Note 3: 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 18 Operating Segments” for more detail regarding loans by market. At December 31, 2013 and 2012, 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.

Our loan classifications were as follows:



	At December 31, 2013				At December 31, 2012
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered
Real estate mortgage:
Commercial	$	740,997	$	11,282	$	870,975	$	18,298
One-to-four family residential		80,058		3,930		70,954		4,881
Real estate construction:
Commercial		143,650		198		130,753		382
One-to-four family residential		4,646		-		3,656		-
Commercial		254,087		971		240,498		2,037
Installment and consumer:
Guaranteed student loans		4,394		-		4,680		-
Other		26,644		46		31,512		109
		1,254,476		16,427		1,353,028		25,707
Less: Allowance for loan losses		(36,607)		(56)		(46,494)		(224)
Total loans, net	$	1,217,869	$	16,371	$	1,306,534	$	25,483

Concentrations of Credit. At December 31, 2013, $417.4 million, or 33%, of our noncovered 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 $3.1 million and $31.7 million at December 31, 2013 and 2012, respectively. The decline is due to reclassifying the guaranteed student loans and the United States Department of Agriculture (“USDA”) government guaranteed commercial real estate loans back into the loan portfolio and not actively looking to sell these loans. These loans were reclassified at their respective book value which approximated fair value. 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 $390.7 million and $343.4 million at December 31, 2013 and 2012, 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, 2013 and 2012.



	For the year ended December 31,
	2013				2012
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	1,904	$	25,707	$	2,402	$	37,615
Payments received		-		(6,954)		-		(9,960)
Transfers to other real estate / repossessed assets		(36)		(2,110)		27		(2,365)
Net charge-offs		(1)		(468)		(5)		(151)
Net reclassifications to / from nonaccretable amount		235		-		192		-
Accretion		(505)		252		(712)		568
Balance at end of period	$	1,597	$	16,427	$	1,904	$	25,707

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



	At December 31,
	2013				2012
(Dollars in thousands)	Noncovered		Covered		Noncovered		Covered
Real estate mortgage:
Commercial	$	6,564	$	1,202	$	18,337	$	3,087
One-to-four family residential		456		57		563		52
Real estate construction:
Commercial		2,721		-		3,355		130
Commercial		8,769		-		12,761		324
Other consumer		50		-		88		2
Total nonaccrual loans	$	18,560	$	1,259	$	35,104	$	3,595

If interest on nonaccrual loans had been accrued, the interest income as reported in the accompanying consolidated statement of operations would have increased by approximately $1.2 million, $1.2 million, and $5.7 million, for 2013, 2012, and 2011, respectively.

Net cumulative charge-offs against noncovered nonaccrual loans at December 31, 2013 and 2012 were $8.2 million and $8.3 million, respectively.

The following table shows an age analysis of past due loans at the end of the respective reporting period.



			90 days and								Recorded loans
	30-89 days		greater		Total past				Total		> 90 days and
(Dollars in thousands)	past due		past due		due		Current		loans		accruing
At December 31, 2013
Noncovered:
Real estate mortgage:
Commercial	$	3,843	$	6,564	$	10,407	$	730,590	$	740,997	$	-
One-to-four family residential		284		456		740		79,318		80,058		-
Real estate construction:
Commercial		569		2,721		3,290		140,360		143,650		-
One-to-four family residential		-		-		-		4,646		4,646		-
Commercial		1,998		8,819		10,817		243,270		254,087		50
Other		128		53		181		30,857		31,038		3
Total - noncovered		6,822		18,613		25,435		1,229,041		1,254,476		53

Covered:
Real estate mortgage:
Commercial		8		1,202		1,210		10,072		11,282		-
One-to-four family residential		18		57		75		3,855		3,930		-
Real estate construction:
Commercial		-		-		-		198		198		-
Commercial		-		-		-		971		971		-
Other		-		-		-		46		46		-
Total - covered		26		1,259		1,285		15,142		16,427		-
Total	$	6,848	$	19,872	$	26,720	$	1,244,183	$	1,270,903	$	53

At December 31, 2012
Noncovered:
Real estate mortgage:
Commercial	$	23,348	$	18,337	$	41,685	$	829,290	$	870,975	$	-
One-to-four family residential		1,479		1,310		2,789		68,165		70,954		747
Real estate construction:
Commercial		3,501		3,355		6,856		123,897		130,753		-
One-to-four family residential		-		-		-		3,656		3,656		-
Commercial		7,358		15,232		22,590		217,908		240,498		2,471
Other		538		160		698		35,494		36,192		72
Total - noncovered		36,224		38,394		74,618		1,278,410		1,353,028		3,290

Covered:
Real estate mortgage:
Commercial real estate		1,090		3,087		4,177		14,121		18,298		-
One-to-four family residential		-		52		52		4,829		4,881		-
Real estate construction:
Commercial		-		130		130		252		382		-
Commercial		-		324		324		1,713		2,037		-
Other		-		2		2		107		109		-
Total - covered		1,090		3,595		4,685		21,022		25,707		-
Total	$	37,314	$	41,989	$	79,303	$	1,299,432	$	1,378,735	$	3,290

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



	With No Specific Allowance				With A Specific Allowance
			Unpaid				Unpaid
	Recorded		Principal		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Investment		Balance		Allowance
At December 31, 2013
Noncovered:
Commercial real estate	$	32,284	$	32,784	$	15,446	$	15,729	$	4,012
One-to-four family residential		456		576		-		-		-
Real estate construction		84		106		2,636		2,762		18
Commercial		1,120		1,254		9,177		14,608		3,863
Other		4		6		46		72		46
Total noncovered	$	33,948	$	34,726	$	27,305	$	33,171	$	7,939

Covered:
Commercial real estate	$	5,793	$	6,760	$	457	$	457	$	3
One-to-four family residential		54		54		42		94		4
Total covered	$	5,847	$	6,814	$	499	$	551	$	7

At December 31, 2012
Noncovered:
Commercial real estate	$	29,425	$	30,340	$	24,630	$	27,397	$	5,094
One-to-four family residential		563		653		7		7		7
Real estate construction		3,970		7,841		232		256		50
Commercial		3,337		6,975		13,422		13,448		6,492
Other		7		8		81		100		81
Total noncovered	$	37,302	$	45,817	$	38,372	$	41,208	$	11,724

Covered:
Commercial real estate	$	4,325	$	5,347	$	2,214	$	3,979	$	22
One-to-four family residential		20		25		52		98		2
Real estate construction		130		308		-		-		-
Commercial		322		1,884		2		3		1
Other		2		4		-		-		-
Total covered	$	4,799	$	7,568	$	2,268	$	4,080	$	25

The following table presents the average recorded investment and interest income recognized on impaired loans for the year ended December 31, 2013, 2012, and 2011.



	As of and for the year ended December 31,
	2013				2012				2011
	Average				Average				Average
	Recorded		Interest		Recorded		Interest		Recorded		Interest
(Dollars in thousands)	Investment		Income		Investment		Income		Investment		Income
Noncovered:
Commercial real estate	$	47,835	$	1,784	$	36,373	$	1,517	$	10,012	$	1,852
One-to-four family residential		362		-		427		8		1,317		8
Real estate construction		2,488		-		4,507		51		8,222		805
Commercial		11,468		87		4,494		137		9,144		746
Other		63		-		104		-		97		-
Total noncovered	$	62,216	$	1,871	$	45,905	$	1,713	$	28,792	$	3,411

Covered:
Commercial real estate	$	15,290	$	328	$	21,110	$	184	$	26,642	$	-
One-to-four family residential		4,283		1		5,627		1		7,926		-
Real estate construction		313		-		1,721		-		6,003		-
Commercial		1,431		-		2,175		-		4,403		-
Other		66		-		158		-		438		-
Total covered	$	21,383	$	329	$	30,791	$	185	$	45,412	$	-

Included in interest income recognized on impaired loans are $2.4 million and $1.9 million, and $3.3 million, for December 31, 2013, 2012, and 2011, 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, 2013 and 2012 are as follows:



	At December 31, 2013				At December 31, 2012
(Dollars in thousands)	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial real estate	$	44,442	$	4,456	$	39,170	$	2,953
One-to-four family residential		18		162		27		134
Real estate construction		-		-		847		130
Commercial		1,527		648		3,998		351
Consumer		-		46		-		81
Total	$	45,987	$	5,312	$	44,042	$	3,649

At December 31, 2013 and 2012, 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, 2013 and 2012 are shown in the following tables:


	For the year ended December 31,
	2013				2012
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Modifications		Investment		Modifications		Investment
Commercial real estate		9	$	4,732		12	$	22,713
One-to-four family residential		1		68		3		110
Real estate construction		-		-		1		847
Commercial		5		784		7		3,328
Consumer		-		-		1		80
Total		15	$	5,584		24	$	27,078

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.

The following tables present the recorded investment and the number of loans modified as a troubled debt restructuring which subsequently defaulted for the year ended December 31, 2013 and 2012. 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.


	For the year ended December 31,
	2013				2012
	Number of		Recorded		Number of		Recorded
(Dollars in thousands)	Contracts		Investment		Contracts		Investment
Commercial real estate		1	$	166		-	$	-
Commercial		-		-		3		1,658
Real estate construction		-		-		1		130
Total		1	$	166		4	$	1,788

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, 2013 and 2012, based on the most recent analysis performed as of those dates, the risk category of loans by class is as follows:



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2013
Grade:
Pass	$	610,929	$	81,534	$	101,715	$	233,132	$	30,893	$	1,058,203
Special Mention		62,932		1,452		22,576		6,130		141		93,231
Substandard		77,453		944		24,203		11,329		50		113,979
Doubtful		965		58		-		4,467		-		5,490
Total	$	752,279	$	83,988	$	148,494	$	255,058	$	31,084	$	1,270,903

At December 31, 2012
Grade:
Pass	$	718,054	$	71,975	$	83,350	$	208,019	$	35,897	$	1,117,295
Special Mention		88,167		1,901		25,964		7,047		181		123,260
Substandard		80,104		1,923		25,477		26,887		223		134,614
Doubtful		2,948		36		-		582		-		3,566
Total	$	889,273	$	75,835	$	134,791	$	242,535	$	36,301	$	1,378,735

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, 2013 and 2012.



	Commercial		1-4 Family		Real Estate
(Dollars in thousands)	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2013
Balance at beginning of period	$	27,223	$	861	$	5,271	$	12,604	$	759	$	46,718
Loans charged-off		(806)		(578)		246		(8,599)		(267)		(10,004)
Recoveries		171		253		4,527		2,049		158		7,158
Provision for loan losses		(7,734)		314		(4,521)		4,931		(199)		(7,209)
Balance at end of period	$	18,854	$	850	$	5,523	$	10,985	$	451	$	36,663

Allowance for loan losses ending balance:
Individually evaluated for impairment	$	4,012	$	-	$	18	$	3,863	$	46	$	7,939
Collectively evaluated for impairment		14,839		797		5,505		7,122		405		28,668
Acquired with deteriorated credit quality		3		53		-		-		-		56
Total ending allowance balance	$	18,854	$	850	$	5,523	$	10,985	$	451	$	36,663

Loans receivable ending balance:
Individually evaluated for impairment	$	47,730	$	456	$	2,720	$	10,297	$	50	$	61,253
Collectively evaluated for impairment		693,267		79,602		145,576		243,790		30,988		1,193,223
Acquired with deteriorated credit quality		11,282		3,930		198		971		46		16,427
Total ending loans balance	$	752,279	$	83,988	$	148,494	$	255,058	$	31,084	$	1,270,903



	Commercial		1-4 Family		Real Estate
	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2012
Balance at beginning of period	$	21,749	$	1,016	$	11,177	$	9,827	$	915	$	44,684
Loans charged-off		(2,167)		(269)		-		(4,455)		(649)		(7,540)
Recoveries		58		271		1,972		3,671		495		6,467
Provision for loan losses		7,583		(157)		(7,878)		3,561		(2)		3,107
Balance at end of period	$	27,223	$	861	$	5,271	$	12,604	$	759	$	46,718

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	5,094	$	7	$	50	$	6,492	$	81	$	11,724
Collectively evaluated for impairment		21,975		785		5,221		6,111		678		34,770
Acquired with deteriorated credit quality		154		69		-		1		-		224
Total ending allowance balance	$	27,223	$	861	$	5,271	$	12,604	$	759	$	46,718

Loans receivable ending balance:
Individually evaluated for impairment	$	54,055	$	570	$	4,202	$	16,759	$	88	$	75,674
Collectively evaluated for impairment		816,920		70,384		130,207		223,739		36,104		1,277,354
Acquired with deteriorated credit quality		18,298		4,881		382		2,037		109		25,707
Total ending loans balance	$	889,273	$	75,835	$	134,791	$	242,535	$	36,301	$	1,378,735


	Commercial		1-4 Family		Real Estate
	Real Estate		Residential		Construction		Commercial		Other		Total
At December 31, 2011
Balance at beginning of period	$	32,508	$	1,597	$	19,605	$	10,605	$	914	$	65,229
Loans charged-off		(71,066)		(346)		(62,070)		(22,103)		(1,040)		(156,625)
Recoveries		411		67		1,521		1,864		116		3,979
Provision for loan losses		59,896		(302)		52,121		19,461		925		132,101
Balance at end of period	$	21,749	$	1,016	$	11,177	$	9,827	$	915	$	44,684

Allowance for loan losses ending balances:
Individually evaluated for impairment	$	411	$	21	$	73	$	349	$	112	$	966
Collectively evaluated for impairment		21,198		981		10,846		9,439		803		43,267
Acquired with deteriorated credit quality		140		14		258		39		-		451
Total ending allowance balance	$	21,749	$	1,016	$	11,177	$	9,827	$	915	$	44,684

Loans receivable ending balance:
Individually evaluated for impairment	$	21,701	$	1,468	$	11,983	$	10,490	$	123	$	45,765
Collectively evaluated for impairment		1,006,860		78,907		220,102		335,776		38,463		1,680,108
Acquired with deteriorated credit quality		23,686		7,072		3,746		2,841		270		37,615
Total ending loans balance	$	1,052,247	$	87,447	$	235,831	$	349,107	$	38,856	$	1,763,488