(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:

	December 31,
	2016					2015
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and financial:
Commercial and industrial	$	828,260		18.82	%	$	795,803		18.80	%
Oil & gas production and equipment		84,228		1.91			87,304		2.06
Agriculture		144,751		3.29			150,620		3.56
State and political subdivisions:
Taxable		33,793		0.77			17,605		0.42
Tax-exempt		47,283		1.07			33,575		0.79
Real estate:
Construction		420,884		9.57			403,664		9.54
Farmland		197,872		4.50			184,707		4.36
One to four family residences		846,360		19.24			821,251		19.41
Multifamily residential properties		57,806		1.31			65,477		1.55
Commercial		1,426,643		32.42			1,356,430		32.05
Consumer		279,704		6.36			283,636		6.70
Other (not classified above)		32,648		0.74			31,976		0.76
Total loans	$	4,400,232		100.00	%	$	4,232,048		100.00	%

The Company’s commercial and industrial loan category includes a small percentage of loans to companies that provide ancillary services to the oil and gas industry, such as transportation, preparation contractors and equipment manufacturers. The balance of these loans at December 31, 2016 was approximately $56 million.

The Company’s loans are mostly to customers within Oklahoma and over 65% 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.

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. As a lender, the Company faces the risk that a significant number of its borrowers will fail to pay their loans when due. If borrower defaults cause losses in excess of the Company’s allowance for loan losses, it could have an adverse effect on the Company’s business, profitability, and financial condition.

Loans secured by real estate, including farmland, multifamily, commercial, one-to-four family residential and construction and development loans, have been a large portion of the Company’s loan portfolio. The Company is subject to risk of future market fluctuations in property values relating to these loans. In addition, multi-family and commercial real estate (“CRE”) loans represent the majority of the Company’s real estate loans outstanding. A decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of the Company’s borrowers to repay their loans on a timely basis, which could have a negative impact on the Company’s financial condition and results of operation. The Company attempts to manage this risk through rigorous loan underwriting standards.

During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage.

Nonperforming and Restructured Assets

The following is a summary of nonperforming and restructured assets:

	December 31,
	2016		2015
	(Dollars in thousands)
Past due 90 days or more and still accruing	$	1,962	$	1,841
Nonaccrual		31,798		30,096
Restructured		1,713		15,143
Total nonperforming and restructured loans		35,473		47,080
Other real estate owned and repossessed assets		3,866		8,214
Total nonperforming and restructured assets	$	39,339	$	55,294

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $2.0 million in 2016, $2.0 million in 2015 and $1.2 million in 2014.

Restructured loans at December 31, 2015 consisted primarily of one relationship restructured in prior periods to defer certain principal payments. This relationship was re-evaluated by management and removed from restructured loans in 2016 due to sustained improvement in financial condition, performance and the commercially reasonable nature of its structure. 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,
	2016		2015
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	713	$	261
Non-residential real estate other		5,688		3,957
Residential real estate permanent mortgage		1,116		656
Residential real estate all other		5,089		1,833
Commercial and financial:
Non-consumer non-real estate		4,464		10,159
Consumer non-real estate		265		312
Other loans		8,370		9,381
Acquired loans		6,093		3,537
Total	$	31,798	$	30,096

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 past due loans, segregated by class of loans:

	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 December 31, 2016
Real estate:
Non-residential real estate owner occupied	$	2,255	$	96	$	150	$	2,501	$	569,130	$	571,631	$	—
Non-residential real estate other		611		16		418		1,045		1,122,351		1,123,396		—
Residential real estate permanent mortgage		2,742		649		1,273		4,664		320,749		325,413		513
Residential real estate all other		2,559		531		1,416		4,506		743,723		748,229		369
Commercial and financial:
Non-consumer non-real estate		1,269		1,628		741		3,638		1,047,547		1,051,185		608
Consumer non-real estate		2,046		760		419		3,225		280,652		283,877		274
Other loans		5,345		958		7,775		14,078		127,404		141,482		45
Acquired loans		825		310		408		1,543		153,476		155,019		153
Total	$	17,652	$	4,948	$	12,600	$	35,200	$	4,365,032	$	4,400,232	$	1,962
As of December 31, 2015
Real estate:
Non-residential real estate owner occupied	$	441	$	179	$	183	$	803	$	502,094	$	502,897	$	—
Non-residential real estate other		1,149		108		568		1,825		1,108,935		1,110,760		521
Residential real estate permanent mortgage		2,840		636		648		4,124		328,477		332,601		493
Residential real estate all other		2,842		609		824		4,275		672,414		676,689		193
Commercial and financial:
Non-consumer non-real estate		2,278		161		187		2,626		982,136		984,762		152
Consumer non-real estate		2,237		772		349		3,358		265,511		268,869		278
Other loans		3,565		295		1,761		5,621		156,995		162,616		132
Acquired loans		1,052		71		918		2,041		190,813		192,854		72
Total	$	16,404	$	2,831	$	5,438	$	24,673	$	4,207,375	$	4,232,048	$	1,841

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, 2016
Real estate:
Non-residential real estate owner occupied	$	894	$	806	$	101	$	825
Non-residential real estate other		7,742		5,688		574		5,854
Residential real estate permanent mortgage		1,878		1,683		124		1,612
Residential real estate all other		5,871		5,614		1,538		5,445
Commercial and financial:
Non-consumer non-real estate		12,015		6,272		1,457		6,478
Consumer non-real estate		686		650		133		788
Other loans		9,799		8,415		1,870		8,062
Acquired loans		8,780		6,581		—		6,041
Total	$	47,665	$	35,709	$	5,797	$	35,105

As of December 31, 2015
Real estate:
Non-residential real estate owner occupied	$	507	$	383	$	14	$	446
Non-residential real estate other		21,068		19,052		357		19,655
Residential real estate permanent mortgage		1,401		1,209		81		1,125
Residential real estate all other		2,498		2,235		242		1,958
Commercial and financial:
Non-consumer non-real estate		13,897		10,312		2,062		11,786
Consumer non-real estate		738		715		181		652
Other loans		10,722		9,513		331		10,335
Acquired loans		6,295		4,248		—		4,564
Total	$	57,126	$	47,667	$	3,268	$	50,521

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 Small Business Administration (“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, 2016
Real estate:
Non-residential real estate owner occupied	$	464,504	$	89,978	$	16,220	$	929	$	—	$	571,631
Non-residential real estate other		933,743		169,561		14,404		5,688		—		1,123,396
Residential real estate permanent mortgage		284,893		32,889		5,987		1,644		—		325,413
Residential real estate all other		614,338		119,018		9,382		5,491		—		748,229
Commercial and financial:
Non-consumer non-real estate		856,318		170,865		19,101		4,901		—		1,051,185
Consumer non-real estate		263,442		17,154		2,640		641		—		283,877
Other loans		132,254		5,376		1,514		2,338		—		141,482
Acquired loans		92,946		42,668		12,888		6,517		—		155,019
Total	$	3,642,438	$	647,509	$	82,136	$	28,149	$	—	$	4,400,232

As of December 31, 2015
Real estate:
Non-residential real estate owner occupied	$	417,529	$	76,749	$	8,304	$	315	$	—	$	502,897
Non-residential real estate other		945,993		156,159		4,580		4,028		—		1,110,760
Residential real estate permanent mortgage		295,265		29,793		6,315		1,228		—		332,601
Residential real estate all other		554,007		111,879		9,109		1,694		—		676,689
Commercial and financial:
Non-consumer non-real estate		821,394		140,384		12,687		10,297		—		984,762
Consumer non-real estate		251,994		14,433		1,779		662		1		268,869
Other loans		153,416		5,851		872		2,477		—		162,616
Acquired loans		165,305		12,566		11,049		3,858		76		192,854
Total	$	3,604,903	$	547,814	$	54,695	$	24,559	$	77	$	4,232,048

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 one-to-four family residential property, loans secured by one-to-four 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 certain 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, 2016
Real estate:
Non-residential real estate owner occupied	$	4,661	$	(11	)	$	3	$	(8	)	$	949	$	5,602
Non-residential real estate other		9,921		(9	)		6		(3	)		875		10,793
Residential real estate permanent mortgage		3,148		(208	)		55		(153	)		134		3,129
Residential real estate all other		6,725		(181	)		21		(160	)		2,057		8,622
Commercial and financial:
Non-consumer non-real estate		11,754		(2,921	)		122		(2,799	)		3,466		12,421
Consumer non-real estate		2,642		(1,088	)		159		(929	)		1,091		2,804
Other loans		2,648		(388	)		17		(371	)		1,768		4,045
Acquired loans		167		(101	)		32		(69	)		1,179		1,277
Total	$	41,666	$	(4,907	)	$	415	$	(4,492	)	$	11,519	$	48,693
As of December 31, 2015
Real estate:
Non-residential real estate owner occupied	$	4,406	$	(37	)	$	1	$	(36	)	$	291	$	4,661
Non-residential real estate other		9,616		(708	)		2		(706	)		1,011		9,921
Residential real estate permanent mortgage		2,948		(222	)		40		(182	)		382		3,148
Residential real estate all other		6,269		(138	)		17		(121	)		577		6,725
Commercial and financial:
Non-consumer non-real estate		12,771		(3,799	)		199		(3,600	)		2,583		11,754
Consumer non-real estate		2,404		(626	)		124		(502	)		740		2,642
Other loans		2,359		(1,109	)		16		(1,093	)		1,382		2,648
Acquired loans		116		(686	)		28		(658	)		709		167
Total	$	40,889	$	(7,325	)	$	427	$	(6,898	)	$	7,675	$	41,666

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.

	ALL
	December 31, 2016				December 31, 2015
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	716	$	4,886	$	323	$	4,338
Non-residential real estate other		1,119		9,674		323		9,598
Residential real estate permanent mortgage		422		2,707		399		2,749
Residential real estate all other		2,160		6,462		839		5,886
Commercial and financial:
Non-consumer non-real estate		3,317		9,104		3,365		8,389
Consumer non-real estate		478		2,326		445		2,197
Other loans		1,812		2,233		291		2,357
Acquired loans		495		782		—		167
Total	$	10,519	$	38,174	$	5,985	$	35,681

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, 2016						December 31, 2015
	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)
Real estate:
Non-residential real estate owner occupied	$	17,149	$	554,482	$	—	$	8,619	$	494,278	$	—
Non-residential real estate other		20,092		1,103,304		—		8,608		1,102,152		—
Residential real estate permanent mortgage		7,631		317,782		—		7,543		325,058		—
Residential real estate all other		14,873		733,356		—		10,803		665,886		—
Commercial and financial:
Non-consumer non-real estate		24,002		1,027,183		—		22,983		961,779		—
Consumer non-real estate		3,203		280,674		—		2,416		266,453		—
Other loans		2,254		139,228		—		2,323		160,293		—
Acquired loans		13,459		135,616		5,944		7,889		177,871		7,094
Total	$	102,663	$	4,291,625	$	5,944	$	71,184	$	4,153,770	$	7,094

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,
	2016		2015		2014
	(Dollars in thousands)
Other real estate owned	$	2,553	$	2,139	$	3,573
Repossessed assets		1,402		1,098		1,209
Total	$	3,955	$	3,237	$	4,782

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)
2016	$	37,577	$	16,133	$	(26,224	)	$	27,486
2015		25,019		22,330		(9,772	)		37,577
2014		27,134		22,521		(24,636	)		25,019