Allowance for Loan and Lease Losses ("ALLL") and Credit Quality Indicators | 5. Allowance for Loan and Lease Losses (“ALLL”) and Credit Quality Indicators Allowance for Loan and Lease Losses The following table is a summary of activity within the ALLL for the periods indicated. Three Months Ended June 30, Six Months Ended June 30, 2016 2015 2016 2015 (Dollars in thousands) Beginning balance $ 61,760 $ 54,147 $ 60,854 $ 52,918 Non-purchased loans and leases charged off (1,218 ) (1,496 ) (2,565 ) (5,575 ) Recoveries of non-purchased loans and leases previously charged off 191 198 444 506 Net non-purchased loans and leases charged off (1,027 ) (1,298 ) (2,121 ) (5,069 ) Purchased loans charged off (470 ) (702 ) (535 ) (2,115 ) Recoveries of purchased loans previously charged off 36 294 84 392 Net purchased loans charged off (434 ) (408 ) (451 ) (1,723 ) Net charge-offs - total loans and leases (1,461 ) (1,706 ) (2,572 ) (6,792 ) Provision for loan and lease losses: Non-purchased loans and leases 4,400 3,900 6,400 8,900 Purchased loans 434 408 451 1,723 Total provision 4,834 4,308 6,851 10,623 Ending balance $ 65,133 $ 56,749 $ 65,133 $ 56,749 ALLL allocated to non-purchased loans and leases $ 63,933 $ 56,749 $ 63,933 $ 56,749 ALLL allocated to purchased loans 1,200 — 1,200 — Total ALLL $ 65,133 $ 56,749 $ 65,133 $ 56,749 The following tables are a summary of the Company’s ALLL for the periods indicated. Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Three months ended June 30, 2016: Real estate: Residential 1-4 family $ 9,429 $ (13 ) $ 13 $ 670 $ 10,099 Non-farm/non-residential 18,761 — — 357 19,118 Construction/land development 15,259 — 49 2,188 17,496 Agricultural 3,684 — — 71 3,755 Multifamily residential 3,914 — 14 (267 ) 3,661 Commercial and industrial 3,399 (31 ) 6 416 3,790 Consumer 707 (35 ) 2 38 712 Direct financing leases 4,235 (808 ) 5 660 4,092 Other 1,172 (331 ) 102 267 1,210 Purchased loans 1,200 (470 ) 36 434 1,200 Total $ 61,760 $ (1,688 ) $ 227 $ 4,834 $ 65,133 Six months ended June 30, 2016: Real estate: Residential 1-4 family $ 8,672 $ (256 ) $ 37 $ 1,646 $ 10,099 Non-farm/non-residential 16,796 (12 ) — 2,334 19,118 Construction/land development 18,176 (20 ) 51 (711 ) 17,496 Agricultural 3,388 (7 ) — 374 3,755 Multifamily residential 3,031 — 14 616 3,661 Commercial and industrial 2,574 (42 ) 39 1,219 3,790 Consumer 707 (68 ) 14 59 712 Direct financing leases 3,835 (1,468 ) 16 1,709 4,092 Other 2,475 (692 ) 273 (846 ) 1,210 Purchased loans 1,200 (535 ) 84 451 1,200 Total $ 60,854 $ (3,100 ) $ 528 $ 6,851 $ 65,133 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Three months ended June 30, 2015: Real estate: Residential 1-4 family $ 5,657 $ (92 ) $ 10 $ 26 $ 5,601 Non-farm/non-residential 17,766 (119 ) 5 580 18,232 Construction/land development 17,580 (469 ) — 2,037 19,148 Agricultural 2,526 — — (66 ) 2,460 Multifamily residential 2,423 (208 ) — 671 2,886 Commercial and industrial 3,301 (93 ) 23 18 3,249 Consumer 824 (24 ) 21 4 825 Direct financing leases 3,258 (155 ) 7 444 3,554 Other 812 (336 ) 132 186 794 Purchased loans — (702 ) 294 408 — Total $ 54,147 $ (2,198 ) $ 492 $ 4,308 $ 56,749 Six months ended June 30, 2015: Real estate: Residential 1-4 family $ 5,482 $ (621 ) $ 21 $ 719 $ 5,601 Non-farm/non-residential 17,190 (324 ) 17 1,349 18,232 Construction/land development 15,960 (771 ) 37 3,922 19,148 Agricultural 2,558 (13 ) — (85 ) 2,460 Multifamily residential 2,147 (208 ) — 947 2,886 Commercial and industrial 4,873 (2,540 ) 39 877 3,249 Consumer 818 (69 ) 42 34 825 Direct financing leases 2,989 (341 ) 13 893 3,554 Other 901 (688 ) 337 244 794 Purchased loans — (2,115 ) 392 1,723 — Total $ 52,918 $ (7,690 ) $ 898 $ 10,623 $ 56,749 The following table is a summary of the Company’s ALLL for non-purchased loans and leases and recorded investment in non-purchased loans and leases as of the dates indicated. ALLL for Non-Purchased Loans and Leases Non-Purchased Loans and Leases ALLL for Individually Evaluated Impaired Loans and Leases ALLL for All Other Loans and Leases Total ALLL (1) Individually Evaluated Impaired Loans and Leases All Other Loans and Leases Total Loans and Leases (Dollars in thousands) June 30, 2016: Real estate: Residential 1-4 family $ 267 $ 9,832 $ 10,099 $ 2,092 $ 406,142 $ 408,234 Non-farm/non-residential 21 19,097 19,118 1,033 2,619,419 2,620,452 Construction/land development 46 17,450 17,496 280 3,600,475 3,600,755 Agricultural 468 3,287 3,755 1,328 88,979 90,307 Multifamily residential — 3,661 3,661 — 591,792 591,792 Commercial and industrial 508 3,282 3,790 709 254,003 254,712 Consumer 5 707 712 45 28,492 28,537 Direct financing leases — 4,092 4,092 — 133,775 133,775 Other — 1,210 1,210 6 486,330 486,336 Total $ 1,315 $ 62,618 $ 63,933 $ 5,493 $ 8,209,407 $ 8,214,900 December 31, 2015: Real estate: Residential 1-4 family $ 297 $ 8,375 $ 8,672 $ 2,030 $ 348,224 $ 350,254 Non-farm/non-residential 31 16,765 16,796 940 2,009,926 2,010,866 Construction/land development 48 18,128 18,176 5,556 2,820,019 2,825,575 Agricultural 475 2,913 3,388 1,313 73,127 74,440 Multifamily residential — 3,031 3,031 83 440,745 440,828 Commercial and industrial 487 2,087 2,574 714 230,567 231,281 Consumer 2 705 707 24 27,721 27,745 Direct financing leases — 3,835 3,835 — 147,735 147,735 Other — 2,475 2,475 7 419,903 419,910 Total $ 1,340 $ 58,314 $ 59,654 $ 10,667 $ 6,517,967 $ 6,528,634 (1) The following table is a summary of impaired non-purchased loans and leases as of and for the three and six months ended June 30, 2016. Principal Balance Net Charge-offs to Date Principal Balance, Net of Charge-offs Specific ALLL Weighted Average Carrying Value – Three Months Ended June 30, 2016 Weighted Average Carrying Value – Six Months Ended June 30, 2016 (Dollars in thousands) Impaired loans and leases for which there is a related ALLL: Real estate: Residential 1-4 family $ 2,766 $ (1,763 ) $ 1,003 $ 267 $ 1,256 $ 1,207 Non-farm/non-residential 1,087 (914 ) 173 21 113 93 Construction/land development 118 — 118 46 119 120 Agricultural 1,145 — 1,145 468 1,147 1,149 Commercial and industrial 829 (321 ) 508 508 514 511 Consumer 49 (15 ) 34 5 22 18 Total impaired loans and leases with a related ALLL 5,994 (3,013 ) 2,981 1,315 3,171 3,098 Impaired loans and leases for which there is not a related ALLL: Real estate: Residential 1-4 family 1,568 (479 ) 1,089 — 981 961 Non-farm/non-residential 1,058 (198 ) 860 — 861 869 Construction/land development 925 (763 ) 162 — 1,926 3,096 Agricultural 392 (209 ) 183 — 183 175 Multifamily residential 133 (133 ) — — 41 55 Commercial and industrial 251 (50 ) 201 — 201 204 Consumer 16 (5 ) 11 — 11 11 Other 6 — 6 — 6 7 Total impaired loans and leases without a related ALLL 4,349 (1,837 ) 2,512 — 4,210 5,378 Total impaired non-purchased loans and leases $ 10,343 $ (4,850 ) $ 5,493 $ 1,315 $ 7,381 $ 8,476 The following table is a summary of impaired non-purchased loans and leases as of and for the year ended December 31, 2015. Principal Balance Net Charge-offs to Date Principal Balance, Net of Charge-offs Specific ALLL Weighted Average Carrying Value – Year Ended December 31, 2015 (Dollars in thousands) Impaired loans and leases for which there is a related ALLL: Real estate: Residential 1-4 family $ 2,914 $ (1,804 ) $ 1,110 $ 297 $ 1,279 Non-farm/non-residential 962 (907 ) 55 31 129 Construction/land development 121 — 121 48 896 Agricultural 1,153 — 1,153 475 479 Commercial and industrial 825 (322 ) 503 487 404 Consumer 26 (15 ) 11 2 16 Total impaired loans and leases with a related ALLL 6,001 (3,048 ) 2,953 1,340 3,203 Impaired loans and leases for which there is not a related ALLL: Real estate: Residential 1-4 family 1,306 (386 ) 920 — 955 Non-farm/non-residential 1,083 (198 ) 885 — 1,137 Construction/land development 7,873 (2,438 ) 5,435 — 8,255 Agricultural 362 (202 ) 160 — 261 Multifamily residential 216 (133 ) 83 — 155 Commercial and industrial 261 (50 ) 211 — 141 Consumer 18 (5 ) 13 — 14 Other 7 — 7 — 7 Total impaired loans and leases without a related ALLL 11,126 (3,412 ) 7,714 — 10,925 Total impaired non-purchased loans and leases $ 17,127 $ (6,460 ) $ 10,667 $ 1,340 $ 14,128 Management has determined that certain of the Company’s impaired non-purchased loans and leases do not require any specific allowance at June 30, 2016 or at December 31, 2015 because (i) management’s analysis of such individual loans and leases resulted in no impairment or (ii) all identified impairment on such loans and leases had previously been charged off. Interest income on impaired non-purchased loans and leases is recognized on a cash basis when and if actually collected. Total interest income recognized on impaired non-purchased loans and leases for the three and six months ended June 30, 2016 and 2015 was not material. Credit Quality Indicators Non-Purchased Loans and Leases The following table is a summary of credit quality indicators for the Company’s non-purchased loans and leases as of the dates indicated. Satisfactory Moderate Watch Substandard Total (Dollars in thousands) June 30, 2016: Real estate: Residential 1-4 family (1) $ 399,027 $ — $ 4,095 $ 5,112 $ 408,234 Non-farm/non-residential 2,270,225 265,385 79,323 5,519 2,620,452 Construction/land development 3,302,321 286,631 10,362 1,441 3,600,755 Agricultural 51,010 28,270 9,362 1,665 90,307 Multifamily residential 542,211 46,668 1,857 1,056 591,792 Commercial and industrial 165,438 84,965 3,017 1,292 254,712 Consumer (1) 28,101 — 221 215 28,537 Direct financing leases 132,887 170 160 558 133,775 Other (1) 480,365 5,650 207 114 486,336 Total $ 7,371,585 $ 717,739 $ 108,604 $ 16,972 $ 8,214,900 December 31, 2015: Real estate: Residential 1-4 family (1) $ 342,083 $ — $ 2,946 $ 5,225 $ 350,254 Non-farm/non-residential 1,692,632 235,999 73,788 8,447 2,010,866 Construction/land development 2,553,368 256,655 8,916 6,636 2,825,575 Agricultural 40,538 22,799 8,909 2,194 74,440 Multifamily residential 400,848 35,080 4,079 821 440,828 Commercial and industrial 179,797 47,802 1,854 1,828 231,281 Consumer (1) 27,219 — 276 250 27,745 Direct financing leases 146,934 201 190 410 147,735 Other (1) 415,686 4,027 182 15 419,910 Total $ 5,799,105 $ 602,563 $ 101,140 $ 25,826 $ 6,528,634 (1) The Company does not risk rate its residential 1-4 family loans, its consumer loans, and certain “other” loans. However, for purposes of the above table, the Company considers such loans to be (i) satisfactory – if they are performing and less than 30 days past due, (ii) watch – if they are performing and 30 to 89 days past due or (iii) substandard – if they are nonperforming or 90 days or more past due. The following categories of credit quality indicators are used by the Company. Satisfactory Moderate Watch Substandard The following table is an aging analysis of past due non-purchased loans and leases as of the dates indicated. 30-89 Days Past Due (1) 90 Days or More (2) Total Past Due Current (3) Total (Dollars in thousands) June 30, 2016: Real estate: Residential 1-4 family $ 4,677 $ 1,585 $ 6,262 $ 401,972 $ 408,234 Non-farm/non-residential 2,258 1,145 3,403 2,617,049 2,620,452 Construction/land development 3,531 224 3,755 3,597,000 3,600,755 Agricultural 1,372 183 1,555 88,752 90,307 Multifamily residential 736 — 736 591,056 591,792 Commercial and industrial 309 740 1,049 253,663 254,712 Consumer 219 22 241 28,296 28,537 Direct financing leases 419 492 911 132,864 133,775 Other — 108 108 486,228 486,336 Total $ 13,521 $ 4,499 $ 18,020 $ 8,196,880 $ 8,214,900 December 31, 2015: Real estate: Residential 1-4 family $ 2,793 $ 1,507 $ 4,300 $ 345,954 $ 350,254 Non-farm/non-residential 1,881 777 2,658 2,008,208 2,010,866 Construction/land development 1,043 5,645 6,688 2,818,887 2,825,575 Agricultural 1,780 243 2,023 72,417 74,440 Multifamily residential — 83 83 440,745 440,828 Commercial and industrial 823 751 1,574 229,707 231,281 Consumer 248 33 281 27,464 27,745 Direct financing leases 517 321 838 146,897 147,735 Other 8 7 15 419,895 419,910 Total $ 9,093 $ 9,367 $ 18,460 $ 6,510,174 $ 6,528,634 (1) Includes $1.4 million and $1.9 million at June 30, 2016 and December 31, 2015, respectively, of loans and leases on nonaccrual status. (2) All loans and leases greater than 90 days past due were on nonaccrual status at June 30, 2016 and December 31, 2015. (3) Includes $1.9 million and $2.3 million of loans and leases on nonaccrual status at June 30, 2016 and December 31, 2015, respectively. Purchased Loans As of June 30, 2016, the Company had identified purchased loans where it had determined it was probable that the Company would be unable to collect all amounts according to the contractual terms thereof (for purchased loans without evidence of credit deterioration at date of acquisition) or the expected performance of such loans had deteriorated from its performance expectations established in conjunction with the determination of the Day 1 Fair Values or since its most recent review of such portfolio’s performance (for purchased loans with evidence of credit deterioration at date of acquisition). At June 30, 2016, the Company had $6.4 million of impaired purchased loans compared to $8.1 million at December 31, 2015. The following table is a summary of credit quality indicators for the Company’s purchased loans as of the dates indicated. Purchased Loans Without Evidence of Credit Deterioration at Acquisition Purchased Loans With Evidence of Credit Deterioration at Acquisition Total Purchased FV 33 FV 44 FV 55 FV 36 FV 77 FV 66 FV 88 Loans (Dollars in thousands) June 30, 2016: Real estate: Residential 1-4 family $ 53,349 $ 88,447 $ 33,412 $ 73,753 $ 72 $ 68,805 $ 1,516 $ 319,354 Non-farm/non-residential 181,990 615,083 111,291 3,926 422 81,111 4,149 997,972 Construction/land development 11,660 9,356 5,960 3,366 22 6,822 88 37,274 Agricultural 3,353 4,889 999 472 — 3,522 — 13,235 Multifamily residential 16,641 59,309 24,998 824 13 2,661 — 104,446 Commercial and industrial 6,803 10,287 7,077 3,560 25 5,693 72 33,517 Consumer 551 125 29 3,757 — 200 — 4,662 Other 3,051 838 143 93 8 511 — 4,644 Total $ 277,398 $ 788,334 $ 183,909 $ 89,751 $ 562 $ 169,325 $ 5,825 $ 1,515,104 December 31, 2015: Real estate: Residential 1-4 family $ 59,497 $ 117,498 $ 38,888 $ 85,684 $ 351 $ 82,862 $ 2,172 $ 386,952 Non-farm/non-residential 209,542 693,707 122,652 5,039 363 99,681 4,563 1,135,547 Construction/land development 13,121 12,511 7,137 4,771 22 10,224 37 47,823 Agricultural 4,825 7,963 1,456 797 — 4,877 — 19,918 Multifamily residential 20,347 86,588 27,818 896 13 3,835 — 139,497 Commercial and industrial 8,912 29,001 9,244 5,649 20 7,185 511 60,522 Consumer 726 205 185 6,106 2 263 — 7,487 Other 3,944 3,316 212 243 — 576 — 8,291 Total $ 320,914 $ 950,789 $ 207,592 $ 109,185 $ 771 $ 209,503 $ 7,283 $ 1,806,037 The following grades are used for purchased loans without evidence of credit deterioration at the date of acquisition. FV 33 FV 44 FV 55 FV 36 FV 77 The following grades are used for purchased loans with evidence of credit deterioration at the date of acquisition. FV 66 FV 88 The following table is an aging analysis of past due purchased loans as of the dates indicated. 30-89 Days Past Due 90 Days or More Total Past Due Current Total Purchased Loans (Dollars in thousands) June 30, 2016: Real estate: Residential 1-4 family $ 6,492 $ 5,094 $ 11,586 $ 307,768 $ 319,354 Non-farm/non-residential 1,578 5,931 7,509 990,463 997,972 Construction/land development 412 816 1,228 36,046 37,274 Agriculture 130 353 483 12,752 13,235 Multifamily residential — 13 13 104,433 104,446 Commercial and industrial 661 1,084 1,745 31,772 33,517 Consumer 52 29 81 4,581 4,662 Other — — — 4,644 4,644 Total $ 9,325 $ 13,320 $ 22,645 $ 1,492,459 $ 1,515,104 Purchased loans without evidence of credit deterioration at date of acquisition $ 4,246 $ 3,193 $ 7,439 $ 1,332,515 $ 1,339,954 Purchased loans with evidence of credit deterioration at date of acquisition 5,079 10,127 15,206 159,944 175,150 Total $ 9,325 $ 13,320 $ 22,645 $ 1,492,459 $ 1,515,104 December 31, 2015: Real estate: Residential 1-4 family $ 9,042 $ 6,293 $ 15,335 $ 371,617 $ 386,952 Non-farm/non-residential 3,435 6,837 10,272 1,125,275 1,135,547 Construction/land development 919 1,255 2,174 45,649 47,823 Agriculture 106 356 462 19,456 19,918 Multifamily residential 299 — 299 139,198 139,497 Commercial and industrial 714 924 1,638 58,884 60,522 Consumer 101 41 142 7,345 7,487 Other 10 11 21 8,270 8,291 Total $ 14,626 $ 15,717 $ 30,343 $ 1,775,694 $ 1,806,037 Purchased loans without evidence of credit deterioration at date of acquisition $ 7,972 $ 2,743 $ 10,715 $ 1,578,536 $ 1,589,251 Purchased loans with evidence of credit deterioration at date of acquisition 6,654 12,974 19,628 197,158 216,786 Total $ 14,626 $ 15,717 $ 30,343 $ 1,775,694 $ 1,806,037 At June 30, 2016 and December 31, 2015, a portion of the Company’s purchased loans with evidence of credit deterioration at the date of acquisition were past due, including many that were 90 days or more past due. Such delinquencies were included in the Company’s performance expectations in determining the Day 1 Fair Values. Additionally, in accordance with GAAP, the Company continues to accrete into earnings income on such loans. |