LOANS ACQUIRED

During the fourth quarter of 2017, the Company evaluated $1.985 billion of net loans ($2.021 billion gross loans less $36.3 million discount) purchased in conjunction with the acquisition of OKSB, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $11.4 million of net loans ($18.1 million gross loans less $6.7 million discount) purchased in conjunction with the acquisition of OKSB for impairment in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

Also during the fourth quarter of 2017, the Company evaluated $2.208 billion of net loans ($2.246 billion gross loans less $37.8 million discount) purchased in conjunction with the acquisition of First Texas, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans.

During the second quarter of 2017, the Company evaluated $249.2 million of net loans ($254.2 million gross loans less $5.0 million discount) purchased in conjunction with the acquisition of Hardeman, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $2.4 million of net loans ($3.4 million gross loans less $990,000 discount) purchased in conjunction with the acquisition of Hardeman for impairment in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

See Note 2, Acquisitions, for further discussion of loans acquired.

The following table reflects the carrying value of all loans acquired as of September 30, 2018 and December 31, 2017:



	Loans Acquired
(In thousands)	September 30, 2018		December 31, 2017
Consumer:
Other consumer	$	21,278	$	51,467
Real estate:
Construction	467,895		637,032
Single family residential	606,866		793,228
Other commercial	2,040,189		2,387,777
Total real estate	3,114,950		3,818,037
Commercial:
Commercial	596,641		995,587
Agricultural	2,052		66,576
Total commercial	598,693		1,062,163
Other	—		142,409
Total loans acquired ⁽¹⁾	$	3,734,921	$	5,074,076

_____________________________________________________________________________________

(1) Loans acquired are reported net of a $1,345,000 and $418,000 allowance at September 30, 2018 and December 31, 2017, respectively.

Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 5, Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):



(In thousands)	September 30, 2018		December 31, 2017

Consumer:
Other consumer	$	293	$	334
Real estate:
Construction	279		1,767
Single family residential	9,053		12,151
Other commercial	1,354		7,401
Total real estate	10,686		21,319
Commercial:
Commercial	4,964		1,748
Agricultural	38		84
Total commercial	5,002		1,832
Total	$	15,981	$	23,485

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note 5, Loans and Allowance for Loan Losses, for discussion of past due loans):



(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing

September 30, 2018
Consumer:
Other consumer	$	213	$	214	$	427	$	20,851	$	21,278	$	—
Real estate:
Construction	117		207		324		467,571		467,895		—
Single family residential	2,459		5,948		8,407		598,459		606,866		1
Other commercial	2,491		4,157		6,648		2,033,541		2,040,189		—
Total real estate	5,067		10,312		15,379		3,099,571		3,114,950		1
Commercial:
Commercial	1,471		4,020		5,491		591,150		596,641		—
Agricultural	27		5		32		2,020		2,052		—
Total commercial	1,498		4,025		5,523		593,170		598,693		—

Total	$	6,778	$	14,551	$	21,329	$	3,713,592	$	3,734,921	$	1

December 31, 2017
Consumer:
Other consumer	$	889	$	260	$	1,149	$	50,318	$	51,467	$	108
Real estate:
Construction	2,577		1,448		4,025		633,007		637,032		279
Single family residential	12,936		3,302		16,238		776,990		793,228		126
Other commercial	17,176		5,647		22,823		2,364,954		2,387,777		2,565
Total real estate	32,689		10,397		43,086		3,774,951		3,818,037		2,970
Commercial:
Commercial	2,344		1,039		3,383		992,204		995,587		67
Agricultural	51		—		51		66,525		66,576		—
Total commercial	2,395		1,039		3,434		1,058,729		1,062,163		67

Other	15		—		15		142,394		142,409		—
Total	$	35,988	$	11,696	$	47,684	$	5,026,392	$	5,074,076	$	3,145

The following table presents a summary of loans acquired by credit risk rating, segregated by class of loans (see Note 5, Loans and Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.



(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total

September 30, 2018
Consumer:
Other consumer	$	20,813	$	9	$	456	$	—	$	—	$	21,278
Real estate:
Construction	440,881		18,011		9,003		—		—		467,895
Single family residential	590,003		2,475		14,029		359		—		606,866
Other commercial	2,006,371		12,283		21,535		—		—		2,040,189
Total real estate	3,037,255		32,769		44,567		359		—		3,114,950
Commercial:
Commercial	560,791		14,894		20,956		—		—		596,641
Agricultural	1,944		—		108		—		—		2,052
Total commercial	562,735		14,894		21,064		—		—		598,693

Total	$	3,620,803	$	47,672	$	66,087	$	359	$	—	$	3,734,921

December 31, 2017
Consumer:
Other consumer	$	50,625	$	21	$	821	$	—	$	—	$	51,467
Real estate:
Construction	604,796		30,524		1,712		—		—		637,032
Single family residential	770,954		2,618		19,656		—		—		793,228
Other commercial	2,337,097		15,064		35,616		—		—		2,387,777
Total real estate	3,712,847		48,206		56,984		—		—		3,818,037
Commercial:
Commercial	946,322		13,901		35,364		—		—		995,587
Agricultural	66,367		—		209		—		—		66,576
Total commercial	1,012,689		13,901		35,573		—		—		1,062,163

Other	142,409		—		—		—		—		142,409
Total	$	4,918,570	$	62,128	$	93,378	$	—	$	—	$	5,074,076

Loans acquired were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans are systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Company’s legacy loan portfolio, with most focus being placed on those loans which include the larger loan relationships and those loans which exhibit higher risk characteristics.

In addition to the accretable yield on loans acquired not considered to be impaired, the amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments may or may not be required. This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans.

The impact of these adjustments on the Company’s financial results for the three and nine months ended September 30, 2018 and 2017 is shown below:



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017

Impact on net interest income and pre-tax income	$	629	$	23	$	1,105	$	2,596

Impact, net of taxes	$	464	$	14	$	814	$	1,578

These adjustments will be recognized over the remaining lives of the purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,382		$	13,995		$	620		$	17,116
Additions	—			—			—			—
Accretable yield adjustments	717			—			1,895			—
Accretion	(635		)	635			(1,051		)	1,051
Payments and other reductions, net	—			(9,664		)	—			(13,201		)
Balance, ending	$	1,464		$	4,966		$	1,464		$	4,966



	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	766		$	8,448		$	1,655		$	17,802
Additions	—			—			—			2,388
Accretable yield adjustments	52			—			2,698			—
Accretion	(408		)	408			(3,943		)	3,943
Payments and other reductions, net	—			(980		)	—			(16,257		)
Balance, ending	$	410		$	7,876		$	410		$	7,876

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan loss for loans acquired resulting in a total allowance on loans acquired of $1,345,000 at September 30, 2018 and $418,000 at December 31, 2017. The provision on loans acquired for the nine months ended September 30, 2018 and 2017 was $1,837,000 and $1,464,000, respectively. There was no provision on loans acquired for the three months ended September 30, 2018 and 2017.