7. LOANS

The loan portfolio classified by type and class as of the dates set forth were as follows:


	September 30, 2014
	Originated		Acquired		Total
	(Dollars in thousands)

Commercial:
Commercial & industrial	$	723,794	$	1,789	$	725,583
Owner occupied commercial real estate		131,171		1,769		132,940
Commercial real estate		300,659		8,041		308,700
Construction, land & land development		230,103		156		230,259
		1,385,727		11,755		1,397,482

Consumer:
Residential mortgage		100,446		372		100,818
Other consumer		6,459		239		6,698
		106,905		611		107,516

Total loans held for investment	$	1,492,632	$	12,366	$	1,504,998


	December 31, 2013
		Originated		Acquired		Total
		(Dollars in thousands)

Commercial:
Commercial & industrial	$	674,621	$	6,669	$	681,290
Owner occupied commercial real estate		153,507		3,454		156,961
Commercial real estate		254,838		12,173		267,011
Construction, land & land development		139,867		200		140,067
		1,222,833		22,496		1,245,329

Consumer:
Residential mortgage		105,888		474		106,362
Other consumer		7,296		428		7,724
		113,184		902		114,086

Total loans held for investment	$	1,336,017	$	23,398	$	1,359,415

The loan portfolio is comprised of two types, commercial loans and consumer loans. The commercial loans are further segregated into commercial and industrial, owner occupied commercial real estate, commercial real estate, which includes multi-family loans, and construction, land and land development, which includes both commercial construction and loans for the construction of residential properties. The consumer loans are further segregated into residential mortgage, which includes first and second liens and home equity lines, and other consumer loans, which includes various types of loans to consumers and overdrafts. Loans are further separated between loans originated by the Company and loans acquired.

Included in the loans held for investment balance was $8.2 million and $7.1 million of net deferred loan origination fees and unamortized premium and discount at September 30, 2014 and December 31, 2013, respectively. Also included in loans at September 30, 2014 and December 31, 2013, respectively was $285 thousand and $375 thousand in non-accretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $3.7 million and $3.5 million at September 30, 2014 and December 31, 2013, respectively. Other consumer loans include overdrafts of $142 thousand and $21 thousand as of September 30, 2014 and December 31, 2013, respectively.

The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, Dallas and Austin metropolitan areas. Although the portfolio is diversified and generally secured by various types of collateral, a substantial portion of its debtors’ ability to honor their obligations is dependent on local economic conditions.

As of September 30, 2014 and December 31, 2013, there was no concentration of loans to any one type of industry exceeding 10% of total loans.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as loans held for investment stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan losses, deferred fees or costs and unamortized premiums or discounts.

Loans are classified as held-for-sale when management has positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously classified as held-for-sale, such loans are transferred into the held-for-sale classification and carried at the lower of cost or fair value. There were no loans classified as held-for-sale at either September 30, 2014 or December 31, 2013.

Loan maturities and rate sensitivity of the loans held for investment, as of the date indicated, was as follows:


	September 30, 2014
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(Dollars in thousands)

Commercial:
Commercial & industrial	$	203,115	$	482,729	$	39,739	$	725,583
Owner occupied commercial real estate		7,526		62,613		62,801		132,940
Commercial real estate		22,478		221,601		64,621		308,700
Construction, land & land development		29,887		117,791		82,581		230,259
		263,006		884,734		249,742		1,397,482

Consumer:
Residential mortgage		2,253		60,932		37,633		100,818
Other consumer		5,790		871		37		6,698
		8,043		61,803		37,670		107,516

Total loans held for investment	$	271,049	$	946,537	$	287,412	$	1,504,998


Fixed rate	$	28,161	$	208,947	$	57,612	$	294,720
Floating rate		242,888		737,590		229,800		1,210,278

Total loans held for investment	$	271,049	$	946,537	$	287,412	$	1,504,998

In the ordinary course of business, the Company has granted loans to certain directors, officers and their affiliates. In the opinion of management, all transactions entered into between the Bank and such related parties have been and are in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons.

An analysis of activity with respect to these related-party loans for the periods ended September 30, 2014 and December 31, 2013 was as follows:


	September 30,		December 31,
	2014		2013
	(Dollars in thousands)

Beginning balance	$	-	$	-
Advances		2		-
Repayments		-		-
Ending Balance	$	2	$	-

Acquired Loans — The outstanding principal balance and recorded investment in the total acquired loans from all completed acquisitions, which does not include our SharePlus acquisition completed on October 17, 2014, as of the dates set forth, was as follows:


	September 30,		December 31,
	2014		2013
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	7,821	$	8,477
Recorded investment		6,952		7,498
Discount, net	$	869	$	979

Other acquired loans:
Outstanding principal balance		5,489		16,187
Recorded investment		5,414		15,900
Discount, net	$	75	$	287

Total acquired loans:
Outstanding principal balance		13,310		24,664
Recorded investment		12,366		23,398
Discount, net	$	944	$	1,266

Changes in the accretable yield for credit impaired acquired loans for the periods indicated, were as follows:


	Nine Months Ended September 30,
	2014		2013
	(Dollars in thousands)

Balance at beginning of period	$	603	$	510
Reclassifications from (to) nonaccretable yield		91		(3)
Accretion		(110)		(81)
Balance at period end	$	584	$	426

Purchased credit impaired loans are evaluated on an ongoing basis after acquisition. Reclassifications from nonaccretable yield to accretable yield are recorded based on the current estimates of the timing and amount of expected future cash flows.

Nonaccrual and Past Due Loans — When management doubts a borrower’s ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status.

The age analysis of loans, segregated by class, as of the dates set forth was as follows:


	September 30, 2014
	Loans Past Due and Still Accruing
	30 - 89 Days Past Due		90 Days or More Past Due		Total		Nonaccrual		Purchased Credit Impaired		Current		Total Loans
	(Dollars in thousands)

Originated Loans
Commercial:
Commercial & industrial	$	2,687	$	47	$	2,734	$	1,948	$	-	$	719,112	$	723,794
Owner occupied commercial real estate		-		-		-		178		-		130,993		131,171
Commercial real estate		853		-		853		-		-		299,806		300,659
Construction, land & land development		536		-		536		546		-		229,021		230,103
		4,076		47		4,123		2,672		-		1,378,932		1,385,727

Consumer:
Residential mortgage		499		-		499		1,296		-		98,651		100,446
Other consumer		36		5		41		102		-		6,316		6,459
		535		5		540		1,398		-		104,967		106,905

Total loans held for investment	$	4,611	$	52	$	4,663	$	4,070	$	-	$	1,483,899	$	1,492,632

Acquired Loans
Commercial:
Commercial & industrial	$	150	$	-	$	150	$	-	$	718	$	921	$	1,789
Owner occupied commercial real estate		-		-		-		-		1,278		491		1,769
Commercial real estate		-		-		-		587		4,714		2,740		8,041
Construction, land & land development		-		-		-		-		78		78		156
		150		-		150		587		6,788		4,230		11,755

Consumer:
Residential mortgage		-		-		-		-		164		208		372
Other consumer		1		-		1		-		-		238		239
		1		-		1		-		164		446		611

Total loans held for investment	$	151	$	-	$	151	$	587	$	6,952	$	4,676	$	12,366


	December 31, 2013
	Loans Past Due and Still Accruing
	30 - 89 Days Past Due		90 Days or More Past Due		Total		Nonaccrual		Purchased Credit Impaired		Current		Total Loans
	(Dollars in thousands)

Originated Loans
Commercial:
Commercial & industrial	$	4,988	$	-	$	4,988	$	7,345	$	-	$	662,288	$	674,621
Owner occupied commercial real estate		780		536		1,316		-		-		152,191		153,507
Commercial real estate		-		780		780		164		-		253,894		254,838
Construction, land & land development		-		-		-		587		-		139,280		139,867
		5,768		1,316		7,084		8,096		-		1,207,653		1,222,833

Consumer:
Residential mortgage		221		-		221		1,328		-		104,339		105,888
Other consumer		208		-		208		1,284		-		5,804		7,296
		429		-		429		2,612		-		110,143		113,184

Total loans held for investment	$	6,197	$	1,316	$	7,513	$	10,708	$	-	$	1,317,796	$	1,336,017

Acquired Loans
Commercial:
Commercial & industrial	$	-	$	-	$	-	$	-	$	895	$	5,774	$	6,669
Owner occupied commercial real estate		-		-		-		-		1,655		1,799		3,454
Commercial real estate		-		-		-		652		4,676		6,845		12,173
Construction, land & land development		-		-		-		-		96		104		200
		-		-		-		652		7,322		14,522		22,496

Consumer:
Residential mortgage		-		-		-		-		176		298		474
Other consumer		24		-		24		-		-		404		428
		24		-		24		-		176		702		902

Total loans held for investment	$	24	$	-	$	24	$	652	$	7,498	$	15,224	$	23,398

Impaired Loans — The following is a summary of information related to impaired, nonaccrual and restructured loans as of the dates set forth:


	September 30,		December 31,
	2014		2013
	(Dollars in thousands)

Nonaccrual loans	$	2,709	$	1,496
Accruing loans past due 90 days or more		52		1,316
Restructured loans - nonaccrual		1,948		9,864
Restructured loans - accruing		3,973		4,072
Total nonperforming loans	$	8,682	$	16,748

Based on an analysis of impaired loans at September 30, 2014 and December 31, 2013, an allowance of $1.1 million and $4.3 million, respectively, was allocated to impaired loans. The average recorded investment in nonperforming loans for the three months and nine months ended September 30, 2014, and for the year ended December 31, 2013, was $14.2 million, $17.3 million and $38.0 million, respectively. There was approximately $56 thousand and $88 thousand in interest recognized on nonperforming loans, for the three months ended September 30, 2014 and 2013, respectively. There was approximately $166 thousand and $219 thousand in interest recognized on nonperforming loans, for the nine months ended September 30, 2014 and 2013, respectively.

Nonperforming loans of $4.7 million and $11.4 million at September 30, 2014 and December 31, 2013 respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for the three months ended September 30, 2014 and 2013 was approximately $115 thousand and $127 thousand, respectively. During the three months ended September 30, 2014 we collected $386 thousand in interest on nonperforming loans. Interest foregone for the nine months ended September 30, 2014 and 2013 was approximately $70 thousand and $946 thousand, respectively.

The following table presents additional information regarding impaired loans that were individually evaluated for impairment as of the dates indicated:


	September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	783	$	783	$	-
Owner occupied commercial real estate		177		177		-
Commercial real estate		3,047		3,047		-
Construction, land & land development		1,740		1,740		-
Residential mortgage		1,296		1,296		-
Other Consumer		159		159		-

With an allowance recorded:
Commercial & industrial	$	1,326	$	1,326	$	1,035
Other Consumer		102		102		102

Total:
Commercial	$	7,073	$	7,073	$	1,035
Consumer		1,557		1,557		102
	$	8,630	$	8,630	$	1,137


	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	631	$	631	$	-
Commercial real estate		2,690		2,692		-
Construction, land & land development		1,751		1,751		-
Residential mortgage		1,213		1,213		-
Other Consumer		170		170		-

With an allowance recorded:
Commercial & industrial	$	6,932	$	6,932	$	2,924
Commercial real estate		653		653		45
Residential mortgage		114		114		88
Other Consumer		1,278		1,278		1,278

Total:
Commercial	$	12,657	$	12,659	$	2,969
Consumer		2,775		2,775		1,366
	$	15,432	$	15,434	$	4,335

Credit Quality — Internally assigned risk grades for loans are defined as follows:

Grade 1 (Highest Quality — No Apparent Risk) — This category includes loans to borrowers of unquestioned credit standing which are secured by readily marketable collateral of undisputed value, with appropriate margin. It also includes loans to borrowing entities with: excellent capitalization, liquidity and earnings levels; quality management; positive financial trends; and favorable industry conditions.

Grade 2 (Good Quality — Minimal Risk) — This category includes loans to investment grade entities with: good liquidity and financial condition, nominal term debt, strong debt service capability, solid management, and quality financial information. These loans are usually secured with current assets, but may be unsecured. Alternative financing from other lenders is generally available to these borrowers.

Grade 3 (Satisfactory Quality — Acceptable Risk — Tier One) — This category includes loans to entities maintaining fair liquidity and acceptable financial conditions. The level of term debt is moderate, with adequate debt service capability. Earnings may be volatile, but borrowers in this category generally do not show a loss within the last three years. Primary debt service must be supported by identified secondary repayment sources or by guarantors with adequate and proven responsibility and capacity.

Grade 4 (Satisfactory Quality — Acceptable Risk — Tier Two) — This category includes loans to borrowers maintaining acceptable financial conditions; however may exhibit certain characteristics of leverage or asset dependency that reflect a greater level of risk than Tier One credits. This category may also include borrowers exhibiting explainable interim losses within the previous three years and/or industry characteristics that warrant frequent monitoring.

Grade 5 (Monitored Loans) — This category includes loans with trends or characteristics which, if continued, could result in impaired repayment ability. The borrower may exhibit a low degree of liquidity and relatively high leverage, erratic earnings history (including the possibility of a reported loss in the past four years), significant term debt and a nominal cushion for debt service capacity. Loans in this category may also include financing to start-up borrowers backed by experienced management and significant capital investment or established companies in distressed industry conditions.

Grade 6 (Other Assets Especially Mentioned) — This category includes loans which have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or a weakening of the Company’s credit position at some future date. Grade 6 loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Grade 7 (Substandard — Accruing) — This category includes loans which are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any, or loans with identified weaknesses but where there is sufficient collateral value and/or cash flow coverage. This category includes loans that: (1) may require a secondary source of repayment (liquidation of collateral or repayment by a guarantor), (2) lack current financial information or appraisals, and/or (3) have collateral deficiencies such that the Company would be in an unsecured position with an obligor not deserving unsecured credit. This category may also include borrowers with operating losses in recent periods.

Grade 8 (Substandard — Nonaccrual) — This category includes loans with the same basic characteristics as Grade 7 loans and also meet the Company’s criteria for nonaccrual status, but do not warrant a Grade 9 or Grade 10 classification.

Grade 9 (Doubtful/Exposure) — This category includes loans with all the Grade 7 or 8 characteristics but with weaknesses that make collection (or liquidation) highly questionable and improbable.

Grade 10 (Loss) — This category includes loans which are considered uncollectible, or of such little value that they should no longer be carried as an asset of the Company.

The credit risk profile of loans aggregated by class and internally assigned risk grades as of the dates set forth were as follows:


	September 30, 2014
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		Total
	(Dollars in thousands)

Grade 1	$	2,972	$	-	$	-	$	-	$	287	$	511	$	3,770
Grade 2		4,838		-		-		-		-		-		4,838
Grade 3		170,254		23,164		33,815		10,745		60,064		3,256		301,298
Grade 4		468,161		105,450		247,950		207,385		37,692		2,512		1,069,150
Grade 5		64,068		1,593		2,460		4,948		-		159		73,228
Grade 6		8,826		-		17,118		6,528		-		123		32,595
Grade 7		3,798		1,277		2,056		29		1,315		35		8,510
Grade 8		1,846		178		587		546		1,296		102		4,555
Grade 9		102		-		-		-		-		-		102
		724,865		131,662		303,986		230,181		100,654		6,698		1,498,046

Purchased Credit Impaired		718		1,278		4,714		78		164		-		6,952
Total loans	$	725,583	$	132,940	$	308,700	$	230,259	$	100,818	$	6,698	$	1,504,998


	December 31, 2013
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		Total
	(Dollars in thousands)

Grade 1	$	2,657	$	-	$	-	$	-	$	292	$	548	$	3,497
Grade 2		7,750		-		-		-		-		50		7,800
Grade 3		161,581		26,548		37,750		12,058		71,264		3,785		312,986
Grade 4		474,831		118,070		213,946		124,972		32,735		1,653		966,207
Grade 5		10,970		10,631		8,752		2,323		149		248		33,073
Grade 6		11,790		-		569		-		-		107		12,466
Grade 7		3,471		57		502		31		418		49		4,528
Grade 8		6,106		-		816		587		1,328		6		8,843
Grade 9		1,239		-		-		-		-		1,278		2,517
		680,395		155,306		262,335		139,971		106,186		7,724		1,351,917

Purchased Credit Impaired		895		1,655		4,676		96		176		-		7,498

Total loans	$	681,290	$	156,961	$	267,011	$	140,067	$	106,362	$	7,724	$	1,359,415

Troubled Debt Restructurings — The restructuring of a loan is considered a troubled debt restructuring if both the borrower is experiencing financial difficulties and the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses.

Troubled debt restructurings identified during the periods indicated were as follows:


	Nine Months Ended
	September 30, 2014					September 30, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of September 30, 2014		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of September 30, 2013
	(Dollars in thousands)

Commercial & industrial	3	$	545	$	-	5	$	2,737	$	2,781
Commercial real estate	-		-		-	1		2,562		2,536
Construction, land & land development	1		30		29	2		4,671		3,321
Other consumer	1		125		123	1		122		122
Total	5	$	700	$	152	9	$	10,092	$	8,760

The modifications primarily related to extending the maturity date of the loans, which includes loans modified post-bankruptcy. The Company did not forgive any principal or interest on the restructured loans. For the nine months ended September 30, 2014, the Company added $700 thousand in new troubled debt restructurings of which $152 thousand was still outstanding on September 30, 2014. The decrease in outstanding balance was primarily due to charge-offs totaling $545 thousand during the nine months ended September 30, 2014. For the nine months ended September 30, 3013, the Company added $10.1 million in new troubled debt restructurings of which $8.8 million was still outstanding on September 30, 2013. The decrease in outstanding balance was primarily due to payments received totaling $1.3 million during the nine months ended September 30, 2013.

Restructured loans are individually evaluated for impairment. The allowance for loan losses included specific reserves of $46 thousand related to the $5.9 million of these loans at September 30, 2014.