NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans at December 31, 2014 and 2013 consisted of the following:

	December 31,			December 31,
(Dollars in thousands)	2014			2013
Commercial real estate	$	249,164		$	331,462
Construction, land development, land		42,914			37,626
1-4 family residential properties		78,738			91,301
Farmland		22,496			20,294
Commercial		364,567			255,655
Factored receivables		180,910			117,370
Consumer		11,941			13,878
Mortgage warehouse		55,148			13,513
Total		1,005,878			881,099
Allowance for loan and lease losses		(8,843	)		(3,645	)
	$	997,035		$	877,454

Total loans include net deferred origination fees and costs and deferred factoring fees totaling $906,000 and $997,000 at December 31, 2014 and 2013, respectively.

Loans with carrying amounts of $141,427,000 and $166,688,000 at December 31, 2014 and 2013, respectively, were pledged to secure Federal Home Loan Bank advance capacity.

As of December 31, 2014, the states of Illinois (30%), Texas (23%), and Iowa (14%), make up 67% of the Company’s gross loans. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economies in these states.

A significant majority of the Company’s factored receivables, representing approximately 15% of the total loan portfolio as of

December 31, 2014, are receivables purchased from trucking fleets and owner-operators in the transportation industry. The credit

risk related to this portfolio is mitigated by the limited amount of receivables acquired from individual debtors and creditors, which results in diversification across a number of companies and industries.

Allowance for Loan and Lease Losses: The activity in the ALLL during the years ended December 31, 2014, 2013 and 2012 is as follows:

(Dollars in thousands)	Beginning										Ending
Year ended December 31, 2014	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	348	$	199		$	(18	)	$	4	$	533
Construction, land development, land		110		310			(100	)		13		333
1-4 family residential properties		100		416			(409	)		108		215
Farmland		7		12			—			—		19
Commercial		1,145		2,652			(13	)		219		4,003
Factored receivables		1,842		1,971			(419	)		68		3,462
Consumer		49		204			(393	)		280		140
Mortgage warehouse		44		94			—			—		138
	$	3,645	$	5,858		$	(1,352	)	$	692	$	8,843

(Dollars in thousands)	Beginning										Ending
Year ended December 31, 2013	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	261	$	114		$	(156	)	$	129	$	348
Construction, land development, land		40		58			—			12		110
1-4 family residential properties		227		(166	)		(94	)		133		100
Farmland		5		2			—			—		7
Commercial		172		2,474			(1,515	)		14		1,145
Factored receivables		1,221		783			(226	)		64		1,842
Consumer		—		103			(113	)		59		49
Mortgage warehouse		—		44			—			—		44
	$	1,926	$	3,412		$	(2,104	)	$	411	$	3,645

(Dollars in thousands)	Beginning										Ending
Year ended December 31, 2012	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	34	$	359		$	(169	)	$	37	$	261
Construction, land development, land		—		40			—			—		40
1-4 family residential properties		132		104			(116	)		107		227
Farmland		—		53			(48	)		—		5
Commercial		—		61			—			111		172
Factored receivables		—		1,380			(212	)		53		1,221
Consumer		—		(1	)		—			1		—
Mortgage warehouse		—		—			—			—		—
Unallocated		257		(257	)		—			—		—
	$	423	$	1,739		$	(545	)	$	309	$	1,926

The following table presents loans individually and collectively evaluated for impairment, as well as PCI loans, and their respective ALLL allocations:

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
December 31, 2014	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	1,934	$	238,640	$	8,590	$	249,164	$	—	$	533	$	—	$	533
Construction, land development, land		—		41,431		1,483		42,914		—		333		—		333
1-4 family residential properties		627		76,041		2,070		78,738		—		215		—		215
Farmland		—		22,496		—		22,496		—		19		—		19
Commercial		7,188		353,022		4,357		364,567		716		3,287		—		4,003
Factored receivables		1,271		179,639		—		180,910		1,033		2,429		—		3,462
Consumer		—		11,941		—		11,941		—		140		—		140
Mortgage warehouse		—		55,148		—		55,148		—		138		—		138
	$	11,020	$	978,358	$	16,500	$	1,005,878	$	1,749	$	7,094	$	—	$	8,843

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
December 31, 2013	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	4,489	$	308,326	$	18,647	$	331,462	$	—	$	348	$	—	$	348
Construction, land development, land		—		35,585		2,041		37,626		—		110		—		110
1-4 family residential properties		842		87,987		2,472		91,301		14		79		7		100
Farmland		—		20,294		—		20,294		—		7		—		7
Commercial		5,495		248,129		2,031		255,655		15		1,130		—		1,145
Factored receivables		763		116,607		—		117,370		417		1,425		—		1,842
Consumer		—		13,878		—		13,878		—		49		—		49
Mortgage warehouse		—		13,513		—		13,513		—		44		—		44
	$	11,589	$	844,319	$	25,191	$	881,099	$	446	$	3,192	$	7	$	3,645

The following is a summary of information pertaining to impaired loans. Loans included in these tables are non-PCI impaired loans and PCI loans that have deteriorated subsequent to acquisition and as a result have been deemed impaired and an allowance recorded. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an ALLL and are excluded from these tables.

	Impaired Loans and PCI Impaired Loans						Impaired Loans
	With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2014	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	—	$	—	$	—	$	1,934	$	1,960
Construction, land development, land		—		—		—		—		—
1-4 family residential properties		—		—		—		627		748
Farmland		—		—		—		—		—
Commercial		1,845		2,527		716		5,343		5,368
Factored receivables		1,271		1,271		1,033		—		—
Consumer		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—
PCI		—		—		—		—		—
	$	3,116	$	3,798	$	1,749	$	7,904	$	8,076

	Impaired Loans and PCI Impaired Loans						Impaired Loans
	With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2013	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	—	$	—	$	—	$	114	$	131
Construction, land development, land		—		—		—		—		—
1-4 family residential properties		114		127		14		157		166
Farmland		—		—		—		—		—
Commercial		215		215		15		5,224		5,454
Factored receivables		762		762		417		1		—
Consumer		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—
PCI		13		42		7		—		—
	$	1,104	$	1,146	$	453	$	5,496	$	5,751

	Years Ended
	December 31, 2014				December 31, 2013				December 31, 2012
	Average		Interest		Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	1,023	$	213	$	201	$	7	$	201	$	7
Construction, land development, land		4		1		—		—		—		—
1-4 family residential properties		613		195		228		10		—		—
Farmland		—		—		—		—		—		—
Commercial		6,653		290		2,740		14		994		14
Factored receivables		1,017		12		632		—		632		—
Consumer		—		—		—		—		—		—
Mortgage warehouse		—		—		—		—		—		—
PCI		7		—		14		6		1,988		260
	$	9,317	$	711	$	3,815	$	37	$	3,815	$	281

The following table presents the unpaid principal and recorded investment for loans at December 31, 2014 and 2013. The difference between the unpaid principal balance and recorded investment is principally associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI), (2) net deferred origination costs and fees, and (3) previous charge-offs.

(Dollars in thousands)	Recorded		Unpaid
December 31, 2014	Investment		Principal		Difference
Commercial real estate	$	249,164	$	263,060	$	(13,896	)
Construction, land development, land		42,914		44,609		(1,695	)
1-4 family residential properties		78,738		82,263		(3,525	)
Farmland		22,496		22,400		96
Commercial		364,567		366,753		(2,186	)
Factored receivables		180,910		181,817		(907	)
Consumer		11,941		12,012		(71	)
Mortgage warehouse		55,148		55,148		—
	$	1,005,878	$	1,028,062	$	(22,184	)

(Dollars in thousands)	Recorded		Unpaid
December 31, 2013	Investment		Principal		Difference
Commercial real estate	$	331,462	$	351,521	$	(20,059	)
Construction, land development, land		37,626		41,034		(3,408	)
1-4 family residential properties		91,301		96,742		(5,441	)
Farmland		20,294		20,145		149
Commercial		255,655		260,384		(4,729	)
Factored receivables		117,370		118,057		(687	)
Consumer		13,878		14,006		(128	)
Mortgage warehouse		13,513		13,513		—
	$	881,099	$	915,402	$	(34,303	)

At December 31, 2014 and 2013, the Company had $18,976,000 and $10,653,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

Past Due and Nonaccrual Loans: The following is a summary of contractually past due and nonaccrual loans at December 31, 2014 and 2013:

			Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2014	Past Due		Still Accruing		Non-accrual		Total
Commercial real estate	$	643	$	—	$	1,995	$	2,638
Construction, land development, land		—		—		—		—
1-4 family residential properties		584		49		638		1,271
Farmland		—		—		—		—
Commercial		114		—		7,188		7,302
Factored receivables		7,202		651		—		7,853
Consumer		296		—		—		296
Mortgage warehouse		—		—		—		—
PCI		260		—		6,206		6,466
	$	9,099	$	700	$	16,027	$	25,826

			Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2013	Past Due		Still Accruing		Non-accrual		Total
Commercial real estate	$	1,212	$	47	$	276	$	1,535
Construction, land development, land		690		—		—		690
1-4 family residential properties		1,789		19		454		2,262
Farmland		—		—		—		—
Commercial		1,482		11		5,438		6,931
Factored receivables		3,836		89		—		3,925
Consumer		591		2		—		593
Mortgage warehouse		—		—		—		—
PCI		2,434		—		6,135		8,569
	$	12,034	$	168	$	12,303	$	24,505

Credit Quality Information: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes every loan and is performed on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:

Pass:

Loans classified as pass are loans with low to average risk and not otherwise classified as special mention, substandard or doubtful.

Special Mention:

Loans classified as special mention have low to acceptable risks. Liquidity, asset quality, and debt service coverage are as a whole satisfactory and performance is generally as agreed.

Substandard:

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They 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.

PCI:

At acquisition, PCI loans had the characteristics of substandard loans and it was probable, at acquisition, that all contractually required principal payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

As of December 31, 2014 and 2013 based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)			Special
December 31, 2014	Pass		Mention		Substandard		Doubtful		PCI		Total
Commercial real estate	$	231,627	$	2,344	$	6,603	$	—	$	8,590	$	249,164
Construction, land development, land		41,431		—		—		—		1,483		42,914
1-4 family residential		75,781		77		810		—		2,070		78,738
Farmland		22,496		—		—		—		—		22,496
Commercial		347,534		2,435		10,241		—		4,357		364,567
Factored receivables		179,639		—		350		921		—		180,910
Consumer		11,941		—		—		—		—		11,941
Mortgage warehouse		55,148		—		—		—		—		55,148
	$	965,597	$	4,856	$	18,004	$	921	$	16,500	$	1,005,878

(Dollars in thousands)			Special
December 31, 2013	Pass		Mention		Substandard		Doubtful		PCI		Total
Commercial real estate	$	308,077	$	557	$	4,180	$	—	$	18,648	$	331,462
Construction, land development, land		35,585		—		—		—		2,041		37,626
1-4 family residential		88,379		—		450		—		2,472		91,301
Farmland		20,294		—		—		—		—		20,294
Commercial		247,941		—		5,684		—		2,030		255,655
Factored receivables		116,607		—		336		427		—		117,370
Consumer		13,878		—		—		—		—		13,878
Mortgage warehouse		13,513		—		—		—		—		13,513
	$	844,274	$	557	$	10,650	$	427	$	25,191	$	881,099

Troubled Debt Restructurings

As of December 31, 2014 and 2013, the Company had recorded investments in troubled debt restructurings of $360,000 and $336,000, respectively. These troubled debt restructurings and their effects were immaterial as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013, and 2012.

Purchased Credit Impaired Loans

The Company has loans that were acquired for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding contractually required principal and interest and the carrying amount of these loans included in the balance sheet amounts of loans receivable at December 31, 2014 and 2013, are as follows:

	December 31,		December 31,
(Dollars in thousands)	2014		2013
Contractually required principal and interest:
Real estate loans	$	23,457	$	35,584
Commercial loans		6,293		2,795
Outstanding contractually required principal and interest	$	29,750	$	38,379
Gross carrying amount included in loans receivable	$	16,500	$	25,191

The changes in accretable yield during the years ended December 31, 2014 and 2013 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012
Accretable yield, beginning balance	$	4,587		$	4,244		$	1,627
Additions		482			1,717			—
Accretion		(4,276	)		(2,812	)		(2,124	)
Reclassification from nonaccretable to accretable yield		4,677			1,461			5,129
Disposals		(493	)		(23	)		(388	)
Accretable yield, ending balance	$	4,977		$	4,587		$	4,244