LOANS ACQUIRED

During the fourth quarter of 2017, the Company evaluated $1.985 billion of net loans ($2.021 billion gross loans less $36.3 million discount) purchased in conjunction with the acquisition of OKSB, described in Note 2, 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 $11.4 million of net loans ($18.1 million gross loans less $6.7 million discount) purchased in conjunction with the acquisition of OKSB 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.

Also during the fourth quarter of 2017, the Company evaluated $2.208 billion of net loans ($2.246 billion gross loans less $37.8 million discount) purchased in conjunction with the acquisition of First Texas, described in Note 2, 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.

During the second quarter of 2017, the Company evaluated $249.2 million of net loans ($254.2 million gross loans less $5.0 million discount) purchased in conjunction with the acquisition of Hardeman, described in Note 2, 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 $2.4 million of net loans ($3.4 million gross loans less $990,000 discount) purchased in conjunction with the acquisition of Hardeman for impairment in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.

See Note 2, Acquisitions, for further discussion of loans acquired.

The following table reflects the carrying value of all loans acquired as of June 30, 2018 and December 31, 2017:



	Loans Acquired
(In thousands)	June 30, 2018		December 31, 2017
Consumer:
Other consumer	$	31,651	$	51,467
Real estate:
Construction	521,321		637,032
Single family residential	671,602		793,228
Other commercial	2,240,578		2,387,777
Total real estate	3,433,501		3,818,037
Commercial:
Commercial	764,473		995,587
Agricultural	2,809		66,576
Total commercial	767,282		1,062,163
Other	—		142,409
Total loans acquired ⁽¹⁾	$	4,232,434	$	5,074,076

_____________________________________________________________________________________


(1)	Loans acquired are reported net of a $2,044,000 and $418,000 allowance at June 30, 2018 and December 31, 2017, respectively.

Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 5, Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):



(In thousands)	June 30, 2018		December 31, 2017

Consumer:
Other consumer	$	362	$	334
Real estate:
Construction	258		1,767
Single family residential	8,784		12,151
Other commercial	22,944		7,401
Total real estate	31,986		21,319
Commercial:
Commercial	4,680		1,748
Agricultural	32		84
Total commercial	4,712		1,832
Total	$	37,060	$	23,485

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note 5, Loans and 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

June 30, 2018
Consumer:
Other consumer	$	347	$	249	$	596	$	31,055	$	31,651	$	—
Real estate:
Construction	645		1,020		1,665		519,656		521,321		—
Single family residential	3,576		7,410		10,986		660,616		671,602		1,165
Other commercial	4,801		18,947		23,748		2,216,830		2,240,578		—
Total real estate	9,022		27,377		36,399		3,397,102		3,433,501		1,165
Commercial:
Commercial	3,675		7,966		11,641		752,832		764,473		762
Agricultural	35		—		35		2,774		2,809		—
Total commercial	3,710		7,966		11,676		755,606		767,282		762

Total	$	13,079	$	35,592	$	48,671	$	4,183,763	$	4,232,434	$	1,927

December 31, 2017
Consumer:
Other consumer	$	889	$	260	$	1,149	$	50,318	$	51,467	$	108
Real estate:
Construction	2,577		1,448		4,025		633,007		637,032		279
Single family residential	12,936		3,302		16,238		776,990		793,228		126
Other commercial	17,176		5,647		22,823		2,364,954		2,387,777		2,565
Total real estate	32,689		10,397		43,086		3,774,951		3,818,037		2,970
Commercial:
Commercial	2,344		1,039		3,383		992,204		995,587		67
Agricultural	51		—		51		66,525		66,576		—
Total commercial	2,395		1,039		3,434		1,058,729		1,062,163		67

Other	15		—		15		142,394		142,409		—
Total	$	35,988	$	11,696	$	47,684	$	5,026,392	$	5,074,076	$	3,145

The following table presents a summary of loans acquired by credit risk rating, segregated by class of loans (see Note 5, Loans and Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.



(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total

June 30, 2018
Consumer:
Other consumer	$	30,912	$	10	$	729	$	—	$	—	$	31,651
Real estate:
Construction	500,741		19,624		956		—		—		521,321
Single family residential	653,816		1,962		15,451		373		—		671,602
Other commercial	2,190,767		11,345		38,466		—		—		2,240,578
Total real estate	3,345,324		32,931		54,873		373		—		3,433,501
Commercial:
Commercial	717,441		19,044		27,988		—		—		764,473
Agricultural	2,742		—		67		—		—		2,809
Total commercial	720,183		19,044		28,055		—		—		767,282

Total	$	4,096,419	$	51,985	$	83,657	$	373	$	—	$	4,232,434

December 31, 2017
Consumer:
Other consumer	$	50,625	$	21	$	821	$	—	$	—	$	51,467
Real estate:
Construction	604,796		30,524		1,712		—		—		637,032
Single family residential	770,954		2,618		19,656		—		—		793,228
Other commercial	2,337,097		15,064		35,616		—		—		2,387,777
Total real estate	3,712,847		48,206		56,984		—		—		3,818,037
Commercial:
Commercial	946,322		13,901		35,364		—		—		995,587
Agricultural	66,367		—		209		—		—		66,576
Total commercial	1,012,689		13,901		35,573		—		—		1,062,163

Other	142,409		—		—		—		—		142,409
Total	$	4,918,570	$	62,128	$	93,378	$	—	$	—	$	5,074,076

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.

In addition to the accretable yield on loans acquired not considered to be impaired, 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 or may not be required. This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans.

The impact of these adjustments on the Company’s financial results for the three and six months ended June 30, 2018 and 2017 is shown below:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2018		2017		2018		2017

Impact on net interest income and pre-tax income	$	26	$	1,388	$	476	$	2,572

Impact, net of taxes	$	19	$	844	$	350	$	1,563

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 three and six months ended June 30, 2018 and 2017.



	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,369		$	17,605		$	620		$	17,116
Additions	—			—			—			—
Accretable yield adjustments	44			—			1,178			—
Accretion	(31		)	31			(416		)	416
Payments and other reductions, net	—			(3,641		)	—			(3,537		)
Balance, ending	$	1,382		$	13,995		$	1,382		$	13,995



	Three Months Ended June 30, 2017						Six Months Ended June 30, 2017
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,217		$	8,695		$	1,655		$	17,802
Additions	—			2,388			—			2,388
Accretable yield adjustments	1,418			—			2,646			—
Accretion	(1,869		)	1,869			(3,535		)	3,535
Payments and other reductions, net	—			(4,504		)	—			(15,277		)
Balance, ending	$	766		$	8,448		$	766		$	8,448

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan loss for loans acquired resulting in a total allowance on loans acquired of $2,044,000 at June 30, 2018 and $418,000 at December 31, 2017. The provision on loans acquired for the three and six months ended June 30, 2018 was $1,769,000 and $1,837,000, respectively. The provision on loans acquired for the three and six months ended June 30, 2017 was $714,000 and $1,464,000, respectively.