6. LOANS

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


	December 31, 2015

	Originated		Acquired		Total
	(Dollars in thousands)

Commercial & industrial	$	850,048	$	356,404	$	1,206,452
Real estate:
Owner occupied commercial real estate		188,908		164,981		353,889
Commercial real estate		521,887		382,228		904,115
Construction, land & land development		242,611		116,202		358,813
Residential mortgage		120,260		173,223		293,483
Consumer and other		9,843		4,074		13,917
Total loans held for investment	$	1,933,557	$	1,197,112	$	3,130,669

Total loans held for sale	$	384	$	-	$	384


	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 $19.8 million and $10.3 million of net deferred loan origination fees and unamortized premium and discount at December 31, 2015 and 2014, respectively. Also included in loans at December 31, 2015 and 2014, respectively was $13.4 million and $1.4 million in non-accretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $7.3 million and $4.5 million at December 31, 2015 and 2014, respectively. Consumer and other loans include overdrafts of $560 thousand and $51 thousand as of December 31, 2015 and 2014, respectively.

The loan portfolio consists of various types of loans made principally to borrowers located in the Houston and Dallas 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 outstanding represented approximately 4.2% and 8.7% of total funded loans, respectively, as of December 31, 2015 and 2014. Energy related service industry loans represented approximately 5.2% and 5.2% of total funded loans, respectively, as of December 31, 2015 and 2014. As of December 31, 2015, $32.3 million of reserved-based energy loans and $291 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.

Most of the Company’s activities are with customers located within the Texas cities of Houston, Dallas, Honey Grove, Austin and their respective surrounding areas. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in the Houston and Dallas MSA’s. The Company does not have any significant concentration to any one industry or customer. As of December 31, 2015 and 2014, there were no concentrations of loan related to any single industry in excess of 10% of total loans.

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


	December 31, 2015
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(Dollars in thousands)

Commercial & industrial	$	434,014	$	716,059	$	56,379	$	1,206,452
Real estate:
Owner occupied commercial real estate		22,255		197,434		134,200		353,889
Commercial real estate		77,547		671,159		155,409		904,115
Construction, land & land development		112,624		183,651		62,538		358,813
Residential mortgage		23,999		66,141		203,343		293,483
Consumer and other		9,427		3,326		1,164		13,917

Total loans held for investment	$	679,866	$	1,837,770	$	613,033	$	3,130,669

Fixed rate	$	83,431	$	485,204	$	131,349	$	699,984
Floating rate		596,435		1,352,566		481,684		2,430,685

Total loans held for investment	$	679,866	$	1,837,770	$	613,033	$	3,130,669

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 December 31, 2015 and 2014 was as follows:


	December 31,
	2015		2014
	(Dollars in thousands)

Beginning balance	$	-	$	-
Additions (at Acquisition)		10,003
Advances		-		2
Repayments		(262)		(2)
Ending Balance	$	9,741	$	-

Acquired Loans — The outstanding principal balance and recorded investment in loans acquired from Patriot at December 31, 2015 and October 1, 2015, was as follows:


	December 31,		October 1,
	2015		2015
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	50,325	$	52,053
Recorded investment		37,538		38,581
Discount, net	$	12,787	$	13,472

Other acquired loans:
Outstanding principal balance		1,019,212		1,055,998
Deferred fees, net		(144)		-
Recorded investment		1,008,960		1,042,414
Discount, net	$	10,108	$	13,584

Total acquired loans:
Outstanding principal balance		1,069,537		1,108,051
Deferred fees, net		(144)		-
Recorded investment		1,046,498		1,080,995
Discount, net	$	22,895	$	27,056

The outstanding principal balance and recorded investment in the total acquired loans from all acquisitions at December 31, 2015 and 2014, was as follows:


	December 31,
	2015		2014
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	60,554	$	16,224
Recorded investment		46,174		14,154
Discount, net	$	14,380	$	2,070

Other acquired loans:
Outstanding principal balance		1,162,068		226,284
Deferred fees, net		(162)		(3)
Recorded investment		1,150,938		224,270
Discount, net	$	10,968	$	2,011

Total acquired loans:
Outstanding principal balance		1,222,622		242,508
Deferred fees, net		(162)		(3)
Recorded investment		1,197,112		238,424
Discount, net	$	25,348	$	4,081

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


	Year Ended December 31,
	2015		2014
	(Dollars in thousands)

Balance at beginning of period	$	685	$	603
Additions (at acquisition)		(71)		62
Reclassifications from (to) nonaccretable yield		563		161
Accretion		(211)		(141)
Balance at period end	$	966	$	685

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:


	December 31, 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	$	2,064	$	25	$	2,089	$	34,205	$	-	$	813,754	$	850,048
Real estate:
Owner occupied commercial real estate		9,158		-		9,158		829		-		178,921		188,908
Commercial real estate		1,108		-		1,108		-		-		520,779		521,887
Construction, land & land development		181		-		181		472		-		241,958		242,611
Residential mortgage		890		-		890		197		-		119,173		120,260
Consumer and other		593		20		613		-		-		9,230		9,843

Total loans held for investment	$	13,994	$	45	$	14,039	$	35,703	$	-	$	1,883,815	$	1,933,557

Acquired Loans
Commercial & industrial	$	10,908	$	-	$	10,908	$	420	$	13,905	$	331,171	$	356,404
Real estate:
Owner occupied commercial real estate		741		-		741		-		7,149		157,091		164,981
Commercial real estate				-		-		1,590		12,288		368,350		382,228
Construction, land & land development		111		-		111		-		8,681		107,410		116,202
Residential mortgage		4,065		6		4,071		1,292		4,151		163,709		173,223
Consumer and other		52		1		53		-		-		4,021		4,074

Total loans held for investment	$	15,877	$	7	$	15,884	$	3,302	$	46,174	$	1,131,752	$	1,197,112


	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 loans held for investment	$	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 loans held for investment	$	4,314	$	-	$	4,314	$	570	$	14,154	$	219,386	$	238,424

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


	December 31,
	2015		2014
	(Dollars in thousands)

Nonaccrual loans	$	37,541	$	2,127
Accruing loans past due 90 days or more		52		16
Restructured loans - nonaccrual		1,464		2,717
Restructured loans - accruing		5,988		2,257
Total nonperforming loans	$	45,045	$	7,117

Based on an analysis of impaired loans at December 31, 2015 and 2014, an allowance of $14.8 thousand and $468 thousand, respectively, was allocated to impaired loans. The average recorded investment in impaired loans for the years ended December 31, 2015 and 2014, was $16.7 million and $11.7 million, respectively. There was approximately $364 thousand, $667 thousand and $373 thousand in interest recognized on impaired loans, for the years ended December 31, 2015, 2014, and 2013, respectively. Interest recognized includes interest accrued on restructured loans that are performing based on their restructured terms and interest collected on paid nonaccrual loans.

Impaired loans of $39.0 million and $4.8 million at December 31, 2015 and 2014 respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for the years ended December 31, 2015, 2014, and 2013 was approximately $806 thousand, $401 thousand and $657 thousand, respectively.

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


	December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	2,612	$	2,613	$	-
Owner occupied commercial real estate		829		834		-
Commercial real estate		6,946		6,963		-
Construction, land & land development		268		268		-
Residential mortgage		1,423		1,418		-
Consumer and other		174		174		-

With an allowance recorded:
Commercial & industrial	$	32,471	$	32,510	$	14,733
Construction, land & land development		204		204		92
Residential mortgage		66		67		15

Total:
Commercial & Industrial	$	35,083	$	35,123	$	14,733
Real Estate		9,736		9,754		107
Consumer and other		174		174		-
	$	44,993	$	45,051	$	14,840


	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
Real Estate		4,925		4,929		-
Consumer and other		250		251		95
	$	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:


	December 31, 2015
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Consumer and other		Total
	(Dollars in thousands)

Grade 1	$	6,464	$	-	$	84	$	-	$	268	$	926	$	7,742
Grade 2		6,348		-		-		-		-		-		6,348
Grade 3		189,370		17,996		27,851		4,973		63,118		622		303,930
Grade 4		798,335		304,827		770,241		328,296		221,463		11,695		2,434,857
Grade 5		48,083		4,696		49,275		15,103		1,222		499		118,878
Grade 6		46,068		16,114		20,246		1,288		1,109		116		84,941
Grade 7		63,254		2,278		22,540		-		663		59		88,794
Grade 8		27,276		829		1,590		472		1,489		-		31,656
Grade 9		7,349		-		-		-		-		-		7,349
		1,192,547		346,740		891,827		350,132		289,332		13,917		3,084,495

Purchased Credit Impaired		13,905		7,149		12,288		8,681		4,151		-		46,174
Total loans	$	1,206,452	$	353,889	$	904,115	$	358,813	$	293,483	$	13,917	$	3,130,669


	December 31, 2014
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Consumer and other		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:


	Year Ended December 31,
	2015					2014
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment
	(Dollars in thousands)

Commercial & industrial	6	$	1,657	$	862	4	$	915	$	353
Commercial real estate	1		5,417		5,356	1		580		570
Construction, land & land development	-		-		-	1		30		29
Consumer and other	-		-		-	1		125		121
Total	7	$	7,074	$	6,218	7	$	1,650	$	1,073

During the year ended December 31, 2015, the Company added $7.1 million in new troubled debt restructuring. 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. Following the restructure, none were paid in full and $621 thousand defaulted on the modified terms and were charged off during the year. Restructured loans are individually evaluated for impairment. The allowance for loan losses included specific reserves of $35 thousand relates to one loan at December 31, 2015.

During the year ended December 31, 2014, the Company added $1.7 million in new troubled debt restructurings. 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. Following the restructure, none were paid in full and $533 thousand defaulted on the modified terms and were charged off during the year. Restructured loans are individually evaluated for impairment. The allowance for loan losses included specific reserves of $21 thousand relates to one loan at December 31, 2014.