

Loans Held for Investment and Allowance for Credit Losses on Loans

(4) LOANS HELD FOR INVESTMENT AND ALLOWANCE FOR CREDIT LOSSES ON LOANS

Loans held for investment are summarized by portfolio segment as follows:


	September 30, 2022		December 31, 2021
	(Dollars in thousands)
Real estate:
Commercial real estate owner occupied	$	896,202	$	775,554
Commercial real estate non-owner occupied		1,230,074		1,095,324
Construction and development < 60 months		473,631		415,466
Construction residential real estate < 60 months		311,168		254,524
Residential real estate first lien		1,097,710		937,006
Residential real estate all other		188,508		161,018
Farmland		256,821		272,179
Commercial and agricultural non-real estate (2)		1,429,401		1,416,093
Consumer non-real estate		431,913		413,370
Oil and gas		512,344		428,908
Total (1)	$	6,827,772	$	6,169,442
(1) Excludes accrued interest receivable of $25.4 million at September 30, 2022 and $21.0 million at December 31, 2021, that is recorded in accrued interest receivable and other assets.
(2) Includes PPP loans held for investment of $1.1 million, net of unamortized processing fees of $0, at September 30, 2022 and $80.4 million, net of unamortized processing fees of $2.0 million, at December 31, 2021.

Loans that were designated as Other and consisted mainly of Small Business Administration (“SBA”) loans were moved to their more descriptive portfolio segment. Therefore, we no longer have an Other loan portfolio segment.

In April 2020, the Company began originating loans to qualified small businesses under the Paycheck Protection Program (“PPP”) administered by the SBA. Since PPP loans are fully guaranteed by the SBA, there is no expected credit loss related to these loans. The Company had processing fees, which were recognized as interest income related to the PPP loans totaling approximately $0 and $10.0 million during the three months ended September 30, 2022 and 2021, respectively and $2.1 million and $31.7 million during the nine months ended September 30, 2022 and 2021, respectively.

The Company's loans are currently 82% held by BancFirst and 18% held by Pegasus and Worthington. In addition, approximately 65% of the Company's 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.

The Company's portfolio segment descriptions and the weighted average remaining life of portfolio segments are disclosed in Note (5) to the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

Troubled Debt Restructurings, Other Real Estate Owned and Repossessed Assets and Held for Sale Assets

The following is a summary of troubled debt restructurings and other real estate owned and repossessed assets:



	September 30, 2022		December 31, 2021
	(Dollars in thousands)
Troubled debt restructurings	$	2,249	$	3,665
Other real estate owned and repossessed assets	$	39,419	$	39,553

The Company charges interest on principal balances outstanding on troubled debt restructurings during deferral periods. The current and future financial effects of the recorded balance of loans considered to be troubled debt restructurings were not considered to be material.

Other real estate owned included a commercial real estate property recorded at approximately $31.2 million at September 30, 2022 and $29.5 million at December 31, 2021. Rental income for this property is included in other noninterest income on the consolidated statements of comprehensive income. Operating expense for this property is included in net expense from other real estate owned in other noninterest expense on the consolidated statements of comprehensive income.

This property had the following rental income and operating expenses for the periods presented.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands)
Rental income	$	2,347	$	2,703	$	7,750	$	7,277
Operating expense	$	2,381	$	2,036	$	7,120	$	6,599

At December 31, 2021, other real estate owned also included approximately $2.4 million related to the Company's previous headquarters. The previous headquarters was sold during the second quarter of 2022.

During the nine months ended September 30, 2022, the Company sold property held in other real estate owned for a total gain of $4.0 million, compared to a total gain of $245,000 in the nine months ended September 30, 2021.

Nonaccrual loans

The Company did not recognize any interest income on nonaccrual loans for either of the nine months ended September 30, 2022 or 2021. In addition, there were no nonaccrual loans for which there is no related allowance for credit losses at both September 30, 2022 and December 31, 2021. Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $992,000 for the nine months ended September 30, 2022 and approximately $1.7 million for the nine months ended September 30, 2021.

Nonaccrual loans guaranteed by government agencies totaled approximately $2.0 million at September 30, 2022 and approximately $3.3 million at December 31, 2021.

The following table is a summary of amounts included in nonaccrual loans, segregated by portfolio segment.


	September 30, 2022		December 31, 2021
	(Dollars in thousands)
Real estate:
Commercial real estate owner occupied	$	1,845	$	4,351
Commercial real estate non-owner occupied		—		407
Construction and development < 60 months		98		80
Construction residential real estate < 60 months		103		—
Residential real estate first lien		2,156		2,763
Residential real estate all other		58		280
Farmland		1,463		4,224
Commercial and agricultural non-real estate		5,048		7,569
Consumer non-real estate		191		148
Oil and gas		1,000		1,070
Total	$	11,962	$	20,892

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 the Company's 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 September 30, 2022
Real estate:
Commercial real estate owner occupied	$	4,518	$	64	$	339	$	4,921	$	891,281	$	896,202	$	339
Commercial real estate non-owner occupied		525		—		36		561		1,229,513		1,230,074		36
Construction and development < 60 months		224		274		33		531		473,100		473,631		—
Construction residential real estate < 60 months		245		—		469		714		310,454		311,168		366
Residential real estate first lien		2,918		770		1,158		4,846		1,092,864		1,097,710		365
Residential real estate all other		136		155		102		393		188,115		188,508		83
Farmland		391		—		302		693		256,128		256,821		92
Commercial and agricultural non-real estate		2,027		307		4,677		7,011		1,422,390		1,429,401		667
Consumer non-real estate		2,171		776		657		3,604		428,309		431,913		565
Oil and gas		83		60		654		797		511,547		512,344		654
Total	$	13,238	$	2,406	$	8,427	$	24,071	$	6,803,701	$	6,827,772	$	3,167

As of December 31, 2021
Real estate:
Commercial real estate owner occupied	$	2,046	$	223	$	1,465	$	3,734	$	771,820	$	775,554	$	18
Commercial real estate non-owner occupied		7,244		—		—		7,244		1,088,080		1,095,324		—
Construction and development < 60 months		136		—		—		136		415,330		415,466		—
Construction residential real estate < 60 months		2,264		—		—		2,264		252,260		254,524		—
Residential real estate first lien		3,351		567		2,817		6,735		930,271		937,006		1,704
Residential real estate all other		293		30		451		774		160,244		161,018		431
Farmland		253		37		2,077		2,367		269,812		272,179		139
Commercial and agricultural non-real estate		2,506		546		7,118		10,170		1,405,923		1,416,093		2,418
Consumer non-real estate		1,873		321		272		2,466		410,904		413,370		254
Oil and gas		—		—		—		—		428,908		428,908		—
Total	$	19,966	$	1,724	$	14,200	$	35,890	$	6,133,552	$	6,169,442	$	4,964

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. These indicators are reviewed and updated regularly throughout the year. 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 and the table summarizing the Company’s gross loans held for investment by year of origination and internally assigned credit grades as of December 31, 2021, are disclosed in Note (5) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The Company’s revolving loans that are converted to term loans are not material and therefore have not been presented.

The following table summarizes the Company’s gross loans held for investment by year of origination and internally assigned credit grades :


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
	(Dollars in thousands)
As of September 30, 2022
Commercial real estate owner occupied
Grade 1	$	141,987	$	145,596	$	114,356	$	93,878	$	47,340	$	129,610	$	48,189	$	720,956
Grade 2		30,513		36,392		29,012		18,542		9,327		30,565		15,436		169,787
Grade 3		—		126		76		1,302		337		1,421		62		3,324
Grade 4		45		269		—		1,128		186		507		—		2,135
Total commercial real estate owner occupied		172,545		182,383		143,444		114,850		57,190		162,103		63,687		896,202
Commercial real estate non-owner occupied
Grade 1		198,064		238,174		177,410		109,128		26,907		77,085		39,667		866,435
Grade 2		88,113		56,473		30,068		47,428		25,178		72,943		30,663		350,866
Grade 3		7,126		—		—		2,748		79		2,784		—		12,737
Grade 4		—		—		—		—		36		—		—		36
Total commercial real estate non-owner occupied		293,303		294,647		207,478		159,304		52,200		152,812		70,330		1,230,074
Construction and development < 60 months
Grade 1		138,067		122,780		41,667		10,473		3,510		5,479		33,306		355,282
Grade 2		29,324		20,056		1,589		14,711		1,709		1,249		48,254		116,892
Grade 3		1,098		—		102		—		—		—		159		1,359
Grade 4		—		—		33		50		—		15		—		98
Total construction and development < 60 months		168,489		142,836		43,391		25,234		5,219		6,743		81,719		473,631
Construction residential real estate < 60 months
Grade 1		178,568		47,012		261		22		—		43		46,695		272,601
Grade 2		26,903		8,606		179		—		—		407		2,136		38,231
Grade 3		233		—		—		—		—		—		—		233
Grade 4		—		103		—		—		—		—		—		103
Total construction residential real estate < 60 months		205,704		55,721		440		22		—		450		48,831		311,168
Residential real estate first lien
Grade 1		251,829		218,962		150,043		90,854		58,348		146,667		4,922		921,625
Grade 2		34,687		37,637		25,916		13,497		11,075		39,349		—		162,161
Grade 3		1,543		1,171		651		1,516		1,870		4,143		—		10,894
Grade 4		30		322		138		568		180		1,792		—		3,030
Total residential real estate first lien		288,089		258,092		176,748		106,435		71,473		191,951		4,922		1,097,710
Residential real estate all other
Grade 1		24,287		11,519		11,471		5,940		3,909		11,865		41,165		110,156
Grade 2		4,387		1,896		1,860		1,676		1,261		2,646		62,195		75,921
Grade 3		200		204		88		84		222		890		602		2,290
Grade 4		—		18		30		—		39		54		—		141
Total residential real estate all other		28,874		13,637		13,449		7,700		5,431		15,455		103,962		188,508
Farmland
Grade 1		39,963		36,229		30,416		19,528		10,297		30,735		5,256		172,424
Grade 2		12,439		15,174		6,903		7,816		5,835		16,093		9,619		73,879
Grade 3		2,201		113		1,799		1,365		70		2,057		1,891		9,496
Grade 4		—		318		434		—		58		212		—		1,022
Total farmland		54,603		51,834		39,552		28,709		16,260		49,097		16,766		256,821
Commercial and agricultural non-real estate
Grade 1		239,757		257,163		83,658		58,217		17,413		46,390		361,517		1,064,115
Grade 2		79,522		65,913		23,868		15,699		17,090		4,710		136,388		343,190
Grade 3		3,575		2,290		1,843		936		1,896		932		6,094		17,566
Grade 4		439		553		591		1,121		497		1,159		170		4,530
Total commercial and agricultural non-real estate		323,293		325,919		109,960		75,973		36,896		53,191		504,169		1,429,401
Consumer non-real estate
Grade 1		163,610		121,331		46,856		24,674		8,419		2,989		20,821		388,700
Grade 2		15,625		12,007		4,564		4,113		1,079		1,511		968		39,867
Grade 3		663		817		370		381		159		67		3		2,460
Grade 4		231		307		108		175		52		12		1		886
Total consumer non-real estate		180,129		134,462		51,898		29,343		9,709		4,579		21,793		431,913
Oil and gas
Grade 1		137,122		76,145		24,844		864		1,732		313		175,742		416,762
Grade 2		4,432		4,603		2,890		19,655		19,248		200		36,964		87,992
Grade 3		209		4,557		7		—		—		171		1,646		6,590
Grade 4		—		1,000		—		—		—		—		—		1,000
Total oil and gas		141,763		86,305		27,741		20,519		20,980		684		214,352		512,344
Total loans held for investment	$	1,856,792	$	1,545,836	$	814,101	$	568,089	$	275,358	$	637,065	$	1,130,531	$	6,827,772

Allowance for Credit Losses Methodology

The Company determines its provision for credit losses and allowance for credit losses using the expected loss methodology that is referred to as the CECL model. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist.

The increase in allowance for credit losses during 2022 was related to the purchase of loans without credit deterioration during the year along with loan growth. The decrease in the allowance for credit losses during 2021 was driven by a reversal of a pandemic-related provision during 2021 based on sustained improvements in the economy, both nationally and in the Company's markets, which reduced the amount of expected credit losses within the loan portfolio. This reduction during 2021 was partially offset by additional allowance for credit losses required for newly acquired loans. The allowance for credit losses for the oil and gas category was reduced during 2021 due to the increases in oil and gas commodity prices contributing to a more stable and profitable energy industry; however this decrease was offset by an increase in allowance for credit losses for the commercial real estate non-owner occupied category due to ongoing uncertainty regarding the pandemic's long-term impact on the office and retail sectors.

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		Initial allowance on loans purchased with credit deterioration			Charge- offs			Recoveries		Net charge-offs			Provision for /(benefit from) credit losses on loans			Balance at end of period
	(Dollars in thousands)
Three Months Ended September 30, 2022
Real estate:
Commercial real estate owner occupied	$	6,945	$	—		$	—		$	426	$	426		$	(291	)	$	7,080
Commercial real estate non-owner occupied		22,937		—			—			—		—			988			23,925
Construction and development < 60 months		3,728		—			—			3		3			449			4,180
Construction residential real estate < 60 months		2,292		—			—			—		—			115			2,407
Residential real estate first lien		3,383		—			(11	)		15		4			(8	)		3,379
Residential real estate all other		2,051		—			(2	)		1		(1	)		59			2,109
Farmland		4,365		—			—			—		—			(101	)		4,264
Commercial and agricultural non-real estate		27,833		(4	)		(267	)		27		(240	)		545			28,134
Consumer non-real estate		4,094		(3	)		(171	)		59		(112	)		268			4,247
Oil and gas		9,307		—			—			—		—			839			10,146
Total	$	86,935	$	(7	)	$	(451	)	$	531	$	80		$	2,863		$	89,871
Nine Months Ended September 30, 2022
Real estate:
Commercial real estate owner occupied	$	7,568	$	—		$	(20	)	$	504	$	484		$	(972	)	$	7,080
Commercial real estate non-owner occupied		16,987		—			—			—		—			6,938			23,925
Construction and development < 60 months		3,490		—			—			8		8			682			4,180
Construction residential real estate < 60 months		1,092		—			—			—		—			1,315			2,407
Residential real estate first lien		3,076		2			(60	)		28		(32	)		333			3,379
Residential real estate all other		2,104		—			(38	)		403		365			(360	)		2,109
Farmland		4,822		—			—			—		—			(558	)		4,264
Commercial and agricultural non-real estate		28,085		44			(1,166	)		170		(996	)		1,001			28,134
Consumer non-real estate		3,734		25			(404	)		139		(265	)		753			4,247
Oil and gas		12,978		—			—			—		—			(2,832	)		10,146
Total	$	83,936	$	71		$	(1,688	)	$	1,252	$	(436	)	$	6,300		$	89,871


	Allowance for Credit Losses
	Balance at beginning of period		Initial allowance on loans purchased with credit deterioration			Charge- offs			Recoveries		Net charge-offs			Provision for /(benefit from) credit losses on loans			Balance at end of period
	(Dollars in thousands)
Three Months Ended September 30, 2021
Real estate:
Commercial real estate owner occupied	$	8,298	$	93		$	(3	)	$	72	$	69		$	91		$	8,551
Commercial real estate non-owner occupied		15,038		191			(7	)		67		60			46			15,335
Construction and development < 60 months		3,095		—			—			4		4			417			3,516
Construction residential real estate < 60 months		998		—			—			—		—			(25	)		973
Residential real estate first lien		2,921		9			(4	)		9		5			199			3,134
Residential real estate all other		1,963		—			—			46		46			206			2,215
Farmland		3,727		(248	)		—			—		—			969			4,448
Commercial and agricultural non-real estate		34,310		952			(219	)		43		(176	)		(489	)		34,597
Consumer non-real estate		3,481		30			(67	)		49		(18	)		66			3,559
Oil and gas		10,132		—			—			—		—			3			10,135
Total	$	83,963	$	1,027		$	(300	)	$	290	$	(10	)	$	1,483		$	86,463
Nine Months Ended September 30, 2021
Real estate:
Commercial real estate owner occupied	$	8,470	$	1,080		$	(3	)	$	73	$	70		$	(1,069	)	$	8,551
Commercial real estate non-owner occupied		12,318		824			(803	)		67		(736	)		2,929			15,335
Construction and development < 60 months		2,723		173			—			9		9			611			3,516
Construction residential real estate < 60 months		726		—			—			—		—			247			973
Residential real estate first lien		2,822		126			(56	)		36		(20	)		206			3,134
Residential real estate all other		2,236		—			(46	)		50		4			(25	)		2,215
Farmland		3,153		395			—			1		1			899			4,448
Commercial and agricultural non-real estate		34,643		5,663			(3,817	)		195		(3,622	)		(2,087	)		34,597
Consumer non-real estate		3,542		38			(689	)		247		(442	)		421			3,559
Oil and gas		20,733		—			—			—		—			(10,598	)		10,135
Total	$	91,366	$	8,299		$	(5,414	)	$	678	$	(4,736	)	$	(8,466	)	$	86,463

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 credit-deteriorated loans purchased during the nine-month periods ended September 30, 2022 and September 30, 2021 were as follows:


	Loans acquired with deteriorated credit quality
	(Dollars in thousands)
For the period ended September 30, 2022
Purchase price of loans at acquisition	$	661
Allowance for credit losses at acquisition		71
Par value of acquired loans at acquisition	$	732

For the period ended September 30, 2021
Purchase price of loans at acquisition	$	39,284
Allowance for credit losses at acquisition		8,299
Par value of acquired loans at acquisition	$	47,583

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. During the nine months ended September 30, 2022 and 2021, no material amount of interest income was recognized on collateral-dependent loans subsequent to their classification as collateral-dependent. The following table summarizes collateral-dependent gross loans held for investment by collateral type and the related specific allocation as follows:


	Collateral Type
	Real Estate		Business Assets		Energy Reserves		Other Assets		Total		Specific Allocation
	(Dollars in thousands)
As of September 30, 2022
Real estate:
Commercial real estate owner occupied	$	1,307	$	—	$	—	$	—	$	1,307	$	488
Commercial real estate non-owner occupied		595		—		—		—		595		64
Construction and development < 60 months		—		—		—		—		—		—
Construction residential real estate < 60 months		—		—		—		—		—		—
Residential real estate first lien		372		—		—		—		372		96
Residential real estate all other		—		—		—		—		—		—
Farmland		4,746		—		—		—		4,746		971
Commercial and agricultural non-real estate		—		6,088		—		3,816		9,904		3,998
Consumer non-real estate		—		—		—		107		107		59
Oil and gas		—		—		—		—		—		—
Total collateral-dependent loans held for investment	$	7,020	$	6,088	$	—	$	3,923	$	17,031	$	5,676

	Collateral Type
	Real Estate		Business Assets		Energy Reserves		Other Assets		Total		Specific Allocation
	(Dollars in thousands)
As of December 31, 2021
Real estate:
Commercial real estate owner occupied	$	1,952	$	—	$	—	$	—	$	1,952	$	576
Commercial real estate non-owner occupied		1,404		—		—		—		1,404		263
Construction and development < 60 months		—		—		—		—		—		—
Construction residential real estate < 60 months		—		—		—		—		—		—
Residential real estate first lien		871		—		—		—		871		143
Residential real estate all other		199		—		—		—		199		178
Farmland		8,703		—		—		—		8,703		1,805
Commercial and agricultural non-real estate		—		6,472		—		5,202		11,674		4,938
Consumer non-real estate		—		—		—		54		54		20
Oil and gas		—		—		—		—		—		—
Total collateral-dependent loans held for investment	$	13,129	$	6,472	$	—	$	5,256	$	24,857	$	7,923

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:


	Nine Months Ended September 30,
	2022		2021
	(Dollars in thousands)
Other real estate owned	$	4,393	$	10,564
Repossessed assets		696		594
Total	$	5,089	$	11,158