NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	December 31, 2017								December 31, 2016
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	745,893		$	753,803	$	(7,910	)	$	442,237		$	447,926	$	(5,689	)
Construction, land development, land		134,812			138,045		(3,233	)		109,812			113,211		(3,399	)
1-4 family residential properties		125,827			127,499		(1,672	)		104,974			106,852		(1,878	)
Farmland		180,141			184,006		(3,865	)		141,615			142,673		(1,058	)
Commercial		920,812			924,133		(3,321	)		778,643			783,349		(4,706	)
Factored receivables		374,410			376,046		(1,636	)		238,198			239,432		(1,234	)
Consumer		31,131			31,144		(13	)		29,764			29,782		(18	)
Mortgage warehouse		297,830			297,830		—			182,381			182,381		—
Total		2,810,856		$	2,832,506	$	(21,650	)		2,027,624		$	2,045,606	$	(17,982	)
Allowance for loan and lease losses		(18,748	)							(15,405	)
	$	2,792,108							$	2,012,219

The difference between the recorded investment and unpaid principal balance is principally associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $18,706,000 and $15,210,000 at December 31, 2017 and 2016, respectively, and (2) net deferred origination and factoring fees totaling $2,944,000 and $2,772,000 at December 31, 2017 and 2016, respectively.

As of December 31, 2017, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (24%), Colorado (26%), Illinois (17%), and Iowa (7%), make up 74% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2016, the states of Texas (23%), Colorado (22%), Illinois (21%), and Iowa (7%) made up 73% of the Company’s gross loans, excluding factored receivables.

A majority (77%) of the Company’s factored receivables, representing approximately 10% of the total loan portfolio as of December 31, 2017, are receivables purchased from trucking fleets and owner-operators in the transportation industry. At December 31, 2016, 77% of our factored receivables, representing approximately 9% of our total loan portfolio, were receivables purchased from trucking fleets, owner-operators, and freight brokers in the transportation industry.

At December 31, 2017 and 2016, the Company had $32,459,000 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 $596,230,000 and $497,573,000 at December 31, 2017 and 2016, respectively, were pledged to secure Federal Home Loan Bank advance capacity.

During the year ended December 31, 2017, loans with a carrying amount of $3,914,000 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 $3,834,000 and a loss on sale of loans of $80,000, which was recorded as other noninterest income in the consolidated statements of income. During the year ended December 31, 2016, loans with a carrying amount of $24,384,000 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 $24,538,000 and a gain on sale of loans of $154,000, which was recorded as other noninterest income in the consolidated statements of income. No loan transfers were recorded during the year ended December 31, 2015.

Allowance for Loan and Lease Losses

The activity in the ALLL during the years ended December 31, 2017, 2016 and 2015 is as follows:

(Dollars in thousands)	Beginning										Reclassification			Ending
Year ended December 31, 2017	Balance		Provision			Charge-offs			Recoveries		To Held For Sale			Balance
Commercial real estate	$	1,813	$	1,822		$	(259	)	$	59	$	—		$	3,435
Construction, land development, land		465		825			(582	)		175		—			883
1-4 family residential properties		253		24			(31	)		47		—			293
Farmland		170		140			—			—		—			310
Commercial		8,014		5,785			(4,875	)		1,329		(2,103	)		8,150
Factored receivables		4,088		2,058			(1,667	)		118		—			4,597
Consumer		420		859			(1,004	)		508		—			783
Mortgage warehouse		182		115			—			—		—			297
	$	15,405	$	11,628		$	(8,418	)	$	2,236	$	(2,103	)	$	18,748

(Dollars in thousands)	Beginning										Reclassification			Ending
Year ended December 31, 2016	Balance		Provision			Charge-offs			Recoveries		To Held For Sale			Balance
Commercial real estate	$	1,489	$	313		$	(5	)	$	16	$	—		$	1,813
Construction, land development, land		367		92			—			6		—			465
1-4 family residential properties		274		(22	)		(84	)		85		—			253
Farmland		134		36			—			—		—			170
Commercial		5,276		5,390			(3,643	)		991		—			8,014
Factored receivables		4,509		315			(856	)		120		—			4,088
Consumer		216		689			(564	)		79		—			420
Mortgage warehouse		302		(120	)		—			—		—			182
	$	12,567	$	6,693		$	(5,152	)	$	1,297	$	—		$	15,405

(Dollars in thousands)	Beginning										Reclassification			Ending
Year ended December 31, 2015	Balance		Provision			Charge-offs			Recoveries		To Held For Sale			Balance
Commercial real estate	$	533	$	1,055		$	(152	)	$	53	$	—		$	1,489
Construction, land development, land		333		34			—			—		—			367
1-4 family residential properties		215		60			(205	)		204		—			274
Farmland		19		115			—			—		—			134
Commercial		4,003		1,375			(145	)		43		—			5,276
Factored receivables		3,462		1,508			(540	)		79		—			4,509
Consumer		140		218			(347	)		205		—			216
Mortgage warehouse		138		164			—			—		—			302
	$	8,843	$	4,529		$	(1,389	)	$	584	$	—		$	12,567

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, 2017	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	1,013	$	735,118	$	9,762	$	745,893	$	123	$	3,312	$	—	$	3,435
Construction, land development, land		136		130,732		3,944		134,812		—		883		—		883
1-4 family residential properties		2,638		122,093		1,096		125,827		152		141		—		293
Farmland		3,800		176,232		109		180,141		—		310		—		310
Commercial		26,616		893,509		687		920,812		1,409		6,741		—		8,150
Factored receivables		4,726		369,684		—		374,410		949		3,648		—		4,597
Consumer		384		30,747		—		31,131		80		703		—		783
Mortgage warehouse		—		297,830		—		297,830		—		297		—		297
	$	39,313	$	2,755,945	$	15,598	$	2,810,856	$	2,713	$	16,035	$	—	$	18,748

(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 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, 2017	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	165	$	165	$	123	$	848	$	881
Construction, land development, land		—		—		—		136		136
1-4 family residential properties		237		235		152		2,401		2,519
Farmland		—		—		—		3,800		4,071
Commercial		9,194		9,191		1,409		17,422		17,605
Factored receivables		4,726		4,726		949		—		—
Consumer		271		267		80		113		115
Mortgage warehouse		—		—		—		—		—
PCI		—		—		—		—		—
	$	14,593	$	14,584	$	2,713	$	24,720	$	25,327

	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, 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 years ended December 31, 2017, 2016, and 2015:

	Years Ended
	December 31, 2017				December 31, 2016				December 31, 2015
	Average		Interest		Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	1,234	$	33	$	1,090	$	46	$	1,329	$	—
Construction, land development, land		249		—		181		4		—		—
1-4 family residential properties		1,867		45		857		18		623		42
Farmland		2,567		45		667		45		—		—
Commercial		29,825		599		20,474		980		7,552		187
Factored receivables		3,951		—		3,299		—		2,347		—
Consumer		229		9		37		5		—		—
Mortgage warehouse		—		—		—		—		—		—
PCI		262		—		525		—		263		—
	$	40,184	$	731	$	27,130	$	1,098	$	12,114	$	229

Past Due and Nonaccrual Loans

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

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2017	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	1,374	$	—	$	1,012	$	2,386
Construction, land development, land		—		—		136		136
1-4 family residential properties		1,378		62		2,625		4,065
Farmland		250		109		3,412		3,771
Commercial		6,630		39		22,247		28,916
Factored receivables		20,858		1,454		—		22,312
Consumer		947		—		384		1,331
Mortgage warehouse		165		—		—		165
PCI		72		—		2,333		2,405
	$	31,674	$	1,664	$	32,149	$	65,487

	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)	December 31, 2017		December 31, 2016
Nonaccrual loans⁽¹⁾	$	32,149	$	38,030
Factored receivables greater than 90 days past due		1,454		2,153
Troubled debt restructurings accruing interest		5,128		5,123
	$	38,731	$	45,306

⁽¹⁾Includes troubled debt restructurings of $14,009,000 and $13,263,000 at December 31, 2017 and 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 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, 2017 and 2016 based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
December 31, 2017	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	732,175	$	3,956	$	—	$	9,762	$	745,893
Construction, land development, land		130,732		136		—		3,944		134,812
1-4 family residential		122,044		2,687		—		1,096		125,827
Farmland		171,017		9,015		—		109		180,141
Commercial		878,957		41,168		—		687		920,812
Factored receivables		370,839		2,325		1,246		—		374,410
Consumer		30,739		392		—		—		31,131
Mortgage warehouse		297,830		—		—		—		297,830
	$	2,734,333	$	59,679	$	1,246	$	15,598	$	2,810,856

(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 $19,137,000 and $18,386,000 as of December 31, 2017 and 2016, respectively. The Company had allocated specific allowances for these loans of $535,000 and $1,911,000 at December 31, 2017 and 2016, respectively, and had not committed to lend additional amounts.

The following table presents loans modified as troubled debt restructurings that occurred during the years ended December 31, 2017, 2016, and 2015:


	Recorded		Number of
(Dollars in thousands)	Investment		Loans
December 31, 2017
Commercial	$	8,831		8

December 31, 2016
Commercial real estate	$	809		3
Farmland		793		1
Commercial		16,612		27
	$	18,214		31
December 31, 2015
Commercial	$	1,544		4

Troubled debt restructurings during the years ended December 31, 2017, 2016, and 2015 were the result of extending amortization periods. The Company did not grant principal reductions or interest rate concessions on any restructured loans.

There were no loans modified as troubled debt restructurings during the year ended December 31, 2017 for which there was a payment default during the year then ended. The Company had one borrower relationship with a recorded investment of $2,011,000 at December 31, 2016, comprised of 14 individual commercial loans that were modified as troubled debt restructurings during the year ended December 31, 2016 for which there were payment defaults during the year then ended. The payment defaults did not result in incremental allowance allocations or charge-offs. There were no loans modified as troubled debt restructurings during the year ended December 31, 2015 for which there was a payment default during the year then ended. Default is determined at 90 or more days past due.

Residential Real Estate Loans In Process of Foreclosure

At December 31, 2017, the Company had $484,000 in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process.

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, 2017 and 2016 are as follows:

	December 31,		December 31,
(Dollars in thousands)	2017		2016
Contractually required principal and interest:
Real estate loans	$	16,360	$	25,013
Commercial loans		3,501		9,703
Outstanding contractually required principal and interest	$	19,861	$	34,716
Gross carrying amount included in loans receivable	$	15,598	$	26,907

The changes in accretable yield during the years ended December 31, 2017, 2016 and 2015 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)	2017			2016			2015
Accretable yield, beginning balance	$	4,261		$	2,594		$	4,977
Additions		371			4,124			—
Accretion		(3,442	)		(3,092	)		(4,023	)
Reclassification from nonaccretable to accretable yield		2,108			646			1,805
Disposals		(505	)		(11	)		(165	)
Accretable yield, ending balance	$	2,793		$	4,261		$	2,594