NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the recorded investment and unpaid principal for loans at June 30, 2017 and December 31, 2016:

	June 30, 2017								December 31, 2016
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	541,217		$	546,617	$	(5,400	)	$	442,237		$	447,926	$	(5,689	)
Construction, land development, land		120,253			122,119		(1,866	)		109,812			113,211		(3,399	)
1-4 family residential properties		101,833			103,366		(1,533	)		104,974			106,852		(1,878	)
Farmland		136,258			137,307		(1,049	)		141,615			142,673		(1,058	)
Commercial		842,715			846,091		(3,376	)		778,643			783,349		(4,706	)
Factored receivables		293,633			295,246		(1,613	)		238,198			239,432		(1,234	)
Consumer		29,497			29,512		(15	)		29,764			29,782		(18	)
Mortgage warehouse		229,694			229,694		—			182,381			182,381		—
Total		2,295,100		$	2,309,952	$	(14,852	)		2,027,624		$	2,045,606	$	(17,982	)
Allowance for loan and lease losses		(19,797	)							(15,405	)
	$	2,275,303							$	2,012,219

The difference between the recorded investment and the unpaid principal balance is primarily associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $11,688,000 and $15,210,000 at June 30, 2017 and December 31, 2016, respectively, and (2) net deferred origination and factoring fees totaling $3,164,000 and $2,772,000 at June 30, 2017 and December 31, 2016, respectively.

At June 30, 2017 and December 31, 2016, the Company had $27,751,000 and $23,597,000, 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to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

Loans with carrying amounts of $486,269,000 and $497,573,000 at June 30, 2017 and December 31, 2016, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

During the six months ended June 30, 2017, loans with a carrying amount of $1,965,000 were transferred to loans held for sale as the Company made the decision to sell the loans. These loans were subsequently sold resulting in proceeds of $1,919,000 and losses on sale of loans of $46,000, which were recorded as other noninterest income in the consolidated statements of income for the six months ended June 30, 2017. No loans were transferred to loans held for sale during the three months ended June 30, 2017. During the three and six months ended June 30, 2016, loans with a carrying amount of $1,238,000 and $4,119,000, respectively, were transferred to loans held for sale. These loans were subsequently sold resulting in proceeds of $1,233,000 and $4,038,000, respectively, and losses on sale of loans of $5,000 and $81,000, respectively.

Allowance for Loan and Lease Losses

The activity in the allowance for loan and lease losses (“ALLL”) during the three and six months ended June 30, 2017 and 2016 is as follows:

(Dollars in thousands)	Beginning										Ending
Three months ended June 30, 2017	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	2,243	$	263		$	—		$	—	$	2,506
Construction, land development, land		566		512			(163	)		—		915
1-4 family residential properties		160		(25	)		—			14		149
Farmland		214		47			—			—		261
Commercial		11,177		(504	)		(226	)		156		10,603
Factored receivables		4,064		814			(386	)		15		4,507
Consumer		547		233			(308	)		155		627
Mortgage warehouse		122		107			—			—		229
	$	19,093	$	1,447		$	(1,083	)	$	340	$	19,797

(Dollars in thousands)	Beginning										Ending
Three months ended June 30, 2016	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,619	$	161		$	(1	)	$	13	$	1,792
Construction, land development, land		198		(17	)		—			—		181
1-4 family residential properties		285		(50	)		(47	)		71		259
Farmland		133		10			—			—		143
Commercial		5,331		1,134			(169	)		401		6,697
Factored receivables		4,110		524			(450	)		20		4,204
Consumer		222		169			(112	)		14		293
Mortgage warehouse		195		8			—			—		203
	$	12,093	$	1,939		$	(779	)	$	519	$	13,772

(Dollars in thousands)	Beginning										Ending
Six months ended June 30, 2017	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,813	$	830		$	(137	)	$	—	$	2,506
Construction, land development, land		465		1,025			(582	)		7		915
1-4 family residential properties		253		(95	)		(28	)		19		149
Farmland		170		91			—			—		261
Commercial		8,014		5,289			(3,078	)		378		10,603
Factored receivables		4,088		1,333			(966	)		52		4,507
Consumer		420		605			(607	)		209		627
Mortgage warehouse		182		47			—			—		229
	$	15,405	$	9,125		$	(5,398	)	$	665	$	19,797

(Dollars in thousands)	Beginning										Ending
Six months ended June 30, 2016	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,489	$	290		$	(1	)	$	14	$	1,792
Construction, land development, land		367		(186	)		—			—		181
1-4 family residential properties		274		(28	)		(63	)		76		259
Farmland		134		9			—			—		143
Commercial		5,276		1,159			(169	)		431		6,697
Factored receivables		4,509		84			(458	)		69		4,204
Consumer		216		199			(155	)		33		293
Mortgage warehouse		302		(99	)		—			—		203
	$	12,567	$	1,428		$	(846	)	$	623	$	13,772

The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective ALLL allocations:

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
June 30, 2017	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	862	$	529,803	$	10,552	$	541,217	$	126	$	2,380	$	—	$	2,506
Construction, land development, land		134		117,220		2,899		120,253		—		915		—		915
1-4 family residential properties		1,710		98,734		1,389		101,833		—		149		—		149
Farmland		3,480		132,537		241		136,258		—		261		—		261
Commercial		22,886		818,667		1,162		842,715		2,387		7,931		285		10,603
Factored receivables		3,295		290,338		—		293,633		1,550		2,957		—		4,507
Consumer		110		29,387		—		29,497		—		627		—		627
Mortgage warehouse		—		229,694		—		229,694		—		229		—		229
	$	32,477	$	2,246,380	$	16,243	$	2,295,100	$	4,063	$	15,449	$	285	$	19,797

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
December 31, 2016	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	1,456	$	427,918	$	12,863	$	442,237	$	100	$	1,358	$	355	$	1,813
Construction, land development, land		362		105,493		3,957		109,812		25		440		—		465
1-4 family residential properties		1,095		101,551		2,328		104,974		1		252		—		253
Farmland		1,333		140,045		237		141,615		—		170		—		170
Commercial		33,033		738,088		7,522		778,643		2,101		5,913		—		8,014
Factored receivables		3,176		235,022		—		238,198		1,546		2,542		—		4,088
Consumer		73		29,691		—		29,764		—		420		—		420
Mortgage warehouse		—		182,381		—		182,381		—		182		—		182
	$	40,528	$	1,960,189	$	26,907	$	2,027,624	$	3,773	$	11,277	$	355	$	15,405

The following is a summary of information pertaining to impaired loans. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an allowance and are excluded from these tables.

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
June 30, 2017	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	169	$	170	$	126	$	693	$	726
Construction, land development, land		—		—		—		134		134
1-4 family residential properties		—		—		—		1,710		1,834
Farmland		—		—		—		3,480		3,563
Commercial		13,990		14,083		2,387		8,896		8,991
Factored receivables		3,295		3,295		1,550		—		—
Consumer		—		—		—		110		109
Mortgage warehouse		—		—		—		—		—
PCI		285		1,114		285		—		—
	$	17,739	$	18,662	$	4,348	$	15,023	$	15,357

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2016	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	517	$	517	$	100	$	939	$	1,011
Construction, land development, land		277		275		25		85		86
1-4 family residential properties		8		14		1		1,087		1,215
Farmland		—		—		—		1,333		1,364
Commercial		15,022		15,018		2,101		18,011		18,096
Factored receivables		3,176		3,176		1,546		—		—
Consumer		—		—		—		73		73
Mortgage warehouse		—		—		—		—		—
PCI		525		525		355		—		—
	$	19,525	$	19,525	$	4,128	$	21,528	$	21,845

The following table presents average impaired loans and interest recognized on impaired loans for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended				Three Months Ended
	June 30, 2017				June 30, 2016
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	793	$	1	$	702	$	—
Construction, land development, land		275		—		138		—
1-4 family residential properties		1,488		6		779		—
Farmland		3,200		9		—		—
Commercial		24,023		109		12,769		73
Factored receivables		3,512		—		4,074		—
Consumer		122		—		35		—
Mortgage warehouse		—		—		—		—
PCI		1,494		—		1,432		—
	$	34,907	$	125	$	19,929	$	73

	Six Months Ended				Six Months Ended
	June 30, 2017				June 30, 2016
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	1,159	$	1	$	706	$	—
Construction, land development, land		248		—		138		2
1-4 family residential properties		1,402		7		775		4
Farmland		2,406		18		—		—
Commercial		27,960		232		10,593		247
Factored receivables		3,235		—		3,309		—
Consumer		89		—		16		—
Mortgage warehouse		—		—		—		—
PCI		405		—		983		—
	$	36,904	$	258	$	16,520	$	253

Past Due and Nonaccrual Loans

The following is a summary of contractually past due and nonaccrual loans at June 30, 2017 and December 31, 2016:

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
June 30, 2017	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	1,828	$	—	$	862	$	2,690
Construction, land development, land		543		—		134		677
1-4 family residential properties		1,383		—		1,695		3,078
Farmland		3,553		—		2,688		6,241
Commercial		7,044		65		17,892		25,001
Factored receivables		14,477		1,844		—		16,321
Consumer		747		2		110		859
Mortgage warehouse		—		—		—		—
PCI		192		122		2,392		2,706
	$	29,767	$	2,033	$	25,773	$	57,573

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2016	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	699	$	144	$	1,163	$	2,006
Construction, land development, land		619		—		362		981
1-4 family residential properties		956		—		1,039		1,995
Farmland		3,583		141		541		4,265
Commercial		11,060		1,077		26,619		38,756
Factored receivables		11,921		2,153		—		14,074
Consumer		667		2		73		742
Mortgage warehouse		—		—		—		—
PCI		2,020		104		8,233		10,357
	$	31,525	$	3,621	$	38,030	$	73,176

The following table presents information regarding nonperforming loans at the dates indicated:

(Dollars in thousands)	June 30, 2017		December 31, 2016
Nonaccrual loans⁽¹⁾	$	25,773	$	38,030
Factored receivables greater than 90 days past due		1,844		2,153
Troubled debt restructurings accruing interest		3,529		5,123
	$	31,146	$	45,306

⁽¹⁾

Includes troubled debt restructurings of $8,557,000 and $13,263,000 at June 30, 2017 and December 31, 2016, respectively.

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 substandard or doubtful.

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 and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

As of June 30, 2017 and December 31, 2016, based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
June 30, 2017	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	528,842	$	1,823	$	—	$	10,552	$	541,217
Construction, land development, land		117,220		134		—		2,899		120,253
1-4 family residential		98,642		1,802		—		1,389		101,833
Farmland		128,067		7,950		—		241		136,258
Commercial		802,068		39,485		—		1,162		842,715
Factored receivables		291,367		795		1,471		—		293,633
Consumer		29,386		111		—		—		29,497
Mortgage warehouse		229,694		—		—		—		229,694
	$	2,225,286	$	52,100	$	1,471	$	16,243	$	2,295,100

(Dollars in thousands)
December 31, 2016	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	422,423	$	6,951	$	—	$	12,863	$	442,237
Construction, land development, land		105,493		362		—		3,957		109,812
1-4 family residential		101,339		1,307		—		2,328		104,974
Farmland		136,474		4,904		—		237		141,615
Commercial		729,634		41,487		—		7,522		778,643
Factored receivables		236,084		1,029		1,085		—		238,198
Consumer		29,688		76		—		—		29,764
Mortgage warehouse		182,381		—		—		—		182,381
	$	1,943,516	$	56,116	$	1,085	$	26,907	$	2,027,624

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $12,086,000 and $18,386,000 as of June 30, 2017 and December 31, 2016, respectively. The Company had allocated specific allowances for these loans of $435,000 and $1,911,000 at June 30, 2017 and December 31, 2016, respectively, and had not committed to lend additional amounts. Troubled debt restructurings are the result of extending amortization periods, reducing contractual interest rates, or a combination thereof. The Company did not grant principal reductions on any restructured loans.

The following table presents loans modified as troubled debt restructurings that occurred during the six months ended June 30, 2017 and 2016:

Pre-Modification

Post-Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

June 30, 2017

Loans

Investment

Commercial

186

Pre-Modification

Post-Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

June 30, 2016

Loans

Investment

Commercial

5,730

During the six months ended June 30, 2017, the Company had three loans modified as troubled debt restructurings with a recorded investment of $2,983,000 for which there were payment defaults within twelve months following the modification. The full recorded investment in one of these loans of $2,702,000 was charged off during the period. During the six months ended June 30, 2016, there were no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. Default is determined at 90 or more days past due.

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 at June 30, 2017 and December 31, 2016, are as follows:

	June 30,		December 31,
	2017		2016
Contractually required principal and interest:
Real estate loans	$	18,836	$	25,013
Commercial loans		2,249		9,703
Outstanding contractually required principal and interest	$	21,085	$	34,716
Gross carrying amount included in loans receivable	$	16,243	$	26,907

The changes in accretable yield during the three and six months ended June 30, 2017 and 2016 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Accretable yield, beginning balance	$	3,432		$	2,064		$	4,261		$	2,593
Additions		—			—			—			—
Accretion		(2,234	)		(1,518	)		(2,706	)		(2,034	)
Reclassification from nonaccretable to accretable yield		1,928			646			2,011			646
Disposals		—			—			(440	)		(13	)
Accretable yield, ending balance	$	3,126		$	1,192		$	3,126		$	1,192