7. LOANS

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


	March 31, 2017
	Originated		Acquired		Total
	(Dollars in thousands)

Commercial & industrial	$	889,848	$	123,134	$	1,012,982
Real estate:
Owner occupied commercial real estate		292,413		123,182		415,595
Commercial real estate		809,026		320,005		1,129,031
Construction, land & land development		151,114		50,832		201,946
Residential mortgage		130,799		111,040		241,839
Consumer and other		9,011		1,871		10,882
Total loans held for investment	$	2,282,211	$	730,064	$	3,012,275

Total loans held for sale	$	17,350	$	-	$	17,350


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

Commercial & industrial	$	904,331	$	149,594	$	1,053,925
Real estate:
Owner occupied commercial real estate		264,876		129,334		394,210
Commercial real estate		816,029		327,722		1,143,751
Construction, land & land development		179,999		69,705		249,704
Residential mortgage		127,445		117,746		245,191
Consumer and other		9,248		2,191		11,439
Total loans held for investment	$	2,301,928	$	796,292	$	3,098,220

Total loans held for sale	$	23,989	$	-	$	23,989

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 $16.4 million and $17.4 million of net deferred loan origination fees and unamortized premium and discount at March 31, 2017 and December 31, 2016, respectively. Also included in loans at March 31, 2017 and December 31, 2016 was $1.1 million and $3.0 million, respectively, in non-accretable discount on acquired credit impaired loans. Accrued interest receivable on loans was $7.1 million and $7.4 million at March 31, 2017 and December 31, 2016, respectively. Consumer and other loans include overdrafts of $75 thousand and $73 thousand as of March 31, 2017 and December 31, 2016, respectively.

The loan portfolio consists of various types of loans made to borrowers principally 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 held for investment represented approximately 0.5% of total funded loans as of March 31, 2017 and December 31, 2016. Energy-related service industry loans represented approximately 2.0% and 2.6% of total funded loans as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, and December 31, 2016, $14.1 million and $14.0 million of reserved-based energy loans and $35.6 million and $42.2 million of energy-related service industry loans were impaired, respectively.

Most of the Company’s activities are with customers located within the Texas cities of Houston, Dallas, 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 MSAs. The Company does not have any significant concentration to any one industry or customer. As of March 31, 2017 and December 31, 2016, 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, 2017
	Due in One Year or Less		Due After One Year Through Five Years		Due After Five Years		Total
	(Dollars in thousands)

Commercial & industrial	$	400,304	$	560,953	$	51,725	$	1,012,982
Real estate:
Owner occupied commercial real estate		45,086		154,424		216,085		415,595
Commercial real estate		116,160		780,531		232,340		1,129,031
Construction, land & land development		75,966		98,596		27,384		201,946
Residential mortgage		24,284		58,639		158,916		241,839
Consumer and Other		5,016		5,260		606		10,882

Total loans held for investment	$	666,816	$	1,658,403	$	687,056	$	3,012,275

Fixed rate	$	75,518	$	407,582	$	117,013	$	600,113
Floating rate		591,298		1,250,821		570,043		2,412,162

Total loans held for investment	$	666,816	$	1,658,403	$	687,056	$	3,012,275

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, 2017 and December 31, 2016 was as follows:


	March 31,		December 31,
	2017		2016
	(Dollars in thousands)

Beginning balance	$	5,813	$	9,741
Advances		-		503
Repayments		(114)		(4,431)
Ending Balance	$	5,699	$	5,813

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,
	2017		2016
	(Dollars in thousands)

Credit impaired acquired loans:
Outstanding principal balance	$	26,005	$	30,694
Recorded investment		22,476		25,188
Discount, net	$	3,529	$	5,506

Other acquired loans:
Outstanding principal balance		711,525		775,709
Deferred fees, net		(152)		(174)
Recorded investment		707,588		771,104
Discount, net	$	3,785	$	4,431

Total acquired loans:
Outstanding principal balance		737,530		806,403
Deferred fees, net		(152)		(174)
Recorded investment		730,064		796,292
Discount, net	$	7,314	$	9,937

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


	Quarter Ended March 31,
	2017		2016
	(Dollars in thousands)

Balance at beginning of period	$	2,544	$	966
Reclassifications from non-accretable discount		263		-
Accretion		(403)		-
Balance at period end	$	2,404	$	966

Purchased credit impaired loans are evaluated on an ongoing basis after acquisition. Reclassifications from non-accretable 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, 2017
	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	$	2,193	$	1,506	$	3,699	$	40,263	$	-	$	845,886	$	889,848
Real estate:
Owner occupied commercial real estate		534		915		1,449		-		-		290,964		292,413
Commercial real estate		1,612		396		2,008		2,021		-		804,997		809,026
Construction, land & land development		1,575		1,025		2,600		-		-		148,514		151,114
Residential mortgage		2,816		-		2,816		2,614		-		125,369		130,799
Consumer and other		44		-		44		119		-		8,848		9,011
Total originated loans	$	8,774	$	3,842	$	12,616	$	45,017	$	-	$	2,224,578	$	2,282,211

Acquired Loans
Commercial & industrial	$	5,401	$	1,172	$	6,573	$	11,094	$	3,805	$	101,662	$	123,134
Real estate:
Owner occupied commercial real estate		470		-		470		8,743		5,246		108,723		123,182
Commercial real estate		59		175		234		1,912		10,699		307,160		320,005
Construction, land & land development		884		311		1,195		1,336		18		48,283		50,832
Residential mortgage		1,846		-		1,846		1,296		2,708		105,190		111,040
Consumer and other		2		-		2		216		-		1,653		1,871
Total acquired loans	$	8,662	$	1,658	$	10,320	$	24,597	$	22,476	$	672,671	$	730,064
Total loans held for investment	$	17,436	$	5,500	$	22,936	$	69,614	$	22,476	$	2,897,249	$	3,012,275


	December 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	$	1,515	$	1,106	$	2,621	$	36,331	$	-	$	865,379	$	904,331
Real estate:
Owner occupied commercial real estate		1,941		-		1,941		-		-		262,935		264,876
Commercial real estate		1,612		-		1,612		2,059		-		812,358		816,029
Construction, land & land development		4,375		-		4,375		-		-		175,624		179,999
Residential mortgage		1,791		63		1,854		1,254		-		124,337		127,445
Consumer and other		139		-		139		119		-		8,990		9,248
Total originated loans	$	11,373	$	1,169	$	12,542	$	39,763	$	-	$	2,249,623	$	2,301,928

Acquired Loans
Commercial & industrial	$	2,854	$	-	$	2,854	$	23,424	$	4,506	$	118,810	$	149,594
Real estate:
Owner occupied commercial real estate		223		-		223		8,942		5,339		114,830		129,334
Commercial real estate		2,529		-		2,529		2,002		10,807		312,384		327,722
Construction, land & land development		488		-		488		978		1,819		66,420		69,705
Residential mortgage		2,768		-		2,768		1,692		2,717		110,569		117,746
Consumer and other		226		-		226		5		-		1,960		2,191
Total acquired loans		9,088		-		9,088		37,043		25,188		724,973		796,292
Total loans held for investment	$	20,461	$	1,169	$	21,630	$	76,806	$	25,188	$	2,974,596	$	3,098,220

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


	March 31, 2017
	Originated		Acquired		Total
	(Dollars in thousands)

Nonaccrual loans	$	38,058	$	21,280	$	59,338
Accruing loans past due 90 days or more		3,842		1,658		5,500
Restructured loans - nonaccrual		6,959		3,317		10,276
Restructured loans - accruing		145		10,923		11,068
Total nonperforming loans	$	49,004	$	37,178	$	86,182


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

Nonaccrual loans	$	32,805	$	33,868	$	66,673
Accruing loans past due 90 days or more		1,169		-		1,169
Restructured loans - nonaccrual		6,959		3,174		10,133
Restructured loans - accruing		5,267		11,251		16,518
Total nonperforming loans	$	46,200	$	48,293	$	94,493

Based on an analysis of impaired loans at March 31, 2017 and December 31, 2016, an allowance of $8.1 million and $1.8 million, respectively, was allocated to impaired loans. There was approximately $154 thousand and $91 thousand in interest recognized on impaired loans, for the three months ended March 31, 2017 and 2016, 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 $69.6 million and $76.8 million at March 31, 2017 and December 31, 2016 respectively, have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for the three months ended March 31, 2017 and 2016 was approximately $1.7 million and $890 thousand, respectively.

The following table presents, 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, 2017				March 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)

Originated Loans
Commercial & industrial	$	37,835	$	8	$	38,223	$	7
Owner occupied commercial real estate		-		-		809		-
Commercial real estate		5,512		-		5,314		81
Construction, land & land development		-		-		463		-
Residential mortgage		2,658		6		377		-
Consumer and other		210		1		139		2
Total originated loans	$	46,214	$	15	$	45,325	$	90

Acquired Loans
Commercial & industrial	$	29,324	$	139	$	706	$	-
Owner occupied commercial real estate		8,873		-		434		-
Commercial real estate		1,972		-		1,590		-
Construction, land & land development		1,096		-		-		-
Residential mortgage		1,436		-		1,409		1
Consumer and other		74		-		-		-
Total acquired loans	$	42,774	$	139	$	4,139	$	1
Total	$	88,988	$	154	$	49,464	$	91

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


	March 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

Originated Loans
With no related allowance recorded:
Commercial & industrial	$	17,433	$	17,601	$	-
Commercial real estate		2,021		2,028		-
Residential mortgage		2,614		2,609		-
Consumer and other		89		89		-
Total with no related allowance recorded:	$	22,157	$	22,327	$	-

With an allowance recorded:
Commercial & industrial	$	22,886	$	22,886	$	6,114
Consumer and other		119		119		120
Total with an allowance recorded:	$	23,005	$	23,005	$	6,234
Total originated loans	$	45,162	$	45,332	$	6,234

Acquired Loans
With no related allowance recorded:
Commercial & industrial	$	17,559	$	17,653	$	-
Owner occupied commercial real estate		7,490		7,513		-
Commercial real estate		1,912		1,937		-
Construction, land & land development		1,336		1,349		-
Residential mortgage		1,296		1,298		-
Total with no related allowance recorded:	$	29,593	$	29,750	$	-

With an allowance recorded:
Commercial & industrial	$	4,458	$	4,517	$	586
Owner occupied commercial real estate		1,253		1,237		1,064
Consumer and other		216		210		208
Total with an allowance recorded:	$	5,927	$	5,964	$	1,858
Total acquired loans	$	35,520	$	35,714	$	1,858

Total:
Commercial & industrial	$	62,336	$	62,657	$	6,700
Real estate		17,922		17,971		1,064
Consumer and other		424		418		328
Total	$	80,682	$	81,046	$	8,092


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

Originated Loans
With no related allowance recorded:
Commercial & industrial	$	33,415	$	33,671	$	-
Commercial real estate		7,155		7,162		-
Residential mortgage		1,254		1,249		-
Consumer and other		96		96		-
Total with no related allowance recorded:	$	41,920	$	42,178	$	-

With an allowance recorded:
Commercial & industrial	$	2,992	$	3,038	$	394
Consumer and other		119		119		119
Total with an allowance recorded:	$	3,111	$	3,157	$	513
Total originated loans	$	45,031	$	45,335	$	513

Acquired Loans
With no related allowance recorded:
Commercial & industrial	$	32,922	$	33,093	$	-
Owner occupied commercial real estate		8,942		8,949		-
Commercial real estate		2,002		2,026		-
Construction, land & land development		978		991		-
Residential mortgage		1,692		1,694		-
Consumer and other		2		2		-
Total with no related allowance recorded:	$	46,538	$	46,755	$	-

With an allowance recorded:
Commercial & industrial	$	1,753	$	1,774	$	1,260
Consumer and other		2		3		2
Total with an allowance recorded:	$	1,755	$	1,777	$	1,262
Total acquired loans	$	48,293	$	48,532	$	1,262

Total:
Commercial & Industrial	$	71,082	$	71,576	$	1,654
Real Estate		22,023		22,071		-
Consumer and other		219		220		121
Total	$	93,324	$	93,867	$	1,775

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 that 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, 2017
	Grade 1 - 4 (Pass)		Grade 5 (Watch)		Grade 6 (Special Mention)		Grade 7 (Substandard-Accrual)		Grade 8 (Substandard-Nonaccrual)		Grade 9 (Doubtful)			PCI	Total
	(Dollars in thousands)

Originated Loans
Commercial & Industrial	$	772,640	$	28,259	$	26,645	$	22,041	$	38,294	$	1,969	$	-	$	889,848
Owner Occupied Commercial Real Estate		273,067		4,975		10,656		3,715		-		-		-		292,413
Commercial Real Estate		712,740		45,483		40,944		7,838		2,021		-		-		809,026
Construction & Land Development		141,491		4,548		1,697		3,378		-		-		-		151,114
Residential Mortgage		119,939		7,626		-		620		2,614		-		-		130,799
Other Consumer		8,802		4		56		30		119		-		-		9,011
Total originated loans	$	2,028,679	$	90,895	$	79,998	$	37,622	$	43,048	$	1,969	$	-	$	2,282,211

Acquired Loans
Commercial & Industrial	$	58,662	$	4,399	$	7,618	$	37,556	$	11,094	$	-	$	3,805	$	123,134
Owner Occupied Commercial Real Estate		89,004		2,322		9,706		8,161		8,743		-		5,246		123,182
Commercial Real Estate		246,254		22,183		34,288		4,669		1,912		-		10,699		320,005
Construction & Land Development		31,579		13,732		2,955		1,212		1,336		-		18		50,832
Residential Mortgage		104,000		579		1,178		1,279		1,296		-		2,708		111,040
Other Consumer		1,655		-		-		-		216		-		-		1,871
Total acquired loans	$	531,154	$	43,215	$	55,745	$	52,877	$	24,597	$	-	$	22,476	$	730,064

Total loans	$	2,559,833	$	134,110	$	135,743	$	90,499	$	67,645	$	1,969	$	22,476	$	3,012,275


	December 31, 2016
	Grade 1 - 4 (Pass)		Grade 5 (Watch)		Grade 6 (Special Mention)		Grade 7 (Substandard-Accrual)		Grade 8 (Substandard-Nonaccrual)		Grade 9 (Doubtful)			PCI	Total
	(Dollars in thousands)

Originated Loans
Commercial & Industrial	$	818,352	$	11,427	$	24,133	$	14,088	$	34,520	$	1,811	$	-	$	904,331
Owner Occupied Commercial Real Estate		247,868		13,169		513		3,326		-		-		-		264,876
Commercial Real Estate		716,744		35,812		55,230		6,184		2,059		-		-		816,029
Construction & Land Development		171,287		5,590		1,931		1,191		-		-		-		179,999
Residential Mortgage		118,042		6,079		573		1,497		1,254		-		-		127,445
Other Consumer		9,032		5		58		34		119		-		-		9,248
Total originated loans	$	2,081,325	$	72,082	$	82,438	$	26,320	$	37,952	$	1,811	$	-	$	2,301,928

Acquired Loans
Commercial & Industrial	$	69,304	$	2,982	$	15,528	$	33,850	$	23,424	$	-	$	4,506	$	149,594
Owner Occupied Commercial Real Estate		94,450		2,533		9,788		8,282		8,942		-		5,339		129,334
Commercial Real Estate		248,583		23,854		39,833		2,643		2,002		-		10,807		327,722
Construction & Land Development		49,849		12,859		2,577		1,623		978		-		1,819		69,705
Residential Mortgage		111,818		948		215		356		1,692		-		2,717		117,746
Other Consumer		1,972		-		214		-		5		-		-		2,191
Total acquired loans	$	575,976	$	43,176	$	68,155	$	46,754	$	37,043	$	-	$	25,188	$	796,292

Total loans	$	2,657,301	$	115,258	$	150,593	$	73,074	$	74,995	$	1,811	$	25,188	$	3,098,220

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:


	Quarter Ended
	March 31, 2017					March 31, 2016
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of March 31, 2017		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Recorded Investment as of March 31, 2016
	(Dollars in thousands)

Consumer and other	1		208		214	-	$	-	$	-
Total	1	$	208	$	214	-	$	-	$	-

The modifications primarily relate 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 quarter ended March 31, 2017, the Company added $208 thousand in new troubled debt restructuring of which $214 thousand was still outstanding on March 31, 2017. The decrease in outstanding balance was primarily due to payments received. For the quarter ended March 31, 2016, the Company did not add new troubled debt restructurings.

Troubled debt restructurings are individually evaluated for impairment. The allowance for loan losses included specific reserves of $722 thousand related to $7.2 million of these loans at March 31, 2017.