NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the recorded investment and unpaid principal for loans:

	September 30, 2018								December 31, 2017
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	906,494		$	914,503	$	(8,009	)	$	745,893		$	753,803	$	(7,910	)
Construction, land development, land		190,920			195,075		(4,155	)		134,812			138,045		(3,233	)
1-4 family residential properties		194,752			196,361		(1,609	)		125,827			127,499		(1,672	)
Farmland		177,313			180,599		(3,286	)		180,141			184,006		(3,865	)
Commercial		1,123,598			1,127,844		(4,246	)		920,812			924,133		(3,321	)
Factored receivables		611,285			613,832		(2,547	)		374,410			376,046		(1,636	)
Consumer		31,423			31,576		(153	)		31,131			31,144		(13	)
Mortgage warehouse		276,358			276,358		—			297,830			297,830		—
Total		3,512,143		$	3,536,148	$	(24,005	)		2,810,856		$	2,832,506	$	(21,650	)
Allowance for loan and lease losses		(27,256	)							(18,748	)
	$	3,484,887							$	2,792,108

The difference between the recorded investment and the unpaid principal balance is primarily (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $20,869,000 and $18,706,000 at September 30, 2018 and December 31, 2017, respectively, and (2) net deferred origination and factoring fees totaling $3,136,000 and $2,944,000 at September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018 and December 31, 2017, the Company had $54,917,000 and $32,459,000, 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to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.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 $680,070,000 and $596,230,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

During the nine months ended September 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 a reduction in other noninterest income in the consolidated statements of income. No loans were transferred to loans held for sale during the three months ended September 30, 2018 and 2017. There were no loans sold during the nine months ended September 30, 2018, other than those included in the sale of THF. See Note 2 – Business Combinations and Divestitures for details of the THF sale and its impact on our consolidated financial statements.

Allowance for Loan and Lease Losses

The activity in the allowance for loan and lease losses (“ALLL”) is as follows:

(Dollars in thousands)	Beginning										Ending
Three months ended September 30, 2018	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	3,803	$	136		$	—		$	103	$	4,042
Construction, land development, land		1,025		244			—			2		1,271
1-4 family residential properties		240		15			(3	)		7		259
Farmland		509		(6	)		—			—		503
Commercial		10,230		6,324			(4,074	)		273		12,753
Factored receivables		7,727		64			(228	)		8		7,571
Consumer		670		93			(286	)		104		581
Mortgage warehouse		343		(67	)		—			—		276
	$	24,547	$	6,803		$	(4,591	)	$	497	$	27,256

(Dollars in thousands)	Beginning										Ending
Three months ended September 30, 2017	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	2,506	$	58		$	—		$	—	$	2,564
Construction, land development, land		915		210			—			—		1,125
1-4 family residential properties		149		111			(1	)		23		282
Farmland		261		(22	)		—			—		239
Commercial		10,603		(629	)		(755	)		929		10,148
Factored receivables		4,507		645			(136	)		30		5,046
Consumer		627		208			(270	)		178		743
Mortgage warehouse		229		(9	)		—			—		220
	$	19,797	$	572		$	(1,162	)	$	1,160	$	20,367

(Dollars in thousands)	Beginning										Ending
Nine months ended September 30, 2018	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	3,435	$	506		$	(2	)	$	103	$	4,042
Construction, land development, land		883		376			—			12		1,271
1-4 family residential properties		293		(29	)		(17	)		12		259
Farmland		310		393			(200	)		—		503
Commercial		8,150		8,895			(4,701	)		409		12,753
Factored receivables		4,597		3,850			(928	)		52		7,571
Consumer		783		287			(776	)		287		581
Mortgage warehouse		297		(21	)		—			—		276
	$	18,748	$	14,257		$	(6,624	)	$	875	$	27,256

(Dollars in thousands)	Beginning										Ending
Nine months ended September 30, 2017	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,813	$	888		$	(137	)	$	—	$	2,564
Construction, land development, land		465		1,235			(582	)		7		1,125
1-4 family residential properties		253		16			(29	)		42		282
Farmland		170		69			—			—		239
Commercial		8,014		4,660			(3,833	)		1,307		10,148
Factored receivables		4,088		1,978			(1,102	)		82		5,046
Consumer		420		813			(877	)		387		743
Mortgage warehouse		182		38			—			—		220
	$	15,405	$	9,697		$	(6,560	)	$	1,825	$	20,367

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
September 30, 2018	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	7,847	$	887,834	$	10,813	$	906,494	$	581	$	3,461	$	—	$	4,042
Construction, land development, land		221		183,862		6,837		190,920		74		1,197		—		1,271
1-4 family residential properties		2,240		191,868		644		194,752		125		134		—		259
Farmland		4,156		172,782		375		177,313		72		431		—		503
Commercial		19,680		1,102,309		1,609		1,123,598		1,496		11,253		4		12,753
Factored receivables		6,841		604,444		—		611,285		1,916		5,655		—		7,571
Consumer		256		31,167		—		31,423		29		552		—		581
Mortgage warehouse		—		276,358		—		276,358		—		276		—		276
	$	41,241	$	3,450,624	$	20,278	$	3,512,143	$	4,293	$	22,959	$	4	$	27,256

(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

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
September 30, 2018	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	6,031	$	6,079	$	581	$	1,816	$	1,869
Construction, land development, land		167		168		74		54		54
1-4 family residential properties		223		216		125		2,017		2,124
Farmland		914		900		72		3,242		3,524
Commercial		3,620		3,616		1,496		16,060		16,261
Factored receivables		6,841		6,841		1,916		—		—
Consumer		92		86		29		164		169
Mortgage warehouse		—		—		—		—		—
PCI		71		55		4		—		—
	$	17,959	$	17,961	$	4,297	$	23,353	$	24,001

	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, 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

The following table presents average impaired loans and interest recognized on impaired:

	Three Months Ended				Three Months Ended
	September 30, 2018				September 30, 2017
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	6,861	$	70	$	853	$	—
Construction, land development, land		181		1		135		—
1-4 family residential properties		2,205		21		1,817		16
Farmland		3,835		10		3,361		14
Commercial		24,579		46		22,003		167
Factored receivables		5,724		—		3,907		—
Consumer		260		3		136		4
Mortgage warehouse		—		—		—		—
PCI		75		—		143		—
	$	43,720	$	151	$	32,355	$	201

	Nine Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2017
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	4,429	$	76	$	1,150	$	1
Construction, land development, land		178		1		249		—
1-4 family residential properties		2,439		25		1,509		23
Farmland		3,978		27		2,287		32
Commercial		23,149		665		27,077		398
Factored receivables		5,783		—		3,847		—
Consumer		320		4		117		4
Mortgage warehouse		—		—		—		—
PCI		35		—		262		—
	$	40,311	$	798	$	36,498	$	458

Past Due and Nonaccrual Loans

The following is a summary of contractually past due and nonaccrual loans:

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
September 30, 2018	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	2,493	$	—	$	7,873	$	10,366
Construction, land development, land		769		—		221		990
1-4 family residential properties		1,253		79		2,156		3,488
Farmland		—		—		3,387		3,387
Commercial		3,976		246		16,865		21,087
Factored receivables		32,645		2,252		—		34,897
Consumer		820		—		276		1,096
Mortgage warehouse		—		—		—		—
PCI		206		—		2,969		3,175
	$	42,162	$	2,577	$	33,747	$	78,486

	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

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

(Dollars in thousands)	September 30, 2018		December 31, 2017
Nonaccrual loans⁽¹⁾	$	33,747	$	32,149
Factored receivables greater than 90 days past due		2,252		1,454
Troubled debt restructurings accruing interest		3,603		5,128
	$	39,602	$	38,731

⁽¹⁾

Includes troubled debt restructurings of $3,927,000 and $14,009,000 at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
September 30, 2018	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	889,505	$	6,176	$	—	$	10,813	$	906,494
Construction, land development, land		183,706		377		—		6,837		190,920
1-4 family residential		191,844		2,264		—		644		194,752
Farmland		171,631		5,307		—		375		177,313
Commercial		1,099,057		22,932		—		1,609		1,123,598
Factored receivables		605,002		5,340		943		—		611,285
Consumer		31,160		263		—		—		31,423
Mortgage warehouse		276,358		—		—		—		276,358
	$	3,448,263	$	42,659	$	943	$	20,278	$	3,512,143

(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

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $7,530,000 and $19,137,000 as of September 30, 2018 and December 31, 2017, respectively. The Company had allocated specific allowances for these loans of $640,000 and $535,000 at September 30, 2018 and December 31, 2017, respectively, and had not committed to lend additional amounts. The Company’s troubled debt restructurings are the result of granting a borrower that is experiencing financial difficulty a concession such as 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 nine months ended September 30, 2018 and 2017:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
(Dollars in thousands)	Number of		Recorded		Recorded
September 30, 2018	Loans		Investment		Investment
1-4 family residential properties		3	$	111	$	111
Farmland		1		263		263
Commercial		10		875		875
Total		14	$	1,249	$	1,249

Pre-Modification

Post-Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

September 30, 2017

Loans

Investment

Commercial

2,184

During the nine months ended September 30, 2018, the Company had one loan modified as troubled debt restructurings with a recorded investment of $156,000 for which there was a payment default within twelve months following the modification. During the nine months ended September 30, 2017, the Company had four loans modified as troubled debt restructurings with a recorded investment of $2,999,000 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. Default is determined at 90 or more days past due.

Residential Real Estate Loans In Process of Foreclosure

At September 30, 2018, the Company had $21,000 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 at September 30, 2018 and December 31, 2017, are as follows:

	September 30,		December 31,
	2018		2017
Contractually required principal and interest:
Real estate loans	$	22,877	$	16,360
Commercial loans		4,141		3,501
Outstanding contractually required principal and interest	$	27,018	$	19,861
Gross carrying amount included in loans receivable	$	20,278	$	15,598

The changes in accretable yield during the three and nine months ended September 30, 2018 and 2017 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Accretable yield, beginning balance	$	2,105		$	3,126		$	2,793		$	4,261
Additions		2,997			—			2,997			—
Accretion		(439	)		(411	)		(1,177	)		(3,117	)
Reclassification from nonaccretable to accretable yield		124			56			174			2,067
Disposals		—			(2	)		—			(442	)
Accretable yield, ending balance	$	4,787		$	2,769		$	4,787		$	2,769