Note 4:  Loans and Allowance for Loan Losses

 

We extend commercial and consumer credit primarily to customers in the states of Oklahoma, Texas, and Kansas.  Our commercial lending operations are concentrated in Oklahoma City, Dallas, Tulsa, and other metropolitan markets in Texas, Kansas, and Oklahoma.  As a result, the collectability of our loan portfolio can be affected by changes in the economic conditions in those states and markets.  Please see “Note 19 Operating Segments” for more detail regarding loans by market.  At December 31, 2014 and 2013, substantially all of our loans were collateralized with real estate, inventory, accounts receivable, and/or other assets or were guaranteed by agencies of the United States government. 

 

Due to the immateriality of the remaining balance of loans covered under the loss sharing agreement with the FDIC, covered and noncovered loans have been combined for reporting purposes. Prior period numbers have also been adjusted to reflect this change. This adjustment has no financial statement impact.

 

Our loan classifications were as follows: 

 

 

 

Concentrations of Credit.  At December 31, 2014, $413.8 million, or 30%, of our loans consisted of loans to individuals and businesses in the healthcare industry.  We do not have any other concentrations of loans to individuals or businesses involved in a single industry totaling 10% or more of total loans. 

 

Loans Held for Sale.  We had loans which were held for sale of $1.5 million and $3.1 million at December 31, 2014 and 2013, respectively. The loans currently classified as held for sale, primarily residential mortgage loans, are carried at the lower of cost or market value.    A substantial portion of the one-to-four family residential loans and loan servicing rights, if not retained, are primarily sold to one investor.  These mortgage loans are generally sold within a one-month period from loan closing at amounts determined by the investor commitment based upon the pricing of the loan. 

 

Loan Servicing.  We earn fees for servicing real estate mortgages and other loans owned by others.  The fees are generally calculated on the outstanding principal balance of the loans serviced and are recorded as noninterest income when earned.  The unpaid principal balance of real estate mortgage loans serviced for others totaled $410.3 million and $390.7 million at December 31, 2014 and 2013, respectively.  Loan servicing rights are capitalized based on estimated fair value at the point of origination.  The servicing rights are amortized over the period of estimated net servicing income.   

 

Acquired Loans.  Changes in the carrying amounts and accretable yields for ASC 310.30 loans were as follows for the year ended December 31, 2014 and 2013. 

 

 

 

 

Nonperforming / Past Due Loans.  The following table shows the recorded investment in loans on nonaccrual status. 

 

 

 

If interest on nonaccrual loans had been accrued, the interest income as reported in the accompanying Consolidated Statements of Operations would have increased by approximately $0.7 million, $1.2 million, and $1.2 million, for 2014, 2013, and 2012, respectively.

 

Net cumulative charge-offs against nonaccrual loans at December 31, 2014 and 2013 were $6.0 million and $8.2 million, respectively. 

 

The following table shows the delinquency status of past due loans at the end of the respective reporting period.

 

 

 

Impaired Loans.  The following table presents loans individually evaluated for impairment by class of loans at the end of the respective reporting period.

 

 

 

 

The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2014, 2013, and 2012.

 

 

 

Included in interest income recognized on impaired loans are $1.0 million and  $2.2 million, and $1.9 million,  for December 31, 2014, 2013, and 2012, respectively, in interest on accruing troubled debt restructurings.    

 

Troubled Debt Restructurings.  The loan portfolio also includes certain loans that have been modified in a troubled debt restructuring, where economic concessions have been granted to borrowers who have experienced financial difficulties.  These concessions typically result from loss mitigation activities and can include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Troubled debt restructurings are classified as impaired at the time of restructuring and classified as nonperforming, potential problem, or performing restructured, as applicable.  Loans modified in troubled debt restructurings may be returned to performing status after considering the borrowers’ sustained repayment for a reasonable period of at least six months. 

 

When we modify loans in a troubled debt restructuring, an evaluation of any possible impairment is performed similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or use of the current fair value of the collateral, less selling costs for collateral dependent loans.  If it is determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs, and unamortized premium or discount), an impairment is recognized through an allowance estimate or a charge-off to the allowance.  In periods subsequent to modification, all loans modified in troubled debt restructurings are evaluated, including those that have payment defaults, for possible impairment. 

 

Troubled debt restructured loans outstanding as of December 31, 2014 and 2013 are as follows: 

 

 

 

 

At December 31, 2014 and 2013,  we had no significant commitments to lend additional funds to debtors whose loan terms have been modified in troubled debt restructuring. 

 

Loans modified as troubled debt restructurings that occurred during the year ended December 31, 2014 and 2013 are shown in the following tables:  

 

 

 

 

The modifications of loans identified as troubled debt restructurings primarily related to payment extensions and/or reductions in the interest rate.  The financial impact of troubled debt restructurings is not significant.   

 

As of December 31, 2014, there were no loans modified as a troubled debt restructuring which subsequently defaulted. As of December 31, 2013, there was one commercial real estate loan with a recorded investment of $0.2 million that was modified as a troubled debt restructuring which subsequently defaulted.  Default, for this purpose, is deemed to occur when a loan is 90 days or more past due or transferred to nonaccrual and is within twelve months of restructuring.   

 

 

Credit Quality Indicators.  To assess the credit quality of loans, we categorize loans into risk categories based on relevant information about the ability of the borrowers to service their debts such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  This analysis is performed on a quarterly basis.  We use the following definitions for risk ratings:   

 

Special mention – Loans classified as special mention have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for these loans or of the institution’s credit position at some future date. 

 

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligors or of the collateral pledged, if any.  Loans so classified have one or more well-defined weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  These loans are considered potential problem or nonperforming loans depending on the accrual status of the loans.    

 

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  These loans are considered nonperforming. 

 

Loans not meeting the criteria above that are analyzed as part of the above described process are considered to be pass rated loans.  As of December 31, 2014 and 2013, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows: 

 

 

 

Allowance for Loan Losses.  The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment evaluation method as of December 31, 2014 and 2013.