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.

During the third quarter of 2016, the Company evaluated $340.1 million of net loans ($348.8 million gross loans less $8.7 million discount) purchased in conjunction with the acquisition of Citizens, 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 $757,000 of net loans ($1.6 million gross loans less $848,000 discount) purchased in conjunction with the acquisition of Citizens 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 December 31, 2018 and 2017:



	Loans Acquired At December 31,
(In thousands)	2018		2017
Consumer:
Other consumer	$	15,658	$	51,467
Real estate:
Construction	429,605		637,032
Single family residential	566,188		793,228
Other commercial	1,848,679		2,387,777
Total real estate	2,844,472		3,818,037
Commercial:
Commercial	430,914		995,587
Agricultural	1,739		66,576
Total commercial	432,653		1,062,163
Other	—		142,409
Total loans acquired⁽¹⁾	$	3,292,783	$	5,074,076

_________________________

(1) Loans acquired are reported net of a $95,000 and $418,000 allowance as of December 31, 2018 and 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)	December 31, 2018		December 31, 2017
Consumer:
Other consumer	$	140	$	334
Real estate:
Construction	114		1,767
Single family residential	6,603		12,151
Other commercial	1,167		7,401
Total real estate	7,884		21,319
Commercial:
Commercial	13,578		1,748
Agricultural	38		84
Total commercial	13,616		1,832
Total	$	21,640	$	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
December 31, 2018
Consumer:
Other consumer	$	337	$	49	$	386	$	15,272	$	15,658	$	2
Real estate:
Construction	8,283		27		8,310		421,295		429,605		—
Single family residential	4,706		3,049		7,755		558,433		566,188		—
Other commercial	168		577		745		1,847,934		1,848,679		—
Total real estate	13,157		3,653		16,810		2,827,662		2,844,472		—
Commercial:
Commercial	1,302		9,542		10,844		420,070		430,914		—
Agricultural	31		5		36		1,703		1,739		—
Total commercial	1,333		9,547		10,880		421,773		432,653		—

Total	$	14,827	$	13,249	$	28,076	$	3,264,707	$	3,292,783	$	2



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
December 31, 2018
Consumer:
Other consumer	$	15,380	$	—	$	278	$	—	$	—	$	15,658
Real estate:
Construction	393,122		27,621		8,862		—		—		429,605
Single family residential	553,460		2,081		10,299		348		—		566,188
Other commercial	1,822,179		9,137		17,363		—		—		1,848,679
Total real estate	2,768,761		38,839		36,524		348		—		2,844,472
Commercial:
Commercial	401,300		12,416		17,198		—		—		430,914
Agricultural	1,642		—		97		—		—		1,739
Total commercial	402,942		12,416		17,295		—		—		432,653

Total	$	3,187,083	$	51,255	$	54,097	$	348	$	—	$	3,292,783

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.

The following is a summary of the loans acquired in the OKSB acquisition on October 19, 2017, as of the date of acquisition.



(In thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	2,021,388		$	18,136
Non-accretable difference (expected losses and foregone interest)	—			(6,731		)
Cash flows expected to be collected at acquisition	2,021,388			11,405
Accretable yield	(36,340		)	—
Basis in acquired loans at acquisition	$	1,985,048		$	11,405

The following is a summary of the loans acquired in the First Texas acquisition on October 19, 2017, as of the date of acquisition.



(In thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	2,246,212		$	—
Non-accretable difference (expected losses and foregone interest)	—			—
Cash flows expected to be collected at acquisition	2,246,212			—
Accretable yield	(37,834		)	—
Basis in acquired loans at acquisition	$	2,208,378		$	—

The following is a summary of the loans acquired in the Hardeman acquisition on May 15, 2017, as of the date of acquisition.



(In thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	254,189		$	3,452
Non-accretable difference (expected losses and foregone interest)	—			(990		)
Cash flows expected to be collected at acquisition	254,189			2,462
Accretable yield	(5,002		)	—
Basis in acquired loans at acquisition	$	249,187		$	2,462

The following is a summary of the loans acquired in the Citizens acquisition on September 9, 2016, as of the date of acquisition.



(In thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	348,756		$	1,605
Non-accretable difference (expected losses and foregone interest)	—			(848		)
Cash flows expected to be collected at acquisition	348,756			757
Accretable yield	(8,663		)	—
Basis in acquired loans at acquisition	$	340,093		$	757

In addition to the accretable yield on acquired loans 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 also 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. 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 years ended December 31, 2018, 2017 and 2016.



(In thousands)	Accretable Yield			Carrying Amount of Loans
Balance, January 1, 2016	$	954		$	23,469
Additions	19			757
Accretable yield adjustments	5,122			—
Accretion	(4,440		)	4,440
Payments and other reductions, net	—			(10,864		)
Balance, December 31, 2016	1,655			17,802

Additions	—			13,793
Accretable yield adjustments	4,893			—
Accretion	(5,928		)	5,928
Payments and other reductions, net	—			(20,407		)
Balance, December 31, 2017	620			17,116

Additions	—			—
Accretable yield adjustments	2,045			—
Accretion	(1,205		)	1,205
Payments and other reductions, net	—			(14,271		)
Balance, December 31, 2018	$	1,460		$	4,050

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 losses for loans acquired resulting in a total allowance on loans acquired of $95,000 at December 31, 2018, $418,000 at December 31, 2017 and $954,000 at December 31, 2016.