7. LOANS

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


	March 31, 2016
	Originated		Acquired		Total
	(Dollars in thousands)

Commercial & industrial	$	847,538	$	283,172	$	1,130,710
Real estate:
Owner occupied commercial real estate		205,050		162,457		367,507
Commercial real estate		636,539		383,860		1,020,399
Construction, land & land development		252,642		103,565		356,207
Residential mortgage		123,941		156,295		280,236
Consumer and other		9,838		3,286		13,124
Total loans held for investment	$	2,075,548	$	1,092,635	$	3,168,183

Total loans held for sale	$	-	$	-	$	-


	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

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 $18.3 million and $19.8 million of net deferred loan origination fees and unamortized premium and discount at March 31, 2016 and December 31, 2015, respectively. Also included in loans at both March 31, 2016 and December 31, 2015 was $13.4 million in non-accretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $7.8 million and $7.3 million at March 31, 2016 and December 31, 2015, respectively. Consumer and other loans include overdrafts of $56 thousand and $560 thousand as of March 31, 2016 and December 31, 2015, 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 3.5% and 4.2% of total funded loans as of March 31, 2016 and December 31, 2015, respectively. Energy related service industry loans represented approximately 5.3% and 5.2% of total funded loans as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, $41.4 million of reserved-based energy loans and $766 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 March 31, 2016 and December 31, 2015, there were no concentrations of loans 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, were as follows:


	March 31, 2016
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(Dollars in thousands)

Commercial & industrial	$	436,154	$	630,935	$	63,621	$	1,130,710
Real estate:
Owner occupied commercial real estate		19,420		194,902		153,185		367,507
Commercial real estate		53,435		780,939		186,025		1,020,399
Construction, land & land development		122,512		156,712		76,983		356,207
Residential mortgage		19,752		68,554		191,930		280,236
Consumer and Other		9,030		3,017		1,077		13,124

Total loans held for investment	$	660,303	$	1,835,059	$	672,821	$	3,168,183

Fixed rate	$	78,341	$	486,314	$	125,183	$	689,838
Floating rate		581,962		1,348,745		547,638		2,478,345

Total loans held for investment	$	660,303	$	1,835,059	$	672,821	$	3,168,183

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 March 31, 2016 and December 31, 2015 was as follows:


	March 31,		December 31,
	2016		2015
	(Dollars in thousands)

Beginning balance	$	9,741	$	-
Additions (at Acquisition)		-		10,003
Advances		75		-
Repayments		(2,228)		(262)
Ending Balance	$	7,588	$	9,741

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:


	March 31,		December 31,
	2016		2015
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	56,985	$	60,554
Recorded investment		42,652		46,174
Discount, net	$	14,333	$	14,380

Other acquired loans:
Outstanding principal balance		1,058,575		1,162,068
Deferred fees, net		(54)		(162)
Recorded investment		1,049,983		1,150,938
Discount, net	$	8,538	$	10,968

Total acquired loans:
Outstanding principal balance		1,115,560		1,222,622
Deferred fees, net		(54)		(162)
Recorded investment		1,092,635		1,197,112
Discount, net	$	22,871	$	25,348

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


	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)

Balance at beginning of period	$	966	$	685
Additions (at acquisition)		-		-
Reclassifications from (to) nonaccretable discount		-		480
Accretion		-		(63)
Balance at period end	$	966	$	1,102

Purchased credit impaired loans are evaluated on an ongoing basis after acquisition. Reclassifications from nonaccretable discount 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:


	March 31, 2016
	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	$	9,397	$	624	$	10,021	$	44,291	$	-	$	793,226	$	847,538
Real estate:
Owner occupied commercial real estate		3,320		-		3,320		792		-		200,938		205,050
Commercial real estate		4,006		-		4,006		-		-		632,533		636,539
Construction, land & land development		1,687		-		1,687		458		-		250,497		252,642
Residential mortgage		820		-		820		743		-		122,378		123,941
Consumer and other		495		-		495		-		-		9,343		9,838
Total originated loans	$	19,725	$	624	$	20,349	$	46,284	$	-	$	2,008,915	$	2,075,548

Acquired Loans
Commercial & industrial	$	2,499	$	9,745	$	12,244	$	478	$	10,791	$	259,659	$	283,172
Real estate:
Owner occupied commercial real estate		807		-		807		739		6,981		153,930		162,457
Commercial real estate		6,370		1,026		7,396		1,555		12,175		362,734		383,860
Construction, land & land development		1,023		498		1,521		-		8,633		93,411		103,565
Residential mortgage		6,937		254		7,191		1,478		4,072		143,554		156,295
Consumer and other		39		-		39		-		-		3,247		3,286
Total acquired loans	$	17,675	$	11,523	$	29,198	$	4,250	$	42,652	$	1,016,535	$	1,092,635
Total loans held for investment	$	37,400	$	12,147	$	49,547	$	50,534	$	42,652	$	3,025,450	$	3,168,183


	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 originated loans	$	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 acquired loans	$	15,877	$	7	$	15,884	$	3,302	$	46,174	$	1,131,752	$	1,197,112
Total loans held for investment	$	29,871	$	52	$	29,923	$	39,005	$	46,174	$	3,015,567	$	3,130,669

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


	March 31,		December 31,
	2016		2015
	(Dollars in thousands)

Nonaccrual loans	$	49,264	$	37,541
Accruing loans past due 90 days or more		12,147		52
Restructured loans - nonaccrual		1,270		1,464
Restructured loans - accruing		5,616		5,988
Total nonperforming loans	$	68,297	$	45,045

Based on an analysis of impaired loans at March 31, 2016 and December 31, 2015, an allowance of $13.5 million and $14.8 million, respectively, was allocated to impaired loans. The average recorded investment in impaired loans for the three months ended March 31, 2016 and for the year ended December 31, 2015, was $49.5 million and $16.7 million, respectively. There was approximately $90 thousand and $53 thousand in interest recognized on impaired loans, for the three months ended March 31, 2016 and 2015, 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 $50.5 million and $39.0 million at March 31, 2016 and December 31, 2015 respectively, have been categorized by management as nonaccrual loans. The increase was due primarily to energy-related migration to nonperforming and down grade of loans acquired through the Patriot acquisition. Interest foregone on nonaccrual loans for the three months ended March 31, 2016 and 2015 was approximately $890 thousand and $164 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
	March 31, 2016				March 31, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)

Commercial & industrial	$	38,929	$	7	$	3,222	$	4
Owner occupied commercial real estate		1,243		-		1,035		-
Commercial real estate		6,905		81		2,486		31
Construction, land & land development		462		-		795		15
Residential mortgage		1,787		-		1,380		-
Consumer and other		139		2		214		3
Total	$	49,465	$	90	$	9,132	$	53

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


	March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Commercial & industrial	$	3,097	$	3,106	$	-
Owner occupied commercial real estate		1,352		1,356		-
Commercial real estate		6,848		6,865		-
Construction, land & land development		259		259		-
Residential mortgage		1,997		1,987		-
Consumer and other		168		168		-

With an allowance recorded:
Commercial & industrial	$	41,829	$	41,875	$	13,188
Owner occupied commercial real estate		177		181		181
Construction, land & land development		199		199		86
Residential mortgage		225		223		30

Total:
Commercial & industrial	$	44,926	$	44,981	$	13,188
Real estate		11,057		11,070		297
Consumer and other		168		168		-
Total	$	56,151	$	56,219	$	13,485


	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		-
Total	$	44,993	$	45,051	$	14,840

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, borrowers 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:


	March 31, 2016
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		Total
	(Dollars in thousands)

Grade 1	$	5,535	$	-	$	81	$	-	$	266	$	939	$	6,821
Grade 2		3,890		-		-		-		-		-		3,890
Grade 3		195,094		17,808		23,376		2,254		62,380		1,807		302,719
Grade 4		620,190		305,946		899,348		319,181		207,297		9,920		2,361,882
Grade 5		114,031		2,518		25,298		17,356		1,412		298		160,913
Grade 6		39,140		16,138		35,189		7,460		1,733		114		99,774
Grade 7		97,269		16,587		23,377		865		855		45		138,998
Grade 8		33,379		1,529		1,555		458		2,221		1		39,143
Grade 9		11,391		-		-		-		-		-		11,391
		1,119,919		360,526		1,008,224		347,574		276,164		13,124		3,125,531

Purchased Credit Impaired		10,791		6,981		12,175		8,633		4,072		-		42,652

Total loans	$	1,130,710	$	367,507	$	1,020,399	$	356,207	$	280,236	$	13,124	$	3,168,183


	December 31, 2015
	Commercial & Industrial		Owner Occupied Commercial Real Estate		Commercial Real Estate		Construction & Land Development		Residential Mortgage		Other Consumer		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

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:


	Three Months Ended
	March 31, 2016					March 31, 2015
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of March 31, 2016		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of March 31, 2015
	(Dollars in thousands)

Commercial & industrial	-	$	-	$	-	1	$	739	$	689
Total	-	$	-	$	-	1	$	739	$	689

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 three months ended March 31, 2016, the Company did not add new troubled debt restructurings. For the three months ended March 31, 2015, the Company added $739 thousand in new troubled debt restructurings of which $689 thousand was still outstanding on March 31, 2015. The decrease in outstanding balance was due to payments totaling $50 thousand during the three months ended March 31, 2015. Restructured loans are individually evaluated for impairment.