5. LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are classified by major type as follows:

	June 30, 2016			December 31, 2015
	(Dollars in thousands)

Loans held for sale (1)	$	-		$	27,887

Commercial and industrial		382,795			383,044
Mortgage warehouse		75,554			59,071
Real estate:
Commercial real estate (including multi-family residential)		806,771			745,595
Commercial real estate construction and land development		161,572			154,646
1-4 family residential (including home equity)		214,442			205,200
Residential construction		101,677			93,848
Consumer and other		10,872			11,761
Total loans held for investment		1,753,683			1,653,165
Total loans		1,753,683			1,681,052
Allowance for loan losses		(14,917	)		(13,098	)
Loans, net	$	1,738,766		$	1,667,954

(1)

Consisted of loans at two former F&M Bancshares locations acquired in 2015 and sold during the first quarter of 2016. At December 31, 2015, loans held for sale consisted of $13.2 million of commercial and industrial loans, $11.6 million of commercial real estate (including multi-family residential) loans, $2.3 million of 1-4 family residential (including home equity) loans and $803 thousand of consumer and other loans. Loans held for sale were carried at the lower of aggregate cost or fair value.

Nonaccrual and Past Due Loans

An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows:

	June 30, 2016
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Commercial and industrial	$	956	$	-	$	956	$	2,723	$	379,116	$	382,795
Mortgage warehouse		-		-		-		-		75,554		75,554
Real estate:
Commercial real estate (including multi-family residential)		628		-		628		4,141		802,002		806,771
Commercial real estate construction and land development		890		-		890		-		160,682		161,572
1-4 family residential (including home equity)		213		-		213		227		214,002		214,442
Residential construction		-		-		-		-		101,677		101,677
Consumer and other		-		-		-		33		10,839		10,872
Total loans	$	2,687	$	-	$	2,687	$	7,124	$	1,743,872	$	1,753,683

	December 31, 2015
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Loans held for sale	$	539	$	-	$	539	$	209	$	27,139	$	27,887

Commercial and industrial		1,474		-		1,474		2,664		378,906		383,044
Mortgage warehouse		-		-		-		-		59,071		59,071
Real estate:
Commercial real estate (including multi-family residential)		1,866		-		1,866		2,006		741,723		745,595
Commercial real estate construction and land development		77		-		77		-		154,569		154,646
1-4 family residential (including home equity)		1,904		-		1,904		239		203,057		205,200
Residential construction		-		-		-		-		93,848		93,848
Consumer and other		36		-		36		66		11,659		11,761
Total loans held for investment		5,357		-		5,357		4,975		1,642,833		1,653,165
Total loans	$	5,896	$	-	$	5,896	$	5,184	$	1,669,972	$	1,681,052

Impaired Loans

Impaired loans by class of loans are set forth in the following tables. The average recorded investment presented in the table below is reported on a year-to-date basis.

	June 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,037	$	3,782	$	-	$	3,548	$	98
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		11,154		11,240		-		11,599		222
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		227		227		-		233		8
Residential construction		-		-		-		-		-
Consumer and other		11		11		-		13		-
Total		14,429		15,260		-		15,393		328

With an allowance recorded:
Commercial and industrial		2,365		2,365		936		2,411		66
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		-		-		-		-		-
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		-		-		-		-		-
Residential construction		-		-		-		-		-
Consumer and other		22		22		13		25		1
Total		2,387		2,387		949		2,436		67

Total:
Commercial and industrial		5,402		6,147		936		5,959		164
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		11,154		11,240		-		11,599		222
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		227		227		-		233		8
Residential construction		-		-		-		-		-
Consumer and other		33		33		13		38		1
	$	16,816	$	17,647	$	949	$	17,829	$	395

	Year Ended December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	3,842	$	4,216	$	-	$	3,698	$	222
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		4,700		4,700		-		4,833		285
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		239		239		-		248		13
Residential construction		-		-		-		-		-
Consumer and other		82		97		-		102		8
Total		8,863		9,252		-		8,881		528

With an allowance recorded:
Commercial and industrial		1,573		1,573		670		2,040		87
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		1,146		1,146		180		1,122		77
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		-		-		-		-		-
Residential construction		-		-		-		-		-
Consumer and other		19		19		9		21		1
Total		2,738		2,738		859		3,183		165

Total:
Commercial and industrial		5,415		5,789		670		5,738		309
Mortgage warehouse		-		-		-		-		-
Real estate:
Commercial real estate (including multi-family residential)		5,846		5,846		180		5,955		362
Commercial real estate construction and land development		-		-		-		-		-
1-4 family residential (including home equity)		239		239		-		248		13
Residential construction		-		-		-		-		-
Consumer and other		101		116		9		123		9
	$	11,601	$	11,990	$	859	$	12,064	$	693

The total average recorded investment of impaired loans for the six months ended June 30, 2015 was $7.1 million. Total interest income recognized for the six months ended June 30, 2015 on impaired loans was $186 thousand.

Credit Quality Indicators

The company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including factors such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends. The Company analyzes loans individually by classifying the loans by credit risk. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks risk ratings to be used as credit quality indicators.

The following is a general description of the risk ratings used:

Watch

—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.

Special Mention

—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard

—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These classified loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful

—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loan at June 30, 2016 is as follows:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial and industrial	$	358,753	$	2,683	$	7,001	$	14,358	$	-	$	382,795
Mortgage warehouse		75,554		-		-		-		-		75,554
Real estate:
Commercial real estate (including multi-family residential)		766,685		7,620		5,378		27,088		-		806,771
Commercial real estate construction and land development		152,267		7,410		-		1,895		-		161,572
1-4 family residential (including home equity)		210,009		300		2,054		2,079		-		214,442
Residential construction		101,677		-		-		-		-		101,677
Consumer and other		10,480		262		3		127		-		10,872
Total loans	$	1,675,425	$	18,275	$	14,436	$	45,547	$	-	$	1,753,683

The following table presents the risk category of loans by class of loan at December 31, 2015:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Loans held for sale	$	26,570	$	477	$	19	$	821	$	-	$	27,887

Commercial and industrial		366,479		8,094		1,253		7,218		-		383,044
Mortgage warehouse		59,071		-		-		-		-		59,071
Real estate:
Commercial real estate (including multi-family residential)		721,781		7,186		790		15,838		-		745,595
Commercial real estate construction and land development		152,380		1,846		-		420		-		154,646
1-4 family residential (including home equity)		200,262		2,385		390		2,163		-		205,200
Residential construction		93,848		-		-		-		-		93,848
Consumer and other		11,522		155		18		66		-		11,761
Total loans held for investment		1,605,343		19,666		2,451		25,705		-		1,653,165
Total loans	$	1,631,913	$	20,143	$	2,470	$	26,526	$	-	$	1,681,052

Allowance for Loan Losses

The following table presents the activity in the allowance for loan losses by portfolio type for the three and six months ended June 30, 2016 and June 30, 2015:

	Commercial and industrial			Mortgage warehouse		Commercial real estate (including multi-family residential)			Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction			Consumer and other			Total
	(Dollars in thousands)
Allowance for loan losses:
Three Months Ended
Balance March 31, 2016	$	4,057		$	-	$	5,905		$	1,352	$	1,484	$	889		$	70		$	13,757
Provision for loan losses		480			-		984			16		158		(2	)		9			1,645

Charge-offs		(442	)		-		(43	)		-		-		-			(12	)		(497	)
Recoveries		10			-		-			-		-		-			2			12
Net charge-offs		(432	)		-		(43	)		-		-		-			(10	)		(485	)

Balance June 30, 2016	$	4,105		$	-	$	6,846		$	1,368	$	1,642	$	887		$	69		$	14,917

Six Months Ended
Balance January 1, 2016	$	3,644		$	-	$	5,914		$	1,221	$	1,432	$	820		$	67		$	13,098
Provision for loan losses		859			-		1,061			147		200		67			21			2,355

Charge-offs		(443	)		-		(129	)		-		-		-			(22	)		(594	)
Recoveries		45			-		-			-		10		-			3			58
Net charge-offs		(398	)		-		(129	)		-		10		-			(19	)		(536	)

Balance June 30, 2016	$	4,105		$	-	$	6,846		$	1,368	$	1,642	$	887		$	69		$	14,917

	Commercial and industrial			Mortgage warehouse		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other			Total
	(Dollars in thousands)
Allowance for loan losses:
Three Months Ended
Balance March 31, 2015	$	2,960		$	-	$	3,551	$	646	$	1,130	$	596	$	57		$	8,940
Provision for loan losses		(6	)		-		982		196		125		111		12			1,420

Charge-offs		(70	)		-		-		-		-		-		(2	)		(72	)
Recoveries		21			-		-		-		-		3		-			24
Net charge-offs		(49	)		-		-		-		-		3		(2	)		(48	)

Balance June 30, 2015	$	2,905		$	-	$	4,533	$	842	$	1,255	$	710	$	67		$	10,312

Six Months Ended
Balance January 1, 2015	$	2,334		$	-	$	3,799	$	578	$	1,008	$	475	$	52		$	8,246
Provision for loan losses		614			-		734		264		247		213		31			2,103

Charge-offs		(82	)		-		-		-		-		-		(18	)		(100	)
Recoveries		39			-		-		-		-		22		2			63
Net charge-offs		(43	)		-		-		-		-		22		(16	)		(37	)

Balance June 30, 2015	$	2,905		$	-	$	4,533	$	842	$	1,255	$	710	$	67		$	10,312

The following table presents the balance in the allowance for loan losses by portfolio type based on the impairment method as of June 30, 2016 and December 31, 2015:

	Commercial and industrial		Mortgage warehouse		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total
	(Dollars in thousands)
Allowance for loan losses related to:
June 30, 2016
Individually evaluated for impairment	$	936	$	-	$	-	$	-	$	-	$	-	$	13	$	949
Collectively evaluated for impairment		3,169		-		6,846		1,368		1,642		887		56		13,968
Total allowance for loan losses	$	4,105	$	-	$	6,846	$	1,368	$	1,642	$	887	$	69	$	14,917

December 31, 2015
Individually evaluated for impairment	$	670	$	-	$	180	$	-	$	-	$	-	$	9	$	859
Collectively evaluated for impairment		2,974		-		5,734		1,221		1,432		820		58		12,239
Total allowance for loan losses	$	3,644	$	-	$	5,914	$	1,221	$	1,432	$	820	$	67	$	13,098

The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment method as of June 30, 2016 and December 31, 2015:

	Commercial and industrial		Mortgage warehouse		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total
	(Dollars in thousands)
Recorded investment in loans:
June 30, 2016
Individually evaluated for impairment	$	5,402	$	-	$	11,154	$	-	$	227	$	-	$	33	$	16,816
Collectively evaluated for impairment		377,393		75,554		795,617		161,572		214,215		101,677		10,839		1,736,867
Total loans evaluated for impairment	$	382,795	$	75,554	$	806,771	$	161,572	$	214,442	$	101,677	$	10,872	$	1,753,683


December 31, 2015
Individually evaluated for impairment	$	5,415	$	-	$	5,846	$	-	$	239	$	-	$	101	$	11,601
Collectively evaluated for impairment		377,629		59,071		739,749		154,646		204,961		93,848		11,660		1,641,564
Total loans evaluated for impairment	$	383,044	$	59,071	$	745,595	$	154,646	$	205,200	$	93,848	$	11,761	$	1,653,165

Troubled Debt Restructurings

Following is a summary of loans modified under troubled debt restructurings during the six months ended June 30, 2016 and June 30, 2015:

	As of June 30,
	2016						2015
	Number of Contracts		Pre- Modification of Outstanding Recorded Investment		Post- Modification of Outstanding Recorded Investment		Number of Contracts		Pre- Modification of Outstanding Recorded Investment		Post- Modification of Outstanding Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings
Commercial and industrial		12	$	2,931	$	2,931		3	$	2,049	$	2,043
Mortgage warehouse
Real estate:
Commercial real estate (including multi-family residential)		6		6,250		6,250		-		-		-
Commercial real estate construction and land development		-		-		-		-		-		-
1-4 family residential (including home equity)		-		-		-		-		-		-
Residential construction		-		-		-		-		-		-
Consumer and other		1		7		7		-		-		-
Total		19	$	9,188	$	9,188		3	$	2,049	$	2,043

As of June 30, 2016 and December 31, 2015, the Company had a recorded investment in troubled debt restructurings of $11.7 million and $3.1 million, respectively. The Company allocated $642 thousand and $681 thousand of specific reserves for troubled debt restructurings at June 30, 2016 and December 31, 2015, respectively, and did not commit to lend additional amounts on these loans. As of June 30, 2016 and June 30, 2015,

there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the six months ended June 30, 2016 and June 30, 2015, respectively.

The modifications primarily related to extending the amortization periods of the loans. Default is determined at 90 or more days past due.