NOTE

LOANS ACQUIRED

During the

second

quarter of

2017,

the Company evaluated

$249.3

million of net loans (

$254.3

million gross loans less

$5.0

million discount) purchased in conjunction with the acquisition of Hardeman, described in Note

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

$2.3

million of net loans (

$3.3

million gross loans less

$956,000

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

. 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.

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

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

Acquisitions, for further discussion of loans acquired.

The following table reflects the carrying value of all loans acquired as of

September 30, 2017

and

December 31, 2016:

	Loans Acquired
(in thousands)	September 30, 2017		December 31, 2016

Consumer:
Other consumer	$	29,662	$	49,677
Total consumer		29,662		49,677
Real estate:
Construction		48,520		57,587
Single family residential		363,796		423,176
Other commercial		565,993		690,108
Total real estate		978,309		1,170,871
Commercial:
Commercial		70,620		81,837
Agricultural		13,448		3,298
Total commercial		84,068		85,135

Total loans acquired (1)	$	1,092,039	$	1,305,683

______________________

(

)

Loans acquired are reported net of a

$391,000

and

$954,000

allowance at

September 30, 2017

and

December 31, 2016,

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

Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):

(In thousands)	September 30, 2017		December 31, 2016

Consumer:
Other consumer	$	315	$	456
Total consumer		315		456
Real estate:
Construction		1,905		7,961
Single family residential		11,840		13,366
Other commercial		7,261		22,045
Total real estate		21,006		43,372
Commercial:
Commercial		2,163		2,806
Agricultural		216		198
Total commercial		2,379		3,004
Total	$	23,700	$	46,832

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note

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, 2017
Consumer:
Other consumer	$	401	$	161	$	562	$	29,100	$	29,662	$	7
Total consumer		401		161		562		29,100		29,662		7
Real estate:
Construction		19		1,420		1,439		47,081		48,520		--
Single family residential		4,785		3,127		7,912		355,884		363,796		--
Other commercial		806		2,670		3,476		562,517		565,993		--
Total real estate		5,610		7,217		12,827		965,482		978,309		--
Commercial:
Commercial		156		1,788		1,944		68,676		70,620		--
Agricultural		16		42		58		13,390		13,448		--
Total commercial		172		1,830		2,002		82,066		84,068		--

Total	$	6,183	$	9,208	$	15,391	$	1,076,648	$	1,092,039	$	7

December 31, 2016
Consumer:
Other consumer	$	571	$	189	$	760	$	48,917	$	49,677	$	--
Total consumer		571		189		760		48,917		49,677		--
Real estate:
Construction		132		7,332		7,464		50,123		57,587		--
Single family residential		8,358		4,857		13,215		409,961		423,176		11
Other commercial		2,836		10,741		13,577		676,531		690,108		--
Total real estate		11,326		22,930		34,256		1,136,615		1,170,871		11
Commercial:
Commercial		723		2,153		2,876		78,961		81,837		--
Agricultural		48		--		48		3,250		3,298		--
Total commercial		771		2,153		2,924		82,211		85,135		--

Total	$	12,668	$	25,272	$	37,940	$	1,267,743	$	1,305,683	$	11

The following table presents a summary of loans acquired by credit risk rating, segregated by class of loans (see Note

Loans and Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic

310

are all included in Risk Rate

in this table.

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

September 30, 2017
Consumer:
Other consumer	$	28,982	$	--	$	680	$	--	$	--	$	29,662
Total consumer		28,982		--		680		--		--		29,662
Real estate:
Construction		45,718		1,314		1,488		--		--		48,520
Single family residential		347,821		1,534		13,825		615		--		363,795
Other commercial		549,853		6,200		9,941		--		--		565,994
Total real estate		943,392		9,048		25,254		615		--		978,309
Commercial:
Commercial		66,367		325		3,928		--		--		70,620
Agricultural		13,148		300		--		--		--		13,448
Total commercial		79,515		625		3,928		--		--		84,068

Total	$	1,051,889	$	9,673	$	29,862	$	615	$	--	$	1,092,039

December 31, 2016
Consumer:
Other consumer	$	48,992	$	14	$	671	$	--	$	--	$	49,677
Total consumer		48,992		14		671		--		--		49,677
Real estate:
Construction		50,704		88		6,795		--		--		57,587
Single family residential		400,553		2,696		18,392		1,535		--		423,176
Other commercial		641,018		17,384		31,706		--		--		690,108
Total real estate		1,092,275		20,168		56,893		1,535		--		1,170,871
Commercial:
Commercial		73,609		1,965		6,257		6		--		81,837
Agricultural		3,010		34		254		--		--		3,298
Total commercial		76,619		1,999		6,511		6		--		85,135

Total	$	1,217,886	$	22,181	$	64,075	$	1,541	$	--	$	1,305,683

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 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

not

be required.

The impact of the adjustments on the Company’s financial results for the

three

and

nine

months ended

September 30, 2017

and

2016

is shown below:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2017		2016		2017		2016

Impact on net interest income and pre-tax income	$	23	$	65	$	2,596	$	1,240

Net impact, net of taxes	$	14	$	40	$	1,578	$	754

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, 2017

and

2016.

	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

	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans

Beginning balance	$	2,365		$	20,663		$	954		$	23,469
Additions		--			1,614			--			1,614
Accretable yield adjustments		171			--			3,245			--
Accretion		(555	)		555			(2,218	)		2,218
Payments and other reductions, net		--			(1,412	)		--			(5,881	)
Balance, ending	$	1,981		$	21,420		$	1,981		$	21,420

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

$391,000

September 30, 2017

and

$954,000

December 31, 2016.

There was

provision on loans acquired for the

three

months ended

September 30, 2017.

The provision on loans acquired for the

nine

months ended

September 30, 2017

was

$1.5

million. The provision on loans acquired during the

three

and

nine

months ended

September 30, 2016

was

$215,000

and

$522,000.