7. LOANS

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


	September 30, 2015
	Originated		Acquired		Total
	(Dollars in thousands)

Commercial & industrial	$	802,603	$	17,734	$	820,337
Real estate:
Owner occupied commercial real estate		169,296		13,928		183,224
Commercial real estate		465,989		17,639		483,628
Construction, land & land development		247,228		4,978		252,206
Residential mortgage		114,733		116,063		230,796
Consumer and other		9,786		2,303		12,089
Total loans held for investment	$	1,809,635	$	172,645	$	1,982,280

Total loans held for sale	$	192	$	-	$	192


	December 31, 2014
		Originated		Acquired		Total
		(Dollars in thousands)

Commercial & industrial	$	759,810	$	28,600	$	788,410
Real estate:
Owner occupied commercial real estate		148,197		15,395		163,592
Commercial real estate		308,521		30,485		339,006
Construction, land & land development		230,143		10,523		240,666
Residential mortgage		107,275		149,791		257,066
Consumer and other		6,785		3,630		10,415
Total loans held for investment	$	1,560,731	$	238,424	$	1,799,155

Total loans held for sale	$	573	$	-	$	573

The loan portfolio is comprised of three types, commercial and industrial loans, real estate loans and consumer and other loans. The real estate loans are further segregated into owner occupied commercial real estate, commercial real estate, which includes multi-family loans, construction, land and land development, which includes both commercial construction and loans for the construction of residential properties and residential mortgage, which includes first and second liens and home equity lines. Consumer and other loans 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 $9.7 million and $10.3 million of net deferred loan origination fees and unamortized premium and discount at September 30, 2015 and December 31, 2014, respectively. Also included in loans at September 30, 2015 and December 31, 2014, respectively was $582 thousand and $1.4 million in non-accretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $4.9 million and $4.5 million at September 30, 2015 and December 31, 2014, respectively. Consumer and other loans include overdrafts of $35 thousand and $51 thousand as of September 30, 2015 and December 31, 2014, respectively.

The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, Dallas, Austin and Louisville 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. The risks created by this geographic concentration and our exposure to energy related borrowers have been considered by management in the determination of the adequacy of the allowance for loan losses.

Reserved-based energy loans in the commercial and industrial portfolio outstanding represented approximately 6.8% and 8.7% of total funded loans, respectively, as of September 30, 2015 and December 31, 2014. Energy related service industry loans represented approximately 3.9% and 5.2% of total funded loans, respectively, as of September 30, 2015 and December 31, 2014. As of September 30, 2015, $18.3 million of reserved-based energy loans and $400 thousand of energy related service industry loans were impaired. Management believes the allowance for loan losses is appropriate to cover estimated losses on loans at each balance sheet date.

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


	September 30, 2015
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(Dollars in thousands)

Commercial & industrial	$	287,452	$	489,461	$	43,424	$	820,337
Real estate:
Owner occupied commercial real estate		11,436		80,284		91,504		183,224
Commercial real estate		54,299		302,731		126,598		483,628
Construction, land & land development		62,592		113,702		75,912		252,206
Residential mortgage		5,582		50,344		174,870		230,796
Consumer and Other		4,201		7,237		651		12,089

Total loans held for investment	$	425,562	$	1,043,759	$	512,959	$	1,982,280

Fixed rate	$	34,003	$	220,613	$	87,307	$	341,923
Floating rate		391,559		823,146		425,652		1,640,357

Total loans held for investment	$	425,562	$	1,043,759	$	512,959	$	1,982,280

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, 2015 and December 31, 2014 was as follows:


	September 30,		December 31,
	2015		2014
	(Dollars in thousands)

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

Acquired Loans — The outstanding principal balance and recorded investment in the total acquired loans from all completed acquisitions, as of the dates set forth, was as follows:


	September 30,		December 31,
	2015		2014
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	11,033	$	16,224
Recorded investment		9,405		14,154
Discount, net	$	1,628	$	2,070

Other acquired loans:
Outstanding principal balance		164,228		226,284
Deferred fees, net		(36)		(3)
Recorded investment		163,240		224,270
Discount, net	$	952	$	2,011

Total acquired loans:
Outstanding principal balance		175,261		242,508
Deferred fees, net		(36)		(3)
Recorded investment		172,645		238,424
Discount, net	$	2,580	$	4,081

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


	Nine Months Ended September 30,
	2015		2014
	(Dollars in thousands)

Balance at beginning of period	$	685	$	603
Additions		-		-
Reclassifications from nonaccretable yield		557		91
Accretion		(196)		(110)
Balance at period end	$	1,046	$	584

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, 2015
	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 & industrial	$	1,330	$	-	$	1,330	$	20,304	$	-	$	780,969	$	802,603
Real estate:
Owner occupied commercial real estate		2,215		-		2,215		854		-		166,227		169,296
Commercial real estate		-		-		-		-		-		465,989		465,989
Construction, land & land development		567		4,221		4,788		486		-		241,954		247,228
Residential mortgage		-		-		-		198		-		114,535		114,733
Consumer and other		114		-		114		-		-		9,672		9,786
Total originated loans	$	4,226	$	4,221	$	8,447	$	21,842	$	-	$	1,779,346	$	1,809,635

Acquired Loans
Commercial & industrial	$	10	$	-	$	10	$	427	$	900	$	16,397	$	17,734
Real estate:										-
Owner occupied commercial real estate		-		-		-		-		1,023		12,905		13,928
Commercial real estate		-		-		-		1,640		4,474		11,525		17,639
Construction, land & land development		-		-		-		-		45		4,933		4,978
Residential mortgage		34		9		43		476		2,963		112,581		116,063
Consumer and other		20		3		23		-		-		2,280		2,303
Total acquired loans	$	64	$	12	$	76	$	2,543	$	9,405	$	160,621	$	172,645
Total loans held for investment	$	4,290	$	4,233	$	8,523	$	24,385	$	9,405	$	1,939,967	$	1,982,280


	December 31, 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 & industrial	$	7,266	$	-	$	7,266	$	1,789	$	-	$	750,755	$	759,810
Real estate:
Owner occupied commercial real estate		1,464		-		1,464		173		-		146,560		148,197
Commercial real estate		-		-		-		-		-		308,521		308,521
Construction, land & land development		677		-		677		940		-		228,526		230,143
Residential mortgage		382		16		398		1,277		-		105,600		107,275
Consumer and other		217		-		217		95		-		6,473		6,785
Total originated loans	$	10,006	$	16	$	10,022	$	4,274	$	-	$	1,546,435	$	1,560,731

Acquired Loans
Commercial & industrial	$	137	$	-	$	137	$	-	$	2,432	$	26,031	$	28,600
Real estate:
Owner occupied commercial real estate		-		-		-		-		1,248		14,147		15,395
Commercial real estate		1,141		-		1,141		570		7,261		21,513		30,485
Construction, land & land development		2,048		-		2,048		-		72		8,403		10,523
Residential mortgage		981		-		981		-		3,141		145,669		149,791
Consumer and other		7		-		7		-		-		3,623		3,630
Total acquired loans	$	4,314	$	-	$	4,314	$	570	$	14,154	$	219,386	$	238,424
Total loans held for investment	$	14,320	$	16	$	14,336	$	4,844	$	14,154	$	1,765,821	$	1,799,155

Impaired Loans — The following is a summary of information related to nonaccrual restructured loans and accruing loans past due 90 days or more as of the dates set forth:


	September 30,		December 31,
	2015		2014
	(Dollars in thousands)

Nonaccrual loans	$	22,762	$	2,127
Accruing loans past due 90 days or more		4,233		16
Restructured loans - nonaccrual		1,623		2,717
Restructured loans - accruing		6,048		2,257
Total nonperforming loans	$	34,666	$	7,117

Impaired loans of $24.4 million and $4.8 million at September 30, 2015 and December 31, 2014 respectively, have been categorized by management as nonaccrual loans. The increase was due primarily to a classified E&P credit relationship moved to nonaccrual during the third quarter 2015. As of September 30, 2015, $18.3 million of reserved-based energy loans and $400 thousand of energy related service industry loans were impaired. Interest foregone on nonaccrual loans for the three months ended September 30, 2015 and 2014 was approximately $83 thousand and $115 thousand, respectively, and for the nine months ended September 30, 2015 and 2014 was approximately $313 thousand and $70 thousand, respectively.

The following tables present, for the periods indicated, the average recorded investment in impaired loans and the approximate amount of interest recognized on impaired loans. Interest recognized includes interest accrued on restructured loans that have performed based on their restructured terms and interest collected on nonaccrual loans that were paid in full during the period.


	Three Months Ended
	September 30, 2015				September 30, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)

Commercial & industrial	$	9,555	$	7	$	4,935	$	393
Owner occupied commercial real estate		1,059		20		231		-
Commercial real estate		2,705		9		3,060		34
Construction, land & land development		492		-		1,745		17
Residential mortgage		553		-		1,302		-
Consumer and other		146		3		263		7
Total	$	14,510	$	39	$	11,536	$	451


	Nine Months Ended
	September 30, 2015				September 30, 2014
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)

Commercial & industrial	$	5,505	$	28	$	6,153	$	399
Owner occupied commercial real estate		1,173		20		96		25
Commercial real estate		1,909		13		3,104		131
Construction, land & land development		598		15		1,749		49
Residential mortgage		1,035		240		1,312		-
Consumer and other		171		8		474		14
Total	$	10,391	$	324	$	12,888	$	618

Based on an analysis of impaired loans at September 30, 2015 and December 31, 2014, an allowance of $2.7 million and $468 thousand, respectively, was allocated to impaired loans. The following table presents additional information regarding impaired loans that were individually evaluated for impairment as of the dates indicated:


	September 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	16,483	$	16,485	$	-
Owner occupied commercial real estate		853		859		-
Commercial real estate		7,058		7,075		-
Construction, land & land development		276		276		-
Residential mortgage		606		605		-
Consumer and other		145		145		-

With an allowance recorded:
Commercial & industrial	$	4,734	$	4,734	$	2,628
Construction, land & land development		210		210		98
Residential mortgage		68		68		16

Total:
Commercial & industrial	$	21,217	$	21,219	$	2,628
Owner occupied commercial real estate		853		859		-
Commercial real estate		7,058		7,075		-
Construction, land & land development		486		486		98
Residential mortgage		674		673		16
Consumer and other		145		145		-
Total	$	30,433	$	30,457	$	2,742


	December 31, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	1,424	$	1,424	$	-
Owner occupied commercial real estate		173		173		-
Commercial real estate		2,506		2,510		-
Construction, land & land development		969		969		-
Residential mortgage		1,277		1,277		-
Consumer and other		155		156		-

With an allowance recorded:
Commercial & industrial	$	502	$	502	$	373
Consumer and other		95		95		95

Total:
Commercial & Industrial	$	1,926	$	1,926	$	373
Owner occupied commercial real estate		173		173		-
Commercial real estate		2,506		2,510		-
Construction, land & land development		969		969		-
Residential mortgage		1,277		1,277		-
Consumer and other		250		251		95
Total	$	7,101	$	7,106	$	468

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, 2015
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		Total
	(Dollars in thousands)

Grade 1	$	3,508	$	-	$	-	$	-	$	280	$	766	$	4,554
Grade 2		6,225		-		-		-		-		-		6,225
Grade 3		160,623		18,029		28,093		7,347		56,452		934		271,478
Grade 4		505,322		158,241		408,846		239,574		169,191		10,130		1,491,304
Grade 5		43,479		865		15,873		2,264		96		125		62,702
Grade 6		41,394		3,771		9,816		-		1,141		117		56,239
Grade 7		38,154		441		14,886		2,490		-		17		55,988
Grade 8		17,155		854		1,640		486		673		-		20,808
Grade 9		3,577		-		-		-		-		-		3,577
		819,437		182,201		479,154		252,161		227,833		12,089		1,972,875

Purchased Credit Impaired		900		1,023		4,474		45		2,963		-		9,405

Total loans	$	820,337	$	183,224	$	483,628	$	252,206	$	230,796	$	12,089	$	1,982,280


	December 31, 2014
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		Total
	(Dollars in thousands)

Grade 1	$	2,410	$	-	$	-	$	-	$	285	$	997	$	3,692
Grade 2		5,338		-		-		-		-		-		5,338
Grade 3		183,109		26,830		33,347		7,605		57,945		2,956		311,792
Grade 4		484,214		133,051		283,401		222,209		192,565		6,067		1,321,507
Grade 5		62,783		1,016		1,935		3,692		99		150		69,675
Grade 6		42,995		-		2,680		-		447		121		46,243
Grade 7		3,341		1,273		9,812		6,148		1,307		29		21,910
Grade 8		1,788		174		570		940		1,277		95		4,844
Grade 9		-		-		-		-		-		-		-
		785,978		162,344		331,745		240,594		253,925		10,415		1,785,001

Purchased Credit Impaired		2,432		1,248		7,261		72		3,141		-		14,154

Total loans	$	788,410	$	163,592	$	339,006	$	240,666	$	257,066	$	10,415	$	1,799,155

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, 2015					September 30, 2014
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of September 30, 2015		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of September 30, 2014
	(Dollars in thousands)

Commercial & industrial	6	$	1,657	$	886	3	$	545	$	-
Commercial real estate	1		5,417		5,417	-		-		-
Construction, land & land development	-		-		-	1		30		29
Consumer and other	-		-		-	1		125		123
Total	7	$	7,074	$	6,303	5	$	700	$	152

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, 2015, the Company added $7.1 million in new troubled debt restructurings of which $6.3 million was still outstanding on September 30, 2015. The decrease in outstanding balance was primarily due to payments received. 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 payments received.

Troubled debt restructurings are individually evaluated for impairment. The allowance for loan losses included specific reserves of $84 thousand related to $200 thousand of these loans at September 30, 2015.