
	June 30, 2020		December 31, 2019

	(Dollars in thousands)
Commercial	$	1,284,919	$	1,356,817
Energy	390,346		408,573
Commercial real estate	1,141,277		1,024,041
Construction and land development	661,691		628,418
Residential real estate	536,270		398,695
Paycheck Protection Program (“PPP”)	369,022		—


Consumer	45,716		45,163
Gross loans	4,429,241		3,861,707
Less: Allowance for loan losses	71,185		56,896
Less: Net deferred loan fees and costs	16,017		9,463
Net loans	$	4,342,039	$	3,795,348

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the loan balance is not collectible. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of its ability to collect the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may

affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers all loans on accrual and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process and loan categories. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

The Company evaluates the loan risk grading system definitions, portfolio segment definitions, and allowance for loan loss methodology on an ongoing basis. During the quarter ended June 30, 2020, the Company distinguished between performing and nonperforming substandard loans, as previously discussed in Note 1: Nature of Operations and Summary of Significant Accounting Policies. In addition, the Company separated out PPP loans that are 100% guaranteed by the Small Business Administration (“SBA”). No additional changes to loan definitions, segmentation, and Allowance for Loan Losses (“ALLL”) methodology occurred during the second quarter of 2020.

The following tables summarize the activity in the allowance for loan losses by portfolio segment and disaggregated based on the Company’s impairment methodology. The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments:


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Three months ended June 30, 2020
Allowance for loan losses
Beginning balance	$	21,129	$	7,599	$	12,623	$	5,021	$	4,687	$	—	$	399	$	51,458
Provision charged to expense	5,499		10,773		4,276		(2)		370		—		84		21,000
Charge-offs	(87)		(1,000)		—		—		(189)		—		—		(1,276)
Recoveries	2		—		—		—		—		—		1		3
Ending balance	$	26,543	$	17,372	$	16,899	$	5,019	$	4,868	$	—	$	484	$	71,185


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Three months ended June 30, 2019
Allowance for loan losses
Beginning balance	$	20,506	$	7,090	$	7,471	$	2,585	$	2,047	$	—	$	302	$	40,001
Provision charged to expense	2,468		210		62		17		91		—		2		2,850
Charge-offs	—		—		—		—		—		—		(1)		(1)
Recoveries	1		—		—		—		—		—		1		2
Ending balance	$	22,975	$	7,300	$	7,533	$	2,602	$	2,138	$	—	$	304	$	42,852


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Six months ended June 30, 2020
Allowance for loan losses
Beginning balance	$	35,864	$	6,565	$	8,085	$	3,516	$	2,546	$	—	$	320	$	56,896
Provision charged to expense	8,771		13,085		8,814		1,503		2,511		—		266		34,950
Charge-offs	(18,165)		(2,278)		—		—		(189)		—		(104)		(20,736)
Recoveries	73		—		—		—		—		—		2		75
Ending balance	$	26,543	$	17,372	$	16,899	$	5,019	$	4,868	$	—	$	484	$	71,185


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
Six months ended June 30, 2019
Allowance for loan losses
Beginning balance	$	16,584	$	10,262	$	6,755	$	2,475	$	1,464	$	—	$	286	$	37,826
Provision charged to expense	7,631		(3,538)		778		127		674		—		$	28	5,700
Charge-offs	(1,254)		—		—		—		—		—		(11)		(1,265)
Recoveries	14		576		—		—		—		—		1		591
Ending balance	$	22,975	$	7,300	$	7,533	$	2,602	$	2,138	$	—	$	304	$	42,852


	Commercial		Energy		Commercial Real Estate		Construction and Land Development		Residential Real Estate		PPP		Consumer		Total
	(Dollars in thousands)
June 30, 2020
Period end allowance for loan losses allocated to:
Individually evaluated for impairment	$	2,933	$	1,942	$	1,704	$	—	$	413	$	—	$	—	$	6,992
Collectively evaluated for impairment	$	23,610	$	15,430	$	15,195	$	5,019	$	4,455	$	—	$	484	$	64,193
Ending balance	$	26,543	$	17,372	$	16,899	$	5,019	$	4,868	$	—	$	484	$	71,185

Allocated to loans:
Individually evaluated for impairment	$	11,831	$	15,532	$	10,909	$	—	$	6,981	$	—	$	249	$	45,502
Collectively evaluated for impairment	$	1,273,088	$	374,814	$	1,130,368	$	661,691	$	529,289	$	369,022	$	45,467	$	4,383,739
Ending balance	$	1,284,919	$	390,346	$	1,141,277	$	661,691	$	536,270	$	369,022	$	45,716	$	4,429,241

The Company analyzes its loan portfolio based on internal rating categories (grades 1 - 8), portfolio segmentation and payment activity. These categories are utilized to develop the associated allowance for loan losses. A description of the loan grades and segments follows:

•Pass (risk rating 1-4) - Considered satisfactory. Includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected.

•Special Mention (risk rating 5) - Borrowers generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification.

•Substandard (risk rating 6) - Credits generally exhibit well-defined weakness(es) that jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Substandard loans include both performing and nonperforming loans and are broken out in the table below.

•Doubtful (risk rating 7) - Credits which exhibit weaknesses inherent in a substandard credit with the added characteristic that these weaknesses make collection or liquidation in full highly questionable and improbable based on existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined.

•Commercial - Includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. Repayment is primarily from the cash flow of a borrower’s principal business operation. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

•Energy - Includes loans to oil and natural gas customers for use in financing working capital needs, exploration and production activities, and acquisitions. The loans are repaid primarily from the conversion of crude oil and natural gas to cash. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Energy loans are typically collateralized with the underlying oil and gas reserves.

•Commercial Real Estate - Loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market areas.

•Construction and Land Development - Loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market areas.

•Residential Real Estate - The loans are generally secured by owner-occupied 1-4 family residences or multifamily properties. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers or underlying tenants. Credit risk in these loans can be impacted by economic conditions within or outside the borrower’s market areas that might impact either property values, a borrower’s personal income, or residents’ income.

•PPP - The loans were established by the CARES Act which authorized forgivable loans to small businesses to pay their employees during the COVID-19 pandemic. The program requires all loan terms to be the same for everyone. The loans are 100 percent guaranteed by the SBA and repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval.

•Consumer - The loan portfolio consists of revolving lines of credit and various term loans such as automobile loans and loans for other personal purposes. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the borrower’s market area) and the creditworthiness of a borrower.

The following tables present the credit risk profile of the Company’s loan portfolio based on an internal rating categories (grades 1 - 8), portfolio segmentation, and payment activity:



	Pass		Special Mention		Substandard Performing		Substandard Nonperforming		Doubtful		Loss		Total
	(Dollars in thousands)
June 30, 2020
Commercial	$	1,143,316	$	53,411	$	77,226	$	7,662	$	3,304	$	—	$	1,284,919
Energy	210,557		71,837		92,568		10,997		4,387		—		390,346
Commercial real estate	1,069,590		39,332		25,355		6,187		813		—		1,141,277
Construction and land development	655,200		5,330		1,161		—		—		—		661,691
Residential real estate	528,510		540		3,285		3,935		—		—		536,270
PPP	369,022		—		—		—		—		—		369,022


Consumer	45,467		—		—		249		—		—		45,716
	$	4,021,662	$	170,450	$	199,595	$	29,030	$	8,504	$	—	$	4,429,241


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Loans Receivable		Loans >= 90 Days and Accruing
	(Dollars in thousands)
June 30, 2020
Commercial	$	4,645	$	3,391	$	7,315	$	15,351	$	1,269,568	$	1,284,919	$	—
Energy	—		16,918		4,440		21,358		368,988		390,346		—
Commercial real estate	8,009		230		4,481		12,720		1,128,557		1,141,277		—
Construction and land development	194		—		—		194		661,497		661,691		—
Residential real estate	1,357		—		3,915		5,272		530,998		536,270		220
PPP	—		—		—		—		369,022		369,022		—


Consumer	—		137		—		137		45,579		45,716		—
	$	14,205	$	20,676	$	20,151	$	55,032	$	4,374,209	$	4,429,241	$	220


	30-59 Days Past Due		60-89 Days Past Due		90 Days or More		Total Past Due		Current		Total Loans Receivable		Loans >= 90 Days and Accruing
	(Dollars in thousands)
December 31, 2019
Commercial	$	1,091	$	276	$	30,911	$	32,278	$	1,324,539	$	1,356,817	$	37
Energy	2,340		—		4,593		6,933		401,640		408,573		53
Commercial real estate	316		—		4,589		4,905		1,019,136		1,024,041		4,501
Construction and land development	196		—		—		196		628,222		628,418		—
Residential real estate	2,347		—		1,919		4,266		394,429		398,695		—
PPP	—		—		—		—		—		—		—
Consumer	2		254		—		256		44,907		45,163		—
	$	6,292	$	530	$	42,012	$	48,834	$	3,812,873	$	3,861,707	$	4,591

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. The intent of concessions is to maximize collection.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

The following tables present loans individually evaluated for impairment, including all restructured and formerly restructured loans, for the periods ended June 30, 2020 and December 31, 2019:


			Unpaid
	Recorded Balance		Principal Balance		Specific Allowance
	(Dollars in thousands)
June 30, 2020
Loans without a specific valuation
Commercial	$	70	$	70	$	—
Energy	—		—		—
Commercial real estate	763		854		—
Construction and land development	—		—		—
Residential real estate	5,404		5,404		—
PPP	—		—		—


Consumer	249		249		—
Loans with a specific valuation
Commercial	11,761		29,710		2,933
Energy	15,532		18,244		1,942
Commercial real estate	10,146		10,146		1,704
Construction and land development	—		—		—
Residential real estate	1,577		1,577		413
PPP	—		—		—


Consumer	—		—		—


Total
Commercial	11,831		29,780		2,933
Energy	15,532		18,244		1,942
Commercial real estate	10,909		11,000		1,704
Construction and land development	—		—		—
Residential real estate	6,981		6,981		413
PPP	—		—		—


Consumer	249		249		—
	$	45,502	$	66,254	$	6,992

The table below shows interest income recognized during the three and six month periods ended June 30, 2020 and 2019 for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020			2019
	(Dollars in thousands)
Commercial	$	27	$	781	$	88		$	1,564
Energy	46		53		210			109
Commercial real estate	58		278		135			532
Construction and land development	—		—		—			1
Residential real estate	35		10		74			21
PPP	—		—		—			—


Consumer	—		—		—			—
Total interest income recognized	$	166	$	1,122	$	507		$	2,227

The table below shows the three and six month average balance of impaired loans as of June 30, 2020 and 2019 by loan category for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Commercial	$	11,793	$	50,732	$	19,002	$	74,259
Energy	16,798		12,534		17,527		13,850
Commercial real estate	10,958		13,779		11,044		14,661
Construction and land development	—		50		—		25
Residential real estate	7,171		2,665		6,953		2,428
PPP	—		—		—		—
Consumer	251		—		253		—
Total average impaired loans	$	46,971	$	79,760	$	54,779	$	105,223

Nonperforming loans are loans for which the Company does not record interest income. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date, if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following table presents the Company’s non-accrual loans by loan category at June 30, 2020 and December 31, 2019:



	June 30, 2020		December 31, 2019
	(Dollars in thousands)

Commercial	$	10,966	$	32,130
Energy	15,384		4,540
Commercial real estate	7,000		1,063
Construction and land development	—		—
Residential real estate	3,935		1,942
PPP	—		—
Consumer	249		—
Total non-accrual loans	$	37,534	$	39,675

Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession, excluding loan modifications as a result of the COVID-19 pandemic. The modification of terms typically includes the extension of maturity, reduction or deferment of monthly payment, or reduction of the stated interest rate.

The table below presents loans restructured, excluding loans restructured as a result of the COVID-19 pandemic, during the three and six months ended June 30, 2020 and 2019, including the post-modification outstanding balance and the type of concession made:


	Three Months Ended						Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Commercial
- Interest rate reduction	$	—	$	—	$	3,171	$	—
- Reduction of monthly payment	—		—		—		994
- Extension of maturity date	—		30,005		—		30,005
Energy
- Extension of maturity date	—		—		2,340		—
Commercial real estate

- Reduction of monthly payment	—		—		—		3,767


Residential real estate
- Payment deferral	65		—		65		—



Total troubled debt restructurings during applicable period	$	65	$	30,005	$	5,576	$	34,766

As of June 30, 2020 and December 31, 2019, the Company had $749 thousand and $934 thousand, respectively, in unfunded commitments to borrowers whose terms have been modified in TDRs. For the three and six-month periods ended June 30, 2020, the modifications related to the TDRs above did not impact the allowance for loan losses because the loans were previously impaired and evaluated on an individual basis or enough collateral was obtained to provide an additional commitment.

The balance of restructured loans, excluding loans restructured as a result of the COVID-19 pandemic, is provided below as of June 30, 2020 and December 31, 2019. In addition, the balance of those loans that are in default at any time during the past twelve months at June 30, 2020 and December 31, 2019 is provided below:



	June 30, 2020								December 31, 2019
	Number of Loans	Outstanding Balance		Balance 90 days past due at any time during previous 12 months⁽¹⁾		Number of Loans	Outstanding Balance		Balance 90 days past due at any time during previous 12 months⁽¹⁾
	(Dollars in thousands)
Commercial	6	$	9,657	$	842	7	$	31,770	$	831
Energy	3	4,032		—		2	2,864		—
Commercial real estate	3	4,749		—		3	4,909		—
Construction and land development	—	—		—		—	—		—
Residential real estate	2	3,065		—		—	—		—
PPP	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total troubled debt restructured loans	14	$	21,503	$	842	12	$	39,543	$	831
⁽¹⁾ Default is considered to mean 90 days or more past due as to interest or principal.