NOTE

LOANS ACQUIRED

September

15,

2015,

the Company entered into an agreement with the FDIC to terminate all loss share agreements which were entered into in

2010

and

2012

in conjunction with the Company’s acquisition of substantially all of the assets (“covered assets”) and assumption of substantially all of the liabilities of

four

failed banks in FDIC-assisted transactions. Under the early termination, all rights and obligations of the Company and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated.

Under the terms of the agreement, the FDIC made a net payment of

$2,368,000

to the bank as consideration for the early termination of the loss share agreements. The early termination was recorded in the Company’s financial statements by removing the FDIC Indemnification Asset, receivable from FDIC, the FDIC True-up liability and recording a

one

-time, pre-tax charge of

$7,476,000.

As a result, the Company reclassified loans previously covered by FDIC loss share to loans acquired, not covered by FDIC loss share. Foreclosed assets previously covered by FDIC loss share were reclassified to foreclosed assets not covered by FDIC loss share.

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

. 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

first

quarter of

2015,

the Company evaluated

$769.9

million of net loans

($774.8

million gross loans less

$4.9

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

Acquisitions, in accordance with the provisions of ASC Topic

310

20,

Nonrefundable Fees and Other Costs

$10.7

million of net loans

($15.7

million gross loans less

$5.0

million discount) purchased in conjunction with the acquisition of Liberty for impairment in accordance with the provisions of ASC Topic

310

30.

Also during the

first

quarter of

2015,

the Company evaluated

$1.13

billion of net loans

($1.15

billion gross loans less

$23.7

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

Acquisitions, in accordance with the provisions of ASC Topic

310

20.

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

$7.0

million of net loans

($10.1

million gross loans less

$3.1

million discount) purchased in conjunction with the acquisition of Community First for impairment in accordance with the provisions of ASC Topic

310

30.

During the

third

quarter of

2014,

the Company evaluated

$308.2

million of net loans

($316.1

million gross loans less

$7.9

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

Acquisitions, in accordance with the provisions of ASC Topic

310

20,

Nonrefundable Fees and Other Costs

$3.5

million of net loans

($10.7

million gross loans less

$7.2

million discount) purchased in conjunction with the acquisition of Delta Trust for impairment in accordance with the provisions of ASC Topic

310

30.

See Note

Acquisitions, for further discussion of loans acquired.

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

December

31,

2016

and

2015:

	Loans Acquired At December 31,
(in thousands)	2016		2015

Consumer:
Credit cards	$	--	$	--
Other consumer		49,677		75,606
Total consumer		49,677		75,606
Real estate:
Construction		57,587		77,119
Single family residential		423,176		501,002
Other commercial		690,108		854,068
Total real estate		1,170,871		1,432,189
Commercial:
Commercial		81,837		154,533
Agricultural		3,298		10,573
Total commercial		85,135		165,106

Total loans acquired (1)	$	1,305,683	$	1,672,901

(1)

Loans acquired are reported net of a

$954,000

allowance at

December

31,

2016

and

2015.

Nonaccrual acquired loans, excluding purchased credit impaired loans accounted for under ASC Topic

310

30,

segregated by class of loans, are as follows (see Note

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

(In thousands)	December 31, 2016		December 31, 2015

Consumer:
Other consumer	$	456	$	71
Total consumer		456		71
Real estate:
Construction		7,961		783
Single family residential		13,366		7,795
Other commercial		22,045		6,435
Total real estate		43,372		15,013
Commercial:
Commercial		2,806		3,859
Agricultural		198		8
Total commercial		3,004		3,867
Total	$	46,832	$	18,951

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

Loans an 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

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

December 31, 2015
Consumer:
Other consumer	$	826	$	122	$	948	$	74,658	$	75,606	$	57
Total consumer		826		122		948		74,658		75,606		57
Real estate:
Construction		736		9,449		10,185		66,934		77,119		410
Single family residential		9,493		4,850		14,343		486,659		501,002		1,246
Other commercial		12,910		7,810		20,720		833,348		854,068		203
Total real estate		23,139		22,109		45,248		1,386,941		1,432,189		1,859
Commercial:
Commercial		1,999		2,334		4,333		150,200		154,533		912
Agricultural		114		396		510		10,063		10,573		396
Total commercial		2,113		2,730		4,843		160,263		165,106		1,308

Total	$	26,078	$	24,961	$	51,039	$	1,621,862	$	1,672,901	$	3,224

The following table presents a summary of acquired loans, at

December

31,

2016

and

2015,

by credit risk rating, segregated by class of loans (see Note

Loans an 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

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

December 31, 2015
Consumer:
Other consumer	$	75,330	$	--	$	276	$	--	$	--	$	75,606
Total consumer		75,330		--		276		--		--		75,606
Real estate:
Construction		68,775		--		8,344		--		--		77,119
Single family residential		479,193		1,490		18,640		1,675		4		501,002
Other commercial		812,537		7,328		33,748		--		455		854,068
Total real estate		1,360,505		8,818		60,732		1,675		459		1,432,189
Commercial:
Commercial		144,239		332		7,948		2,014		--		154,533
Agricultural		10,310		--		263		--		--		10,573
Total commercial		154,549		332		8,211		2,014		--		165,106

Total	$	1,590,384	$	9,150	$	69,219	$	3,689	$	459	$	1,672,901

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 following is a summary of the loans acquired in the Citizens acquisition on

September

2016,

as of the date of acquisition.

(in thousands)	Not Impaired			Impaired

Contractually required principal and interest at acquisition	$	348,756		$	1,605
Non-accretable difference (expected losses and foregone interest)		--			(848	)
Cash flows expected to be collected at acquisition		348,756			757
Accretable yield		(8,663	)		--
Basis in acquired loans at acquisition	$	340,093		$	757

The following is a summary of the loans acquired in the Liberty acquisition on

February

27,

2015,

as of the date of acquisition.

(in thousands)	Not Impaired			Impaired

Contractually required principal and interest at acquisition	$	774,777		$	15,716
Non-accretable difference (expected losses and foregone interest)		--			(4,978	)
Cash flows expected to be collected at acquisition		774,777			10,738
Accretable yield		(4,869	)		12
Basis in acquired loans at acquisition	$	769,908		$	10,750

The following is a summary of the loans acquired in the Community First acquisition on

February

27,

2015,

as of the date of acquisition.

(in thousands)	Not Impaired			Impaired

Contractually required principal and interest at acquisition	$	1,153,255		$	10,143
Non-accretable difference (expected losses and foregone interest)		--			(3,247	)
Cash flows expected to be collected at acquisition		1,153,255			6,896
Accretable yield		(23,712	)		104
Basis in acquired loans at acquisition	$	1,129,543		$	7,000

The following is a summary of the non-covered loans acquired in the Delta acquisition on

August

31,

2014,

as of the date of acquisition.

(in thousands)	Not Impaired			Impaired

Contractually required principal and interest at acquisition	$	316,103		$	10,726
Non-accretable difference (expected losses and foregone interest)		--			(7,023	)
Cash flows expected to be collected at acquisition		316,103			3,703
Accretable yield		(7,949	)		(177	)
Basis in acquired loans at acquisition	$	308,154		$	3,526

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. This has resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loans. For those loans previously covered by FDIC loss share, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which was recorded as indemnification assets. The estimated adjustments to the indemnification assets were amortized on a level-yield basis over the remainder of the loss-sharing agreements or the remaining expected lives of the loans, whichever was shorter. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization in future quarters.

100

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

December

31,

2016

and

2015

is shown below:

(In thousands)	2016		2015

Impact on net interest income	$	3,072	$	19,995
Non-interest income (1)		--		(7,719	)
Net impact to pre-tax income		3,072		12,276
Net impact, net of taxes	$	1,867	$	7,461

(1)

Negative non-interest income resulted from the amortization of the FDIC indemnification assets. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization.

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 years ended

December

31,

2016,

2015

and

2014.

(in thousands)	Accretable Yield			Carrying Amount of Loans

Balance, January 1, 2014	$	41,385		$	234,785
Additions		177			3,526
Accretable yield adjustments		9,104			--
Accretion		(30,031	)		30,031
Payments and other reductions, net		--			(99,244	)
Balance, December 31, 2014		20,635			169,098

Additions		(116	)		17,750
Accretable yield adjustments		6,593			--
Accretion		(21,038	)		21,038
Payments and other reductions, net		(5,120	)		(184,417	)
Balance, December 31, 2015		954			23,469

Additions		19			757
Accretable yield adjustments		5,122			--
Accretion		(4,440	)		4,440
Payments and other reductions, net					(10,864	)
Balance, December 31, 2016	$	1,655		$	17,802

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company, previously covered by loss share agreements, were determined to have experienced impairment in the estimated credit quality or cash flows during

2014,

the Company recorded a provision to establish a

$954,000

allowance for loan losses for covered purchased impaired loans. During

2015,

the Company recorded a provision totaling

$736,000

to cover impairment in the estimated credit quality of acquired loans, not covered by loss share. Non-covered loans were subsequently charged-off and the allowance was used during

2015.

Because of the termination of the loss share agreements, the allowance for previously covered loans was reclassified to allowance for acquired non-covered loans, resulting in a total allowance on acquired non-covered loans of

$954,000

December

31,

2016

and

2015.

The purchase and assumption agreements for the FDIC-assisted acquisitions allowed for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses failed to reach the expected loss level under a claw back provision (“true-up provision”). The amount of the true-up provision for each acquisition was measured and recorded at Day

fair values. It was calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement, then discounted back to net present value.

101

Under the terms of the loss share termination agreement, the FDIC made a net payment of

$2.4

million to the bank as consideration for early termination. The early termination was recorded in the Company’s financial statements by removing the FDIC indemnification asset, receivable from FDIC, the FDIC true-up provision and recording a

one

-time, pre-tax charge of

$7.5

million.

The following table presents a summary of the changes in the FDIC true-up provision for years ended

December

31,

2015

and

2014,

which was included in other assets on the balance sheet. Due to the termination of the FDIC agreements in

September

2015

there was

amortization expense recorded for the year ended

December

31,

2016.

(in thousands)	FDIC True-up Provision

Balance, January 1, 2014	$	6,768
Amortization expense		168
Adjustments related to changes in expected losses		1,372
Balance, December 31, 2014		8,308

Amortization expense		107
Adjustments related to changes in expected losses		720
Loss share termination agreement		(9,135	)
Balance, December 31, 2015	$	--