LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans and Loans Held for Sale

Loans are summarized as follows according to major portfolio segment and specific loan class:



(In thousands)	September 30, 2016		December 31, 2015

Loans held for sale	$	160,287	$	149,880

Commercial:
Commercial and industrial	$	13,542,752	$	13,211,481
Leasing	438,933		441,666
Owner occupied	6,889,674		7,150,028
Municipal	752,960		675,839
Total commercial	21,624,319		21,479,014
Commercial real estate:
Construction and land development	2,147,212		1,841,502
Term	9,302,712		8,514,401
Total commercial real estate	11,449,924		10,355,903
Consumer:
Home equity credit line	2,581,068		2,416,357
1-4 family residential	5,784,583		5,382,099
Construction and other consumer real estate	453,235		385,240
Bankcard and other revolving plans	457,910		443,780
Other	188,681		187,149
Total consumer	9,465,477		8,814,625
Total loans	$	42,539,720	$	40,649,542

Loan balances are presented net of unearned income and fees, which amounted to $149.1 million at September 30, 2016 and $150.3 million at December 31, 2015.

Owner occupied and commercial real estate (“CRE”) loans include unamortized premiums of approximately $21.4 million at September 30, 2016 and $26.2 million at December 31, 2015.

Municipal loans generally include loans to municipalities with the debt service being repaid from general funds or pledged revenues of the municipal entity, or to private commercial entities or 501(c)(3) not-for-profit entities utilizing a pass-through municipal entity to achieve favorable tax treatment.

Land development loans included in the construction and land development loan class were $295.1 million at September 30, 2016 and $288.0 million at December 31, 2015.

Loans with a carrying value of approximately $25.9 billion at September 30, 2016 have been pledged at the Federal Reserve and the Federal Home Loan Bank (“FHLB”) of Des Moines as collateral for current and potential borrowings compared to $19.4 billion at December 31, 2015 at the Federal Reserve and various FHLBs.

We sold loans totaling $413.2 million and $1,003.9 million for the three and nine months ended September 30, 2016, and $434.1 million and $1,070.2 million for the three and nine months ended September 30, 2015, respectively, that were classified as loans held for sale. The sold loans were derecognized from the balance sheet. Loans classified as loans held for sale primarily consist of conforming residential mortgages and the guaranteed portion of SBA loans. Amounts added to loans held for sale during these periods were $386.7 million and $979.3 million for the three and nine months ended September 30, 2016, and $442.4 million and $1,111.0 million for the three and nine months ended September 30, 2015, respectively.

The principal balance of sold loans for which we retain servicing was approximately $1.2 billion at September 30, 2016 and $1.3 billion at December 31, 2015. Income from loans sold, excluding servicing, was $6.2 million and $15.1 million for the three and nine months ended September 30, 2016, and $5.0 million and $13.9 million for the three and nine months ended September 30, 2015, respectively.

Allowance for Credit Losses

The allowance for credit losses (“ACL”) consists of the allowance for loan and lease losses (“ALLL”) (also referred to as the allowance for loan losses) and the reserve for unfunded lending commitments (“RULC”).

Allowance for Loan and Lease Losses

The ALLL represents our estimate of probable and estimable losses inherent in the loan and lease portfolio as of the balance sheet date. Losses are charged to the ALLL when recognized. Generally, commercial and CRE loans are charged off or charged down when they are determined to be uncollectible in whole or in part, or when 180 days past due unless the loan is well secured and in process of collection. Consumer loans are either charged off or charged down to net realizable value no later than the month in which they become 180 days past due. Closed-end consumer loans that are not secured by residential real estate are either charged off or charged down to net realizable value no later than the month in which they become 120 days past due. We establish the amount of the ALLL by analyzing the portfolio at least quarterly, and we adjust the provision for loan losses so the ALLL is at an appropriate level at the balance sheet date.

We determine our ALLL as the best estimate within a range of estimated losses. The methodologies we use to estimate the ALLL depend upon the impairment status and loan portfolio. The methodology for impaired loans is discussed subsequently. For commercial and CRE loans with commitments equal to or greater than $750,000, we assign internal risk grades using a comprehensive loan grading system based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. The credit quality indicators discussed subsequently are based on this grading system. Estimated losses for these commercial and CRE loans are derived from a statistical analysis of our historical default and loss given default (“LGD”) experience over the period of January 2008 through the most recent full quarter.

For consumer and small commercial and CRE loans with commitments less than $750,000, we primarily use roll rate models to forecast probable inherent losses. Roll rate models measure the rate at which these loans migrate from one delinquency category to the next worse delinquency category, and eventually to loss. We estimate roll rates for these loans using recent delinquency and loss experience by segmenting our loan portfolios into separate pools based on common risk characteristics and separately calculating historical delinquency and loss experience for each pool. These roll rates are then applied to current delinquency levels to estimate probable inherent losses.

The current status and historical changes in qualitative and environmental factors may not be reflected in our quantitative models. Thus, after applying historical loss experience, as described above, we review the quantitatively derived level of ALLL for each segment using qualitative criteria and use those criteria to determine our estimate within the range. We track various risk factors that influence our judgment regarding the level of the ALLL across the portfolio segments. These factors primarily include:


•	Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices


•	Changes in international, national, regional, and local economic and business conditions


•	Changes in the nature and volume of the portfolio and in the terms of loans


•	Changes in the experience, ability, and depth of lending management and other relevant staff


•	Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans


•	Changes in the quality of the loan review system


•	Changes in the value of underlying collateral for collateral-dependent loans


•	The existence and effect of any concentration of credit, and changes in the level of such concentrations


•	The effect of other external factors such as competition and legal and regulatory requirements

The magnitude of the impact of these factors on our qualitative assessment of the ALLL changes from quarter to quarter according to changes made by management in its assessment of these factors, the extent these factors are already reflected in historic loss rates, and the extent changes in these factors diverge from one to another. We also consider the uncertainty inherent in the estimation process when evaluating the ALLL.

Reserve for Unfunded Lending Commitments

We also estimate a reserve for potential losses associated with off-balance sheet commitments, including standby letters of credit. We determine the RULC using the same procedures and methodologies that we use for the ALLL. The loss factors used in the RULC are the same as the loss factors used in the ALLL, and the qualitative adjustments used in the RULC are the same as the qualitative adjustments used in the ALLL. We adjust the Company’s unfunded lending commitments that are not unconditionally cancelable to an outstanding amount equivalent using credit conversion factors, and we apply the loss factors to the outstanding equivalents.

Changes in ACL Assumptions

During the first quarter of 2016, due to the consolidation of our separate banking charters, we enhanced our methodology to estimate the ACL on a Company-wide basis. As described previously, for large commercial and CRE loans, we began estimating historic loss factors by separately calculating historic default and LGD rates, instead of directly calculating loss rates for groupings of probability of default and LGD grades using a loss migration approach. For small commercial and CRE loans, we began using roll rate models to estimate probable inherent losses. For consumer loans, we began pooling loans by current loan-to-value, where applicable. The impact of these changes was largely neutral to the total ACL at implementation.

Changes in the allowance for credit losses are summarized as follows:

	Three Months Ended September 30, 2016
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of period	$	457,064		$	121,567		$	29,714		$	608,345
Additions:
Provision for loan losses	22,298			(6,446		)	2,973			18,825
Deductions:
Gross loan and lease charge-offs	(48,032		)	(1,075		)	(4,656		)	(53,763		)
Recoveries	14,724			6,952			2,102			23,778
Net loan and lease (charge-offs) recoveries	(33,308		)	5,877			(2,554		)	(29,985		)
Balance at end of period	$	446,054		$	120,998		$	30,133		$	597,185

Reserve for unfunded lending commitments
Balance at beginning of period	$	53,523		$	11,257		$	—		$	64,780
Provision credited to earnings	(1,903		)	(1,262		)	—			(3,165		)
Balance at end of period	$	51,620		$	9,995		$	—		$	61,615

Total allowance for credit losses at end of period
Allowance for loan losses	$	446,054		$	120,998		$	30,133		$	597,185
Reserve for unfunded lending commitments	51,620			9,995			—			61,615
Total allowance for credit losses	$	497,674		$	130,993		$	30,133		$	658,800



	Nine Months Ended September 30, 2016
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of period	$	454,277		$	113,992		$	37,779		$	606,048
Additions:
Provision for loan losses	93,359			4,876			(2,773		)	95,462
Deductions:
Gross loan and lease charge-offs	(137,897		)	(9,889		)	(11,716		)	(159,502		)
Recoveries	36,315			12,019			6,843			55,177
Net loan and lease (charge-offs) recoveries	(101,582		)	2,130			(4,873		)	(104,325		)
Balance at end of period	$	446,054		$	120,998		$	30,133		$	597,185

Reserve for unfunded lending commitments
Balance at beginning of period	$	57,696		$	16,526		$	616		$	74,838
Provision credited to earnings	(6,076		)	(6,531		)	(616		)	(13,223		)
Balance at end of period	$	51,620		$	9,995		$	—		$	61,615

Total allowance for credit losses at end of period
Allowance for loan losses	$	446,054		$	120,998		$	30,133		$	597,185
Reserve for unfunded lending commitments	51,620			9,995			—			61,615
Total allowance for credit losses	$	497,674		$	130,993		$	30,133		$	658,800



	Three Months Ended September 30, 2015
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of period	$	437,770		$	125,796		$	45,809		$	609,375
Additions:
Provision for loan losses	22,417			(6,621		)	2,466			18,262
Deductions:
Gross loan and lease charge-offs	(36,961		)	(1,068		)	(4,330		)	(42,359		)
Recoveries	4,471			4,162			2,529			11,162
Net loan and lease (charge-offs) recoveries	(32,490		)	3,094			(1,801		)	(31,197		)
Balance at end of period	$	427,697		$	122,269		$	46,474		$	596,440

Reserve for unfunded lending commitments
Balance at beginning of period	$	60,774		$	18,639		$	548		$	79,961
Provision charged (credited) to earnings	2,808			(1,467		)	87			1,428
Balance at end of period	$	63,582		$	17,172		$	635		$	81,389

Total allowance for credit losses at end of period
Allowance for loan losses	$	427,697		$	122,269		$	46,474		$	596,440
Reserve for unfunded lending commitments	63,582			17,172			635			81,389
Total allowance for credit losses	$	491,279		$	139,441		$	47,109		$	677,829



	Nine Months Ended September 30, 2015
(In thousands)	Commercial			Commercial real estate			Consumer			Total
Allowance for loan losses
Balance at beginning of period	$	412,514		$	145,009		$	47,140		$	604,663
Additions:
Provision for loan losses	53,292			(38,491		)	2,533			17,334
Deductions:
Gross loan and lease charge-offs	(76,734		)	(5,637		)	(11,224		)	(93,595		)
Recoveries	38,682			21,331			8,025			68,038
Net loan and lease (charge-offs) recoveries	(38,052		)	15,694			(3,199		)	(25,557		)
Balance at end of period	$	427,697		$	122,269		$	46,474		$	596,440

Reserve for unfunded lending commitments
Balance at beginning of period	$	58,931		$	21,517		$	628		$	81,076
Provision charged (credited) to earnings	4,651			(4,345		)	7			313
Balance at end of period	$	63,582		$	17,172		$	635		$	81,389

Total allowance for credit losses at end of period
Allowance for loan losses	$	427,697		$	122,269		$	46,474		$	596,440
Reserve for unfunded lending commitments	63,582			17,172			635			81,389
Total allowance for credit losses	$	491,279		$	139,441		$	47,109		$	677,829

The ALLL and outstanding loan balances according to the Company’s impairment method are summarized as follows:

	September 30, 2016
(In thousands)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	68,159	$	3,029	$	6,755	$	77,943
Collectively evaluated for impairment	377,197		117,520		22,900		517,617
Purchased loans with evidence of credit deterioration	698		449		478		1,625

Outstanding loan balances:
Individually evaluated for impairment	$	495,919	$	74,456	$	76,564	$	646,939
Collectively evaluated for impairment	21,086,101		11,336,574		9,380,885		41,803,560
Purchased loans with evidence of credit deterioration	42,299		38,894		8,028		89,221
Total	$	21,624,319	$	11,449,924	$	9,465,477	$	42,539,720



	December 31, 2015
(In thousands)	Commercial		Commercial real estate		Consumer		Total
Allowance for loan losses:
Individually evaluated for impairment	$	36,909	$	3,154	$	9,462	$	49,525
Collectively evaluated for impairment	417,295		110,417		27,866		555,578
Purchased loans with evidence of credit deterioration	73		421		451		945

Outstanding loan balances:
Individually evaluated for impairment	$	289,629	$	107,341	$	92,605	$	489,575
Collectively evaluated for impairment	21,129,125		10,193,840		8,712,079		40,035,044
Purchased loans with evidence of credit deterioration	60,260		54,722		9,941		124,923
Total	$	21,479,014	$	10,355,903	$	8,814,625	$	40,649,542

Nonaccrual and Past Due Loans

Loans are generally placed on nonaccrual status when payment in full of principal and interest is not expected, or the loan is 90 days or more past due as to principal or interest, unless the loan is both well secured and in the process of collection. Factors we consider in determining whether a loan is placed on nonaccrual include delinquency status, collateral value, borrower or guarantor financial statement information, bankruptcy status, and other information which would indicate that the full and timely collection of interest and principal is uncertain.

A nonaccrual loan may be returned to accrual status when all delinquent interest and principal become current in accordance with the terms of the loan agreement; the loan, if secured, is well secured; the borrower has paid according to the contractual terms for a minimum of six months; and analysis of the borrower indicates a reasonable assurance of the ability and willingness to maintain payments. Payments received on nonaccrual loans are applied as a reduction to the principal outstanding.

Closed-end loans with payments scheduled monthly are reported as past due when the borrower is in arrears for two or more monthly payments. Similarly, open-end credit such as charge-card plans and other revolving credit plans are reported as past due when the minimum payment has not been made for two or more billing cycles. Other multi-payment obligations (i.e., quarterly, semiannual, etc.), single payment, and demand notes are reported as past due when either principal or interest is due and unpaid for a period of 30 days or more.

Nonaccrual loans are summarized as follows:

(In thousands)	September 30, 2016		December 31, 2015
Loans held for sale	$	29,448	$	—
Commercial:
Commercial and industrial	$	387,339	$	163,906
Leasing	14,219		3,829
Owner occupied	65,873		73,881
Municipal	868		951
Total commercial	468,299		242,567
Commercial real estate:
Construction and land development	4,037		7,045
Term	27,420		40,253
Total commercial real estate	31,457		47,298
Consumer:
Home equity credit line	11,318		8,270
1-4 family residential	36,016		50,254
Construction and other consumer real estate	753		748
Bankcard and other revolving plans	1,415		537
Other	126		186
Total consumer loans	49,628		59,995
Total	$	549,384	$	349,860

Past due loans (accruing and nonaccruing) are summarized as follows:

	September 30, 2016
(In thousands)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current ¹
Loans held for sale	$	160,287	$	—	$	—	$	—	$	160,287	$	—	$	29,448
Commercial:
Commercial and industrial	$	13,404,163	$	87,689	$	50,900	$	138,589	$	13,542,752	$	5,452	$	320,959
Leasing	438,933		—		—		—		438,933		—		14,219
Owner occupied	6,839,251		30,313		20,110		50,423		6,889,674		5,472		42,803
Municipal	752,960		—		—		—		752,960		—		868
Total commercial	21,435,307		118,002		71,010		189,012		21,624,319		10,924		378,849
Commercial real estate:
Construction and land development	2,113,363		32,079		1,770		33,849		2,147,212		—		2,267
Term	9,254,133		25,362		23,217		48,579		9,302,712		15,231		17,226
Total commercial real estate	11,367,496		57,441		24,987		82,428		11,449,924		15,231		19,493
Consumer:
Home equity credit line	2,569,726		4,380		6,962		11,342		2,581,068		1,500		4,219
1-4 family residential	5,751,412		13,393		19,778		33,171		5,784,583		63		11,248
Construction and other consumer real estate	446,778		5,896		561		6,457		453,235		107		288
Bankcard and other revolving plans	453,961		2,794		1,155		3,949		457,910		1,010		1,174
Other	188,147		533		1		534		188,681		—		82
Total consumer loans	9,410,024		26,996		28,457		55,453		9,465,477		2,680		17,011
Total	$	42,212,827	$	202,439	$	124,454	$	326,893	$	42,539,720	$	28,835	$	415,353



	December 31, 2015
(In thousands)	Current		30-89 days past due		90+ days past due		Total past due		Total loans		Accruing loans 90+ days past due		Nonaccrual loans that are current ¹
Loans held for sale	$	149,880	$	—	$	—	$	—	$	149,880	$	—	$	—
Commercial:
Commercial and industrial	$	13,114,045	$	60,523	$	36,913	$	97,436	$	13,211,481	$	3,065	$	117,942
Leasing	440,963		183		520		703		441,666		—		3,309
Owner occupied	7,085,086		37,776		27,166		64,942		7,150,028		3,626		43,984
Municipal	668,207		7,586		46		7,632		675,839		46		951
Total commercial	21,308,301		106,068		64,645		170,713		21,479,014		6,737		166,186
Commercial real estate:
Construction and land development	1,835,360		842		5,300		6,142		1,841,502		—		1,745
Term	8,469,390		10,424		34,587		45,011		8,514,401		21,697		24,867
Total commercial real estate	10,304,750		11,266		39,887		51,153		10,355,903		21,697		26,612
Consumer:
Home equity credit line	2,407,972		4,717		3,668		8,385		2,416,357		—		3,053
1-4 family residential	5,340,549		14,828		26,722		41,550		5,382,099		1,036		20,939
Construction and other consumer real estate	374,987		8,593		1,660		10,253		385,240		1,337		408
Bankcard and other revolving plans	440,358		1,861		1,561		3,422		443,780		1,217		146
Other	186,436		647		66		713		187,149		—		83
Total consumer loans	8,750,302		30,646		33,677		64,323		8,814,625		3,590		24,629
Total	$	40,363,353	$	147,980	$	138,209	$	286,189	$	40,649,542	$	32,024	$	217,427


¹	Represents nonaccrual loans that are not past due more than 30 days; however, full payment of principal and interest is still not expected.

Credit Quality Indicators

In addition to the past due and nonaccrual criteria, we also analyze loans using loan risk grading systems, which vary based on the size and type of credit risk exposure. The internal risk grades assigned to loans follow our definitions of Pass, Special Mention, Substandard, and Doubtful, which are consistent with published definitions of regulatory risk classifications.

Definitions of Pass, Special Mention, Substandard, and Doubtful are summarized as follows:

Pass – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered low.

Special Mention – A Special Mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date.

Substandard – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well-defined weaknesses and are characterized by the distinct possibility that the bank may sustain some loss if deficiencies are not corrected.

Doubtful – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable.

We generally assign internal risk grades to commercial and CRE loans with commitments equal to or greater than $750,000 based on financial and statistical models, individual credit analysis, and loan officer experience and judgment. For these larger loans, we assign one of multiple grades within the Pass classification or one of the following four grades: Special Mention, Substandard, Doubtful, and Loss. Loss indicates that the outstanding balance has been charged off. We confirm our internal risk grades quarterly, or as soon as we identify information that affects the credit risk of the loan.

For consumer loans and certain small commercial and CRE loans with commitments less than $750,000, we generally assign internal risk grades similar to those described previously based on automated rules that depend on refreshed credit scores, payment performance, and other risk indicators. These are generally assigned either a Pass or Substandard grade and are reviewed as we identify information that might warrant a grade change.

Outstanding loan balances (accruing and nonaccruing) categorized by these credit quality indicators are summarized as follows:



	September 30, 2016
(In thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total loans		Total allowance
Commercial:
Commercial and industrial	$	12,131,677	$	355,800	$	1,046,068	$	9,207	$	13,542,752
Leasing	403,597		6,155		29,181		—		438,933
Owner occupied	6,450,754		145,338		293,582		—		6,889,674
Municipal	738,808		—		14,152		—		752,960
Total commercial	19,724,836		507,293		1,382,983		9,207		21,624,319		$	446,054
Commercial real estate:
Construction and land development	2,059,627		61,936		25,649		—		2,147,212
Term	9,065,467		96,384		140,861		—		9,302,712
Total commercial real estate	11,125,094		158,320		166,510		—		11,449,924		120,998
Consumer:
Home equity credit line	2,566,873		—		14,195		—		2,581,068
1-4 family residential	5,746,829		—		37,754		—		5,784,583
Construction and other consumer real estate	451,809		—		1,426		—		453,235
Bankcard and other revolving plans	454,850		—		3,060		—		457,910
Other	188,468		—		213		—		188,681
Total consumer loans	9,408,829		—		56,648		—		9,465,477		30,133
Total	$	40,258,759	$	665,613	$	1,606,141	$	9,207	$	42,539,720	$	597,185



	December 31, 2015
(In thousands)	Pass		Special Mention		Sub- standard		Doubtful		Total loans		Total allowance
Commercial:
Commercial and industrial	$	12,007,076	$	399,847	$	804,403	$	155	$	13,211,481
Leasing	411,131		5,166		25,369		—		441,666
Owner occupied	6,720,052		139,784		290,192		—		7,150,028
Municipal	663,903		—		11,936		—		675,839
Total commercial	19,802,162		544,797		1,131,900		155		21,479,014		$	454,277
Commercial real estate:
Construction and land development	1,786,610		42,348		12,544		—		1,841,502
Term	8,319,348		47,245		139,036		8,772		8,514,401
Total commercial real estate	10,105,958		89,593		151,580		8,772		10,355,903		113,992
Consumer:
Home equity credit line	2,404,635		—		11,722		—		2,416,357
1-4 family residential	5,325,519		—		56,580		—		5,382,099
Construction and other consumer real estate	381,738		—		3,502		—		385,240
Bankcard and other revolving plans	440,282		—		3,498		—		443,780
Other	186,836		—		313		—		187,149
Total consumer loans	8,739,010		—		75,615		—		8,814,625		37,779
Total	$	38,647,130	$	634,390	$	1,359,095	$	8,927	$	40,649,542	$	606,048

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. For our non-purchased credit-impaired loans, if a nonaccrual loan has a balance greater than $1 million, or if a loan is a troubled debt restructuring (“TDR”), including TDRs that subsequently default, or if the loan is no longer reported as a TDR, we individually evaluate the loan for impairment and estimate a specific reserve for the loan for all portfolio segments under applicable accounting guidance. Smaller nonaccrual loans are pooled for ALLL estimation purposes. Purchase credit-impaired (“PCI”) loans are included in impaired loans and are accounted for under separate accounting guidance. See subsequent discussion under Purchased Loans.

When a loan is impaired, we estimate a specific reserve for the loan based on the projected present value of the loan’s future cash flows discounted at the loan’s effective interest rate, the observable market price of the loan, or the fair value of the loan’s underlying collateral. The process of estimating future cash flows also incorporates the same determining factors discussed previously under nonaccrual loans. When we base the impairment amount on the fair value of the loan’s underlying collateral, we generally charge off the portion of the balance that is impaired, such that these loans do not have a specific reserve in the ALLL. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual are not recognized in interest income, but are applied as a reduction to the principal outstanding. The amount of interest income recognized on a cash basis during the time the loans were impaired within the three and nine months ended September 30, 2016 and 2015 was not significant.

Information on impaired loans individually evaluated is summarized as follows, including the average recorded investment and interest income recognized for the three and nine months ended September 30, 2016 and 2015:



	September 30, 2016
(In thousands)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance
(In thousands)	Unpaid principal balance		with no allowance		with allowance		Total recorded investment		Related allowance

Loans held for sale	$	18,935	$	15,996	$	—	$	15,996	$	—

Commercial:
Commercial and industrial	$	476,275	$	86,904	$	338,754	$	425,658	$	64,381
Owner occupied	108,694		61,794		38,163		99,957		3,612
Municipal	1,347		869		—		869		—
Total commercial	586,316		149,567		376,917		526,484		67,993
Commercial real estate:
Construction and land development	18,432		3,538		7,323		10,861		256
Term	86,540		52,295		22,290		74,585		1,322
Total commercial real estate	104,972		55,833		29,613		85,446		1,578
Consumer:
Home equity credit line	25,200		15,891		6,762		22,653		537
1-4 family residential	59,306		27,047		29,250		56,297		6,488
Construction and other consumer real estate	3,316		917		1,825		2,742		105
Other	1,992		1,484		32		1,516		3
Total consumer loans	89,814		45,339		37,869		83,208		7,133
Total	$	781,102	$	250,739	$	444,399	$	695,138	$	76,704



	December 31, 2015
(In thousands)	Unpaid principal balance		Recorded investment				Total recorded investment		Related allowance
(In thousands)	Unpaid principal balance		with no allowance		with allowance		Total recorded investment		Related allowance

Loans held for sale	$	—	$	—	$	—	$	—	$	—

Commercial:
Commercial and industrial	$	272,161	$	44,190	$	163,729	$	207,919	$	30,538
Owner occupied	141,526		83,024		43,243		126,267		5,486
Municipal	1,430		951		—		951		—
Total commercial	415,117		128,165		206,972		335,137		36,024
Commercial real estate:
Construction and land development	22,791		5,076		9,558		14,634		618
Term	142,239		82,864		34,361		117,225		2,604
Total commercial real estate	165,030		87,940		43,919		131,859		3,222
Consumer:
Home equity credit line	27,064		18,980		5,319		24,299		243
1-4 family residential	74,009		29,540		41,155		70,695		8,736
Construction and other consumer real estate	2,741		989		1,014		2,003		173
Other	3,187		36		2,570		2,606		299
Total consumer loans	107,001		49,545		50,058		99,603		9,451
Total	$	687,148	$	265,650	$	300,949	$	566,599	$	48,697



	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized

Loans held for sale	$	18,561	$	—	$	20,583	$	—

Commercial:
Commercial and industrial	$	448,590	$	1,464	$	318,434	$	3,977
Owner occupied	100,386		2,060		103,439		7,537
Municipal	877		—		903		—
Total commercial	549,853		3,524		422,776		11,514
Commercial real estate:
Construction and land development	11,281		863		12,041		2,065
Term	73,860		2,689		79,449		9,378
Total commercial real estate	85,141		3,552		91,490		11,443
Consumer:
Home equity credit line	22,895		323		22,291		1,029
1-4 family residential	61,149		461		57,815		1,324
Construction and other consumer real estate	2,767		43		2,707		134
Bankcard and other revolving plans	—		1		—		17
Other	1,912		81		2,166		281
Total consumer loans	88,723		909		84,979		2,785
Total	$	723,717	$	7,985	$	599,245	$	25,742



	Three Months Ended September 30, 2015				Nine Months Ended September 30, 2015
(In thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized

Loans held for sale	$	—	$	—	$	—	$	—

Commercial:
Commercial and industrial	$	191,642	$	1,314	$	158,825	$	5,525
Owner occupied	138,194		2,752		135,212		9,706
Municipal	978		—		1,007		—
Total commercial	330,814		4,066		295,044		15,231
Commercial real estate:
Construction and land development	31,506		499		31,920		2,691
Term	119,694		3,705		124,446		13,383
Total commercial real estate	151,200		4,204		156,366		16,074
Consumer:
Home equity credit line	25,095		401		24,329		1,206
1-4 family residential	90,240		398		91,671		1,803
Construction and other consumer real estate	5,540		32		2,342		91
Bankcard and other revolving plans	—		1		1		101
Other	36		177		4,109		692
Total consumer loans	120,911		1,009		122,452		3,893
Total	$	602,925	$	9,279	$	573,862	$	35,198

Modified and Restructured Loans

Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered TDRs.

We consider many factors in determining whether to agree to a loan modification involving concessions, and seek a solution that will both minimize potential loss to the Company and attempt to help the borrower. We evaluate borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral (if applicable), the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

TDRs are classified as either accrual or nonaccrual loans. A loan on nonaccrual and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. A TDR loan that specifies an interest rate that at the time of the restructuring is greater than or equal to the rate the bank is willing to accept for a new loan with comparable risk may not be reported as a TDR or an impaired loan in the calendar years subsequent to the restructuring if it is in compliance with its modified terms.

Selected information on TDRs that includes the recorded investment on an accruing and nonaccruing basis by loan class and modification type is summarized in the following schedules:



	September 30, 2016
	Recorded investment resulting from the following modification types:
(In thousands)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	255	$	17,606	$	9	$	71	$	11	$	40,104	$	58,056
Owner occupied	2,580		109		899		—		7,703		14,352		25,643
Total commercial	2,835		17,715		908		71		7,714		54,456		83,699
Commercial real estate:
Construction and land development	41		196		—		—		—		7,358		7,595
Term	4,549		444		165		979		1,788		10,327		18,252
Total commercial real estate	4,590		640		165		979		1,788		17,685		25,847
Consumer:
Home equity credit line	195		1,358		9,572		4		163		2,677		13,969
1-4 family residential	2,326		368		6,416		254		3,209		31,010		43,583
Construction and other consumer real estate	165		341		14		1,128		—		915		2,563
Other	—		—		123		—		—		—		123
Total consumer loans	2,686		2,067		16,125		1,386		3,372		34,602		60,238
Total accruing	10,111		20,422		17,198		2,436		12,874		106,743		169,784
Nonaccruing
Loans held for sale	$	—	$	—	$	—	$	—	$	—	$	15,996	$	15,996

Commercial:
Commercial and industrial	$	122	$	264	$	—	$	1,130	$	33,902	$	32,280	$	67,698
Owner occupied	622		788		—		2,867		253		13,518		18,048
Municipal	—		869		—		—		—		—		869
Total commercial	744		1,921		—		3,997		34,155		45,798		86,615
Commercial real estate:
Construction and land development	—		45		—		—		1,725		410		2,180
Term	1,705		1,093		—		—		2,531		3,052		8,381
Total commercial real estate	1,705		1,138		—		—		4,256		3,462		10,561
Consumer:
Home equity credit line	—		437		1,357		35		—		682		2,511
1-4 family residential	—		243		2,096		284		1,276		5,583		9,482
Construction and other consumer real estate	—		90		—		21		—		47		158
Total consumer loans	—		770		3,453		340		1,276		6,312		12,151
Total nonaccruing	2,449		3,829		3,453		4,337		39,687		55,572		109,327
Total	$	12,560	$	24,251	$	20,651	$	6,773	$	52,561	$	162,315	$	279,111



	December 31, 2015
	Recorded investment resulting from the following modification types:
(In thousands)	Interest rate below market		Maturity or term extension		Principal forgiveness		Payment deferral		Other¹		Multiple modification types²		Total
Accruing
Commercial:
Commercial and industrial	$	202	$	3,236	$	13	$	100	$	23,207	$	34,473	$	61,231
Owner occupied	1,999		681		929		—		9,879		16,339		29,827
Total commercial	2,201		3,917		942		100		33,086		50,812		91,058
Commercial real estate:
Construction and land development	94		—		—		—		—		9,698		9,792
Term	4,696		638		166		976		2,249		20,833		29,558
Total commercial real estate	4,790		638		166		976		2,249		30,531		39,350
Consumer:
Home equity credit line	192		2,147		9,763		—		164		3,155		15,421
1-4 family residential	2,669		353		6,747		433		3,440		32,903		46,545
Construction and other consumer real estate	174		384		—		—		—		1,152		1,710
Other	—		—		—		—		—		—		—
Total consumer loans	3,035		2,884		16,510		433		3,604		37,210		63,676
Total accruing	10,026		7,439		17,618		1,509		38,939		118,553		194,084
Nonaccruing
Loans held for sale	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial:
Commercial and industrial	$	28	$	455	$	—	$	1,879	$	3,577	$	49,617	$	55,556
Owner occupied	685		1,669		—		724		34		16,335		19,447
Municipal	—		951		—		—		—		—		951
Total commercial	713		3,075		—		2,603		3,611		65,952		75,954
Commercial real estate:
Construction and land development	—		333		—		—		3,156		208		3,697
Term	1,844		—		—		—		2,960		5,203		10,007
Total commercial real estate	1,844		333		—		—		6,116		5,411		13,704
Consumer:
Home equity credit line	7		500		1,400		54		—		233		2,194
1-4 family residential	—		275		2,052		136		1,180		7,299		10,942
Construction and other consumer real estate	—		101		17		48		—		44		210
Total consumer loans	7		876		3,469		238		1,180		7,576		13,346
Total nonaccruing	2,564		4,284		3,469		2,841		10,907		78,939		103,004
Total	$	12,590	$	11,723	$	21,087	$	4,350	$	49,846	$	197,492	$	297,088


¹	Includes TDRs that resulted from other modification types including, but not limited to, a legal judgment awarded on different terms, a bankruptcy plan confirmed on different terms, a settlement that includes the delivery of collateral in exchange for debt reduction, etc.


²	Includes TDRs that resulted from a combination of any of the previous modification types.

Unfunded lending commitments on TDRs amounted to approximately $11.8 million at September 30, 2016 and $7.5 million at December 31, 2015.

The total recorded investment of all TDRs in which interest rates were modified below market was $145.1 million at September 30, 2016 and $188.0 million at December 31, 2015. These loans are included in the previous schedule in the columns for interest rate below market and multiple modification types.

The net financial impact on interest income due to interest rate modifications below market for accruing TDRs is summarized in the following schedule:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015			2016			2015
Commercial:
Commercial and industrial	$	(89	)	$	(67	)	$	(240	)	$	(189	)
Owner occupied	(49		)	(46		)	(148		)	(230		)
Total commercial	(138		)	(113		)	(388		)	(419		)
Commercial real estate:
Construction and land development	(1		)	(26		)	(3		)	(88		)
Term	(65		)	(84		)	(218		)	(295		)
Total commercial real estate	(66		)	(110		)	(221		)	(383		)
Consumer:
Home equity credit line	—			—			(1		)	(1		)
1-4 family residential	(194		)	(260		)	(630		)	(800		)
Construction and other consumer real estate	(4		)	(7		)	(14		)	(21		)
Total consumer loans	(198		)	(267		)	(645		)	(822		)
Total decrease to interest income¹	$	(402	)	$	(490	)	$	(1,254	)	$	(1,624	)


¹	Calculated based on the difference between the modified rate and the premodified rate applied to the recorded investment.

On an ongoing basis, we monitor the performance of all TDRs according to their restructured terms. Subsequent payment default is defined in terms of delinquency, when principal or interest payments are past due 90 days or more for commercial loans, or 60 days or more for consumer loans.

The recorded investment of accruing and nonaccruing TDRs that had a payment default during the period listed below (and are still in default at period end) and are within 12 months or less of being modified as TDRs is as follows:



	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
(In thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial:
Commercial and industrial	$	31	$	3,240	$	3,271	$	31	$	3,309	$	3,340
Owner occupied	3,360		—		3,360		3,360		—		3,360
Total commercial	3,391		3,240		6,631		3,391		3,309		6,700
Commercial real estate:
Construction and land development	—		—		—		—		—		—
Term	—		45		45		—		45		45
Total commercial real estate	—		45		45		—		45		45
Consumer:
Home equity credit line	—		—		—		—		—		—
1-4 family residential	—		—		—		—		118		118
Construction and other consumer real estate	—		—		—		—		—		—
Total consumer loans	—		—		—		—		118		118
Total	$	3,391	$	3,285	$	6,676	$	3,391	$	3,472	$	6,863



	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(In thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial:
Commercial and industrial	$	—	$	9	$	9	$	—	$	104	$	104
Owner occupied	—		—		—		—		943		943
Total commercial	—		9		9		—		1,047		1,047
Commercial real estate:
Construction and land development	—		—		—		—		—		—
Term	—		—		—		—		833		833
Total commercial real estate	—		—		—		—		833		833
Consumer:
Home equity credit line	—		—		—		—		—		—
1-4 family residential	—		595		595		—		595		595
Construction and other consumer real estate	—		—		—		—		—		—
Total consumer loans	—		595		595		—		595		595
Total	$	—	$	604	$	604	$	—	$	2,475	$	2,475

Note: Total loans modified as TDRs during the 12 months previous to September 30, 2016 and 2015 were $139.4 million and $93.4 million, respectively.

At September 30, 2016 and December 31, 2015, the amount of foreclosed residential real estate property held by the Company was approximately $3.0 million and $0.5 million, and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure was approximately $9.5 million and $12.5 million, respectively.

Concentrations of Credit Risk

Credit risk is the possibility of loss from the failure of a borrower, guarantor, or another obligor to fully perform under the terms of a credit-related contract. Credit risks (whether on- or off-balance sheet) may occur when individual borrowers, groups of borrowers, or counterparties have similar economic characteristics, including industries, geographies, collateral types, sponsors, etc., and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. See Note 7 for a discussion of counterparty risk associated with the Company’s derivative transactions.

We perform an ongoing analysis of our loan portfolio to evaluate whether there is any significant exposure to any concentrations of credit risk. Based on this analysis, we believe that the loan portfolio is generally well diversified; however, there are certain significant concentrations in CRE and oil and gas-related lending. Further, we cannot guarantee that we have fully understood or mitigated all risk concentrations or correlated risks. We have adopted and adhere to concentration limits on various types of CRE lending, particularly construction and land development lending, leveraged and enterprise value lending, municipal lending, and oil and gas-related lending. All of these limits are continually monitored and revised as necessary.

Purchased Loans

Background and Accounting

We purchase loans in the ordinary course of business and account for them and the related interest income based on their performing status at the time of acquisition. PCI loans have evidence of credit deterioration at the time of acquisition and it is probable that not all contractual payments will be collected. Interest income for PCI loans is accounted for on an expected cash flow basis. Certain other loans acquired by the Company that are not credit-impaired include loans with revolving privileges and are excluded from the PCI tabular disclosures following. Interest income for these loans is accounted for on a contractual cash flow basis. Upon acquisition, in accordance with applicable accounting guidance, the acquired loans were recorded at their fair value without a corresponding ALLL. Certain acquired loans with similar characteristics such as risk exposure, type, size, etc., are grouped and accounted for in loan pools.

Outstanding Balances and Accretable Yield

The outstanding balances of all required payments and the related carrying amounts for PCI loans are as follows:



(In thousands)	September 30, 2016			December 31, 2015

Commercial		$	47,982		$	72,440
Commercial real estate		48,036			65,167
Consumer		9,027			11,082
Outstanding balance		$	105,045		$	148,689

Carrying amount		$	89,221		$	125,029
Less ALLL		1,625			945
Carrying amount, net		$	87,596		$	124,084

At the time of acquisition of PCI loans, we determine the loan’s contractually required payments in excess of all cash flows expected to be collected as an amount that should not be accreted (nonaccretable difference). With respect to the cash flows expected to be collected, the portion representing the excess of the loan’s expected cash flows over our initial investment (accretable yield) is accreted into interest income on a level yield basis over the remaining expected life of the loan or pool of loans. The effects of estimated prepayments are considered in estimating the expected cash flows.

Certain PCI loans are not accounted for as previously described because the estimation of cash flows to be collected involves a high degree of uncertainty. Under these circumstances, the accounting guidance provides that interest income is recognized on a cash basis similar to the cost recovery methodology for nonaccrual loans. The net carrying amounts in the preceding schedule also include the amounts for these loans, which were $0.7 million at September 30, 2016. There were no amounts of these loans at December 31, 2015.

Changes in the accretable yield for PCI loans were as follows:



(In thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2016			2015			2016			2015

Balance at beginning of period	$	38,033		$	46,702		$	39,803		$	45,055
Accretion	(5,633		)	(7,535		)	(19,026		)	(28,792		)
Reclassification from nonaccretable difference	127			1,005			9,697			18,865
Disposals and other	1,629			1,126			3,682			6,170
Balance at end of period	$	34,156		$	41,298		$	34,156		$	41,298

Note: Amounts have been adjusted based on refinements to the original estimates of the accretable yield.

The primary drivers of reclassification to accretable yield from nonaccretable difference and increases in disposals and other resulted primarily from (1) changes in estimated cash flows, (2) unexpected payments on nonaccrual loans, and (3) recoveries on zero balance loans pools. See subsequent discussion under changes in cash flow estimates.

ALLL Determination

For all acquired loans, the ALLL is only established for credit deterioration subsequent to the date of acquisition and represents our estimate of the inherent losses in excess of the book value of acquired loans. The ALLL for acquired loans is included in the overall ALLL in the balance sheet.

During the three and nine months ended September 30, we adjusted the ALLL for acquired loans by recording a provision for loan losses of $1.1 million and $1.9 million in 2016, and $0.8 million and $0.3 million in 2015, respectively. The provision is net of the ALLL reversals resulting from changes in cash flow estimates, which are discussed subsequently.

Changes in the provision for loan losses and related ALLL are driven in large part by the same factors that affect the changes in reclassification from nonaccretable difference to accretable yield, as discussed under changes in cash flow estimates.

Changes in Cash Flow Estimates

Over the life of the loan or loan pool, we continue to estimate cash flows expected to be collected. We evaluate quarterly at the balance sheet date whether the estimated present values of these loans using the effective interest rates have decreased below their carrying values. If so, we record a provision for loan losses.

For increases in carrying values that resulted from better-than-expected cash flows, we use such increases first to reverse any existing ALLL. During the three and nine months ended September 30, total reversals to the ALLL, including the impact of increases in estimated cash flows, were $0.7 million and $1.2 million in 2016, and $0.6 million and $3.1 million in 2015, respectively. When there is no current ALLL, we increase the amount of accretable yield on a prospective basis over the remaining life of the loan and recognize this increase in interest income.

For the three and nine months ended September 30, the impact of increased cash flow estimates recognized in the statement of income for acquired loans with no ALLL was approximately $4.3 million and $14.3 million in 2016, and $5.4 million and $22.1 million in 2015, respectively, of additional interest income.