Allowance for Loan and Lease Losses ("ALLL") and Credit Quality Indicators | 6. 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 September 30, Nine Months Ended September 30, 2016 2015 2016 2015 (Dollars in thousands) Beginning balance $ 65,133 $ 56,749 $ 60,854 $ 52,918 Charge-offs of non-purchased loans and leases (1,791 ) (992 ) (4,356 ) (6,567 ) Recoveries of non-purchased loans and leases previously charged off 418 360 862 866 Net charge-offs – non-purchased loans and leases (1,373 ) (632 ) (3,494 ) (5,701 ) Chrage-offs of purchased loans (1,197 ) (829 ) (1,732 ) (2,945 ) Recoveries of purchased loans previously charged off 111 148 195 540 Net charge-offs – purchased loans (1,086 ) (681 ) (1,537 ) (2,405 ) Net charge-offs – total loans and leases (2,459 ) (1,313 ) (5,031 ) (8,106 ) Provision for loan and lease losses: Non-purchased loans and leases 5,600 2,900 12,000 11,800 Purchased loans 1,486 681 1,937 2,405 Total provision 7,086 3,581 13,937 14,205 Ending balance $ 69,760 $ 59,017 $ 69,760 $ 59,017 ALLL allocated to non-purchased loans and leases $ 68,160 $ 59,017 $ 68,160 $ 59,017 ALLL allocated to purchased loans 1,600 — 1,600 — Total ALLL $ 69,760 $ 59,017 $ 69,760 $ 59,017 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 September 30, 2016: Non-purchased loans and leases: Real estate: Residential 1-4 family $ 10,099 $ (94 ) $ 6 $ 312 $ 10,323 Non-farm/non-residential 19,118 (236 ) — 754 19,636 Construction/land development 17,496 (22 ) 2 2,582 20,058 Agricultural 3,755 — — (373 ) 3,382 Multifamily residential 3,661 — — (12 ) 3,649 Commercial and industrial 3,790 (45 ) 13 182 3,940 Consumer 712 (19 ) 1 870 1,564 Direct financing leases 4,092 (795 ) 4 842 4,143 Other 1,210 (580 ) 392 443 1,465 Total non-purchased loans and leases 63,933 (1,791 ) 418 5,600 68,160 Purchased loans 1,200 (1,197 ) 111 1,486 1,600 Total loans and leases $ 65,133 $ (2,988 ) $ 529 $ 7,086 $ 69,760 Nine months ended September 30, 2016: Non-purchased loans and leases: Real estate: Residential 1-4 family $ 8,672 $ (350 ) $ 43 $ 1,958 $ 10,323 Non-farm/non-residential 16,796 (248 ) — 3,088 19,636 Construction/land development 18,176 (42 ) 53 1,871 20,058 Agricultural 3,388 (7 ) — 1 3,382 Multifamily residential 3,031 — 14 604 3,649 Commercial and industrial 2,574 (87 ) 52 1,401 3,940 Consumer 707 (87 ) 15 929 1,564 Direct financing leases 3,835 (2,263 ) 20 2,551 4,143 Other 2,475 (1,272 ) 665 (403 ) 1,465 Total non-purchased loans and leases 59,654 (4,356 ) 862 12,000 68,160 Purchased loans 1,200 (1,732 ) 195 1,937 1,600 Total loans and leases $ 60,854 $ (6,088 ) $ 1,057 $ 13,937 $ 69,760 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Three months ended September 30, 2015: Non-purchased loans and leases: Real estate: Residential 1-4 family $ 5,601 $ (121 ) $ 37 $ 92 $ 5,609 Non-farm/non-residential 18,232 (6 ) 1 (144 ) 18,083 Construction/land development 19,148 (38 ) 40 1,997 21,147 Agricultural 2,460 — — 12 2,472 Multifamily residential 2,886 (20 ) — 42 2,908 Commercial and industrial 3,249 (132 ) 149 (106 ) 3,160 Consumer 825 (11 ) 5 34 853 Direct financing leases 3,554 (222 ) 7 522 3,861 Other 794 (442 ) 121 451 924 Total non-purchased loans and leases 56,749 (992 ) 360 2,900 59,017 Purchased loans — (829 ) 148 681 — Total loans and leases $ 56,749 $ (1,821 ) $ 508 $ 3,581 $ 59,017 Nine months ended September 30, 2015: Non-purchased loans and leases: Real estate: Residential 1-4 family $ 5,482 $ (742 ) $ 58 $ 811 $ 5,609 Non-farm/non-residential 17,190 (330 ) 18 1,205 18,083 Construction/land development 15,960 (809 ) 77 5,919 21,147 Agricultural 2,558 (13 ) — (73 ) 2,472 Multifamily residential 2,147 (228 ) — 989 2,908 Commercial and industrial 4,873 (2,672 ) 188 771 3,160 Consumer 818 (80 ) 47 68 853 Direct financing leases 2,989 (563 ) 20 1,415 3,861 Other 901 (1,130 ) 458 695 924 Total non-purchased loans and leases 52,918 (6,567 ) 866 11,800 59,017 Purchased loans — (2,945 ) 540 2,405 — Total loans and leases $ 52,918 $ (9,512 ) $ 1,406 $ 14,205 $ 59,017 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) September 30, 2016: Real estate: Residential 1-4 family $ 32 $ 10,291 $ 10,323 $ 1,006 $ 429,538 $ 430,544 Non-farm/non-residential 4 19,632 19,636 1,562 2,393,280 2,394,842 Construction/land development 73 19,985 20,058 435 4,201,430 4,201,865 Agricultural 404 2,978 3,382 1,265 90,164 91,429 Multifamily residential — 3,649 3,649 — 518,702 518,702 Commercial and industrial 513 3,427 3,940 683 255,422 256,105 Consumer 3 1,561 1,564 23 114,968 114,991 Direct financing leases — 4,143 4,143 — 131,646 131,646 Other — 1,465 1,465 6 619,636 619,642 Total $ 1,029 $ 67,131 $ 68,160 $ 4,980 $ 8,754,786 $ 8,759,766 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) Excludes $1.6 million and $1.2 million of ALLL allocated to the Company’s purchased loans at September 30, 2016 and December 31, 2015, respectively. The following table is a summary of impaired non-purchased loans and leases as of and for the three months and nine months ended September 30, 2016. Principal Balance Net Charge-offs to Date Principal Balance, Net of Charge-offs Specific ALLL Weighted Average Carrying Value – Three Months Ended September 30, 2016 Weighted Average Carrying Value – Nine Months Ended September 30, 2016 (Dollars in thousands) Impaired loans and leases for which there is a related ALLL: Real estate: Residential 1-4 family $ 348 $ (215 ) $ 133 $ 32 $ 568 $ 939 Non-farm/non-residential 928 (924 ) 4 4 89 71 Construction/land development 130 — 130 73 124 122 Agricultural 1,081 — 1,081 404 1,113 1,132 Commercial and industrial 838 (325 ) 513 513 510 511 Consumer 17 (4 ) 13 3 23 17 Total impaired loans and leases with a related ALLL 3,342 (1,468 ) 1,874 1,029 2,427 2,792 Impaired loans and leases for which there is not a related ALLL: Real estate: Residential 1-4 family 1,312 (439 ) 873 — 981 939 Non-farm/non-residential 2,021 (463 ) 1,558 — 1,209 1,042 Construction/land development 1,115 (810 ) 305 — 234 2,398 Agricultural 393 (209 ) 184 — 183 177 Multifamily residential 133 (133 ) — — — 41 Commercial and industrial 220 (50 ) 170 — 185 196 Consumer 15 (5 ) 10 — 10 11 Other 6 — 6 — 6 6 Total impaired loans and leases without a related ALLL 5,215 (2,109 ) 3,106 — 2,808 4,810 Total impaired non-purchased loans and leases $ 8,557 $ (3,577 ) $ 4,980 $ 1,029 $ 5,235 $ 7,602 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 September 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 nine months ended September 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) September 30, 2016: Real estate: Residential 1-4 family (1) $ 423,398 $ — $ 3,226 $ 3,920 $ 430,544 Non-farm/non-residential 2,069,077 272,746 47,063 5,956 2,394,842 Construction/land development 3,875,564 315,893 9,051 1,357 4,201,865 Agricultural 48,128 31,768 9,328 2,205 91,429 Multifamily residential 469,810 45,077 2,771 1,044 518,702 Commercial and industrial 161,387 87,302 6,305 1,111 256,105 Consumer (1) 114,617 — 120 254 114,991 Direct financing leases 130,560 56 234 796 131,646 Other (1) 613,799 5,610 222 11 619,642 Total $ 7,906,340 $ 758,452 $ 78,320 $ 16,654 $ 8,759,766 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) September 30, 2016: Real estate: Residential 1-4 family $ 3,330 $ 1,607 $ 4,937 $ 425,607 $ 430,544 Non-farm/non-residential 2,617 1,716 4,333 2,390,509 2,394,842 Construction/land development 2,403 204 2,607 4,199,258 4,201,865 Agricultural 150 228 378 91,051 91,429 Multifamily residential 779 — 779 517,923 518,702 Commercial and industrial 83 750 833 255,272 256,105 Consumer 125 53 178 114,813 114,991 Direct financing leases 418 659 1,077 130,569 131,646 Other 30 6 36 619,606 619,642 Total $ 9,935 $ 5,223 $ 15,158 $ 8,744,608 $ 8,759,766 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 $0.3 million and $1.9 million at September 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 September 30, 2016 and December 31, 2015. (3) Includes $1.8 million and $2.3 million of loans and leases on nonaccrual status at September 30, 2016 and December 31, 2015, respectively. Purchased Loans As of September 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 September 30, 2016, the Company had $6.0 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) September 30, 2016: Real estate: Residential 1-4 family $ 111,115 $ 410,982 $ 168,343 $ 67,047 $ 235 $ 79,875 $ 1,918 $ 839,515 Non-farm/non-residential 319,635 1,573,456 422,873 3,556 578 133,188 3,108 2,456,394 Construction/land development 106,223 382,823 129,575 3,041 22 12,109 84 633,877 Agricultural 14,856 5,794 3,891 411 — 4,753 — 29,705 Multifamily residential 13,702 236,029 69,283 812 13 10,230 — 330,069 Commercial and industrial 19,865 178,415 14,326 2,687 23 4,917 67 220,300 Consumer 340,537 449,243 82,372 3,015 — 481 — 875,648 Other 5,815 1,908 138 75 — 6,387 — 14,323 Total $ 931,748 $ 3,238,650 $ 890,801 $ 80,644 $ 871 $ 251,940 $ 5,177 $ 5,399,831 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) September 30, 2016: Real estate: Residential 1-4 family $ 10,401 $ 9,857 $ 20,258 $ 819,257 $ 839,515 Non-farm/non-residential 8,542 19,569 28,111 2,428,283 2,456,394 Construction/land development 2,536 870 3,406 630,471 633,877 Agriculture 136 1,022 1,158 28,547 29,705 Multifamily residential 335 160 495 329,574 330,069 Commercial and industrial 1,129 1,373 2,502 217,798 220,300 Consumer 6,360 1,098 7,458 868,190 875,648 Other — — — 14,323 14,323 Total $ 29,439 $ 33,949 $ 63,388 $ 5,336,443 $ 5,399,831 Purchased loans without evidence of credit deterioration at date of acquisition $ 20,257 $ 8,336 $ 28,593 $ 5,114,121 $ 5,142,714 Purchased loans with evidence of credit deterioration at date of acquisition 9,182 25,613 34,795 222,322 257,117 Total $ 29,439 $ 33,949 $ 63,388 $ 5,336,443 $ 5,399,831 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 September 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. |