LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2018, the Company’s loan portfolio was $11.37 billion, compared to $10.78 billion at December 31, 2017. The various categories of loans are summarized as follows:



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

Consumer:
Credit cards	$	180,352	$	185,422
Other consumer	277,330		280,094
Total consumer	457,682		465,516
Real Estate:
Construction	967,720		614,155
Single family residential	1,314,787		1,094,633
Other commercial	2,816,420		2,530,824
Total real estate	5,098,927		4,239,612
Commercial:
Commercial	1,237,910		825,217
Agricultural	187,006		148,302
Total commercial	1,424,916		973,519
Other	151,936		26,962
Loans	7,133,461		5,705,609
Loans acquired, net of discount and allowance ⁽¹⁾	4,232,434		5,074,076
Total loans	$	11,365,895	$	10,779,685

_____________________________


⁽¹⁾	See Note 6, Loans Acquired, for segregation of loans acquired by loan class.

Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; providing an adequate allowance for loans losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio, if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default. Furthermore, a factor that influenced the Company’s judgment regarding the allowance for loan losses consists of an eight-year historical loss average segregated by each primary loan sector. On an annual basis, historical loss rates are calculated for each sector.

Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment. Other consumer loans include direct and indirect installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Real estate – The real estate loan portfolio consists of construction loans, single family residential loans and commercial loans. Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate. Commercial real estate cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length. The Company monitors these loans closely.

Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on all commercial loans for closely-held or limited liability entities.

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless if such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Nonaccrual loans, excluding loans acquired, segregated by class of loans, are as follows:



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

Consumer:
Credit cards	$	238	$	170
Other consumer	3,804		4,605
Total consumer	4,042		4,775
Real estate:
Construction	1,764		2,242
Single family residential	15,415		13,431
Other commercial	11,911		16,054
Total real estate	29,090		31,727
Commercial:
Commercial	9,195		6,980
Agricultural	2,221		2,160
Total commercial	11,416		9,140
Total	$	44,548	$	45,642

An age analysis of past due loans, excluding loans acquired, segregated by class of loans, is as follows:



(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:
Credit cards	$	642	$	383	$	1,025	$	179,327	$	180,352	$	145
Other consumer	3,026		2,363		5,389		271,941		277,330		37
Total consumer	3,668		2,746		6,414		451,268		457,682		182
Real estate:
Construction	515		821		1,336		966,384		967,720		—
Single family residential	6,187		7,898		14,085		1,300,702		1,314,787		121
Other commercial	1,862		6,080		7,942		2,808,478		2,816,420		—
Total real estate	8,564		14,799		23,363		5,075,564		5,098,927		121
Commercial:
Commercial	3,995		4,548		8,543		1,229,367		1,237,910		—
Agricultural	192		2,004		2,196		184,810		187,006		—
Total commercial	4,187		6,552		10,739		1,414,177		1,424,916		—
Other	—		—		—		151,936		151,936		—
Total	$	16,419	$	24,097	$	40,516	$	7,092,945	$	7,133,461	$	303

December 31, 2017
Consumer:
Credit cards	$	707	$	672	$	1,379	$	184,043	$	185,422	$	332
Other consumer	5,009		3,298		8,307		271,787		280,094		10
Total consumer	5,716		3,970		9,686		455,830		465,516		342
Real estate:
Construction	411		1,210		1,621		612,534		614,155		—
Single family residential	8,071		6,460		14,531		1,080,102		1,094,633		1
Other commercial	2,388		8,031		10,419		2,520,405		2,530,824		—
Total real estate	10,870		15,701		26,571		4,213,041		4,239,612		1
Commercial:
Commercial	1,523		6,125		7,648		817,569		825,217		—
Agricultural	50		2,120		2,170		146,132		148,302		—
Total commercial	1,573		8,245		9,818		963,701		973,519		—
Other	—		—		—		26,962		26,962		—
Total	$	18,159	$	27,916	$	46,075	$	5,659,534	$	5,705,609	$	343

Impaired Loans – A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loans, including scheduled principal and interest payments. This includes loans that are delinquent 90 days or more, nonaccrual loans and certain other loans identified by management. Certain other loans identified by management consist of performing loans with specific allocations of the allowance for loan losses. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate, or the fair value of the collateral if the loan is collateral dependent.

Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. Impaired loans, or portions thereof, are charged-off when deemed uncollectible.

Impaired loans, net of government guarantees and excluding loans acquired, segregated by class of loans, are as follows:



(In thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
June 30, 2018											Three Months Ended June 30, 2018				Six Months Ended June 30, 2018
Consumer:
Credit cards	$	238	$	238	$	—	$	238	$	—	$	204	$	10	$	236	$	25
Other consumer	3,981		3,804		—		3,804		—		4,205		33		4,373		67
Total consumer	4,219		4,042		—		4,042		—		4,409		43		4,609		92
Real estate:
Construction	1,825		1,136		396		1,532		253		1,887		13		1,899		29
Single family residential	16,430		14,919		496		15,415		36		14,423		118		14,154		218
Other commercial	17,762		6,376		4,816		11,192		138		13,528		104		14,588		224
Total real estate	36,017		22,431		5,708		28,139		427		29,838		235		30,641		471
Commercial:
Commercial	9,839		7,228		605		7,833		18		7,204		61		7,428		114
Agricultural	3,377		1,249		—		1,249		—		1,142		11		1,474		23
Total commercial	13,216		8,477		605		9,082		18		8,346		72		8,902		137
Total	$	53,452	$	34,950	$	6,313	$	41,263	$	445	$	42,593	$	350	$	44,152	$	700



December 31, 2017											Three Months Ended June 30, 2017				Six Months Ended June 30, 2017
Consumer:
Credit cards	$	170	$	170	$	—	$	170	$	—	$	261	$	6	$	298	$	11
Other consumer	4,755		4,605		—		4,605		—		2,581		17		2,321		31
Total consumer	4,925		4,775		—		4,775		—		2,842		23		2,619		42
Real estate:
Construction	2,522		1,347		895		2,242		249		2,748		21		2,969		39
Single family residential	14,347		12,725		706		13,431		53		12,837		90		12,686		167
Other commercial	22,308		6,732		9,133		15,865		36		22,402		138		19,670		258
Total real estate	39,177		20,804		10,734		31,538		338		37,987		249		35,325		464
Commercial:
Commercial	9,954		4,306		2,269		6,575		—		14,275		91		12,952		170
Agricultural	3,278		1,035		—		1,035		—		2,152		13		1,840		24
Total commercial	13,232		5,341		2,269		7,610		—		16,427		104		14,792		194
Total	$	57,334	$	30,920	$	13,003	$	43,923	$	338	$	57,256	$	376	$	52,736	$	700

At June 30, 2018, and December 31, 2017, impaired loans, net of government guarantees and excluding loans acquired, totaled $41.3 million and $43.9 million, respectively. Allocations of the allowance for loan losses relative to impaired loans were $445,000 and $338,000 at June 30, 2018 and December 31, 2017, respectively. Approximately $350,000 and $700,000 of interest income was recognized on average impaired loans of $42.6 million and $44.2 million for the three and six months ended June 30, 2018. Interest income recognized on impaired loans on a cash basis during the three and six months ended June 30, 2018 and 2017 was not material.

Included in certain impaired loan categories are troubled debt restructurings (“TDRs”). When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

Under ASC Topic 310-10-35 – Subsequent Measurement, a TDR is considered to be impaired, and an impairment analysis must be performed. The Company assesses the exposure for each modification, either by collateral discounting or by calculation of the present value of future cash flows, and determines if a specific allocation to the allowance for loan losses is needed.

Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.

The following table presents a summary of troubled debt restructurings, excluding loans acquired, segregated by class of loans.



	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
June 30, 2018
Consumer:
Other consumer	—	$	—	1	$	91	1	$	91
Total consumer	—	—		1	91		1	91
Real estate:
Construction	1	396		—	—		1	396
Single-family residential	11	734		6	233		17	967
Other commercial	6	3,751		2	3,411		8	7,162
Total real estate	18	4,881		8	3,644		26	8,525
Commercial:
Commercial	5	588		5	2,632		10	3,220
Total commercial	5	588		5	2,632		10	3,220
Total	23	$	5,469	14	$	6,367	37	$	11,836

December 31, 2017
Real estate:
Construction	—	$	—	1	$	420	1	$	420
Single-family residential	4	141		15	954		19	1,095
Other commercial	4	4,322		5	3,712		9	8,034
Total real estate	8	4,463		21	5,086		29	9,549
Commercial:
Commercial	5	2,644		6	745		11	3,389
Total commercial	5	2,644		6	745		11	3,389
Total	13	$	7,107	27	$	5,831	40	$	12,938

The following table presents loans that were restructured as TDRs during the six months ended June 30, 2018 and the three and six months ended June 30, 2017, excluding loans acquired, segregated by class of loans. There were no loans restructured as TDRs during the three months ended June 30, 2018.



						Modification Type
(Dollars in thousands)	Number of Loans	Balance Prior to TDR		Balance at June 30,		Change in Maturity Date		Change in Rate		Financial Impact on Date of Restructure
Three Months Ended June 30, 2017
Commercial:
Commercial	4	$	41	$	39	$	—	$	39	$	—
Total commercial	4	41		39		—		39		—
Total	4	$	41	$	39	$	—	$	39	$	—

Six Months Ended June 30, 2018
Consumer:
Other consumer	1	$	91	$	91	$	91	$	—	$	—
Total consumer	1	91		91		91		—		—
Real estate:
Single-family residential	1	61		62		62		—		—
Total real estate	1	61		62		62		—		—
Total	2	$	152	$	153	$	153	$	—	$	—

Six Months Ended June 30, 2017
Real estate:
Construction	1	$	456	$	456	$	456	$	—	$	—
Other commercial	2	7,362		7,362		7,362		—		33
Total real estate	3	7,818		7,818		7,818		—		33
Commercial:
Commercial	9	811		799		760		39		—
Total commercial	9	811		799		760		39		—
Total	12	$	8,629	$	8,617	$	8,578	$	39	$	33

During the six months ended June 30, 2018, the Company modified 2 loans with a recorded investment of $152,000 prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of up to 12 months. A specific reserve was not considered necessary for these loans based upon the fair value of the collateral. Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

During the three months ended June 30, 2017, the Company modified 4 loans with a recorded investment of $41,000 and during the six months ended June 30, 2017, the Company modified 12 loans with a recorded investment of $8.6 million prior to modification which were deemed troubled debt restructuring. The restructured loans were modified by changing various terms, including changing the interest rate, deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of 12 months. Based on the fair value of the collateral, a specific reserve of $33,000 was determined necessary for these loans and recorded during the six months ended June 30, 2017. Also, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

There was one commercial real estate loan for which a payment default occurred during the six months ended June 30, 2018. A charge-off of $66,300 was recorded for this loan and $294,300 was transferred to OREO. There was one commercial real estate loan for which a payment default occurred during the six months ended June 30, 2017. The Company defines a payment default as a payment received more than 90 days after its due date.

In addition to the TDRs that occurred during the periods provided in the preceding tables, the Company had TDRs with pre-modification loan balances of $294,300 and $117,000 at June 30, 2018 and 2017, respectively, for which OREO was received in full or partial satisfaction of the loans. The majority of such TDRs were in commercial real estate and residential real estate. At June 30, 2018 and December 31, 2017, the Company had $3,190,000 and $5,057,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At June 30, 2018 and December 31, 2017, the Company had $4,075,000 and $3,828,000, respectively, of OREO secured by residential real estate properties.

Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the States of Arkansas, Colorado, Kansas, Missouri, Oklahoma, Tennessee and Texas.

The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Loans are rated on a scale of 1 to 8. A description of the general characteristics of the 8 risk ratings is as follows:


•	Risk Rate 1 – Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.


•	Risk Rate 2 – Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).


•	Risk Rate 3 – Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.

•

Risk Rate 4 – Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.

•

Risk Rate 5 – Special Mention - A loan in this category 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 institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

•

Risk Rate 6 – Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.

•

Risk Rate 7 – Doubtful – A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity, or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.

•

Risk Rate 8 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.

Loans acquired are evaluated using this internal grading system. Loans acquired are evaluated individually and include purchased credit impaired loans of $14.0 million and $17.1 million that are accounted for under ASC Topic 310-30 and are classified as substandard (Risk Rating 6) as of June 30, 2018 and December 31, 2017, respectively. Of the remaining loans acquired and accounted for under ASC Topic 310-20, $70.0 million and $76.3 million were classified (Risk Ratings 6, 7 and 8 – see classified loans discussion below) at June 30, 2018 and December 31, 2017, respectively.

Purchased credit impaired loans are loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their fair value was initially based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates of interest. The difference between the undiscounted cash flows expected at acquisition and the fair value at acquisition is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition are not recognized as a yield adjustment. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows are recognized as impairment.

Classified loans for the Company include loans in Risk Ratings 6, 7 and 8. Loans may be classified, but not considered impaired, due to one of the following reasons: (1)The Company has established minimum dollar amount thresholds for loan impairment testing. Loans rated 6 – 8that fall under the threshold amount are not tested for impairment and therefore are not included in impaired loans. (2) Of the loans that are above the threshold amount and tested for impairment, after testing, some are considered to not be impaired and are not included in impaired loans. Total classified loans, excluding loans accounted for under ASC Topic 310-30, were $174.2 million and $175.6 million, as of June 30, 2018 and December 31, 2017, respectively.

The following table presents a summary of loans by credit risk rating as of June 30, 2018 and December 31, 2017, segregated by class of loans. 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:
Credit cards	$	179,969	$	—	$	383	$	—	$	—	$	180,352
Other consumer	273,345		—		3,985		—		—		277,330
Total consumer	453,314		—		4,368		—		—		457,682
Real estate:
Construction	960,791		2,314		4,599		16		—		967,720
Single family residential	1,287,314		1,711		25,544		218		—		1,314,787
Other commercial	2,780,597		8,620		27,203		—		—		2,816,420
Total real estate	5,028,702		12,645		57,346		234		—		5,098,927
Commercial:
Commercial	1,199,553		12,803		25,554		—		—		1,237,910
Agricultural	184,228		155		2,600		23		—		187,006
Total commercial	1,383,781		12,958		28,154		23		—		1,424,916
Other	151,936		—		—		—		—		151,936
Loans acquired	4,096,419		51,985		83,657		373		—		4,232,434
Total	$	11,114,152	$	77,588	$	173,525	$	630	$	—	$	11,365,895



(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
December 31, 2017
Consumer:
Credit cards	$	184,920	$	—	$	502	$	—	$	—	$	185,422
Other consumer	275,160		—		4,934		—		—		280,094
Total consumer	460,080		—		5,436		—		—		465,516
Real estate:
Construction	603,126		5,795		5,218		16		—		614,155
Single family residential	1,066,902		3,954		23,490		287		—		1,094,633
Other commercial	2,480,293		19,581		30,950		—		—		2,530,824
Total real estate	4,150,321		29,330		59,658		303		—		4,239,612
Commercial:
Commercial	736,377		74,254		14,402		50		134		825,217
Agricultural	146,065		24		2,190		23		—		148,302
Total commercial	882,442		74,278		16,592		73		134		973,519
Other	26,962		—		—		—		—		26,962
Loans acquired	4,918,570		62,128		93,378		—		—		5,074,076
Total	$	10,438,375	$	165,736	$	175,064	$	376	$	134	$	10,779,685

Allowance for Loan Losses

Allowance for Loan Losses – The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310-10, Receivables, and allowance allocations calculated in accordance with ASC Topic 450-20, Loss Contingencies. Accordingly, the methodology is based on the Company’s internal grading system, specific impairment analysis, qualitative and quantitative factors.

As mentioned above, allocations to the allowance for loan losses are categorized as either specific allocations or general allocations.

A loan is considered impaired when it is probable that the Company will not receive all amounts due according to the contractual terms of the loan, including scheduled principal and interest payments. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for loan losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.

The general allocation is calculated monthly based on management’s assessment of several factors such as (1) historical loss experience based on volumes and types, (2) volume and trends in delinquencies and nonaccruals, (3) lending policies and procedures including those for loan losses, collections and recoveries, (4) national, state and local economic trends and conditions, (5) external factors and pressure from competition, (6) the experience, ability and depth of lending management and staff, (7) seasoning of new products obtained and new markets entered through acquisition and (8) other factors and trends that will affect specific loans and categories of loans. The Company establishes general allocations for each major loan category. This category also includes allocations to loans which are collectively evaluated for loss such as credit cards, one-to-four family owner occupied residential real estate loans and other consumer loans.

The following table details activity in the allowance for loan losses by portfolio segment for legacy loans for the three and six months ended June 30, 2018. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



(In thousands)	Commercial			Real Estate			Credit Card			Other Consumer and Other			Total
Three Months Ended June 30, 2018
Balance, beginning of period ⁽²⁾	$	9,601		$	30,414		$	3,799		$	3,393		$	47,207
Provision for loan losses ⁽¹⁾	6,897			(1,461		)	749			1,079			7,264
Charge-offs	(790		)	(161		)	(1,012		)	(1,366		)	(3,329		)
Recoveries	59			112			286			133			590
Net charge-offs	(731		)	(49		)	(726		)	(1,233		)	(2,739		)
Balance, June 30, 2018 ⁽²⁾	$	15,767		$	28,904		$	3,822		$	3,239		$	51,732

Six Months Ended June 30, 2018
Balance, beginning of period ⁽²⁾	$	7,007		$	27,281		$	3,784		$	3,596		$	41,668
Provision for loan losses ⁽¹⁾	11,183			1,825			1,500			1,838			16,346
Charge-offs	(2,551		)	(616		)	(2,011		)	(2,422		)	(7,600		)
Recoveries	128			414			549			227			1,318
Net charge-offs	(2,423		)	(202		)	(1,462		)	(2,195		)	(6,282		)
Balance, June 30, 2018 ⁽²⁾	$	15,767		$	28,904		$	3,822		$	3,239		$	51,732

Period-end amount allocated to:
Loans individually evaluated for impairment	$	18		$	427		$	—		$	—		$	445
Loans collectively evaluated for impairment	15,749			28,477			3,822			3,239			51,287
Balance, June 30, 2018 ⁽²⁾	$	15,767		$	28,904		$	3,822		$	3,239		$	51,732

______________________

(1)

Provision for loan losses of $1,769,000 and $1,837,000 attributable to loans acquired was excluded from this table for the three and six months ended June 30, 2018, respectively (total provision for loan losses for the three and six months ended June 30, 2018 was $9,033,000 and $18,183,000). There were $132,000 and $211,000 in charge-offs for loans acquired during the three and six months ended June 30, 2018, respectively, resulting in an ending balance in the allowance related to loans acquired of $2,044,000.

(2)

Allowance for loan losses at June 30, 2018 includes $2,044,000 allowance for loans acquired (not shown in the table above). Allowance for loan losses at March 31, 2018 and December 31, 2017 includes $407,000 and $418,000, respectively, of allowance for loans acquired (not shown in the table above). The total allowance for loan losses at June 30, 2018 was $53,776,000 and total allowance for loan losses at March 31, 2018 and December 31, 2017 was $47,614,000 and $42,086,000, respectively.

Activity in the allowance for loan losses for the three and six months ended June 30, 2017 was as follows:



(In thousands)	Commercial			Real Estate			Credit Card			Other Consumer and Other			Total
Three Months Ended June 30, 2017
Balance, beginning of period ⁽⁴⁾	$	8,173		$	22,253		$	3,729		$	3,710		$	37,865
Provision for loan losses ⁽³⁾	249			4,974			649			436			6,308
Charge-offs	(349		)	(1,712		)	(901		)	(993		)	(3,955		)
Recoveries	32			216			277			636			1,161
Net charge-offs	(317		)	(1,496		)	(624		)	(357		)	(2,794		)
Balance, June 30, 2017 ⁽⁴⁾	$	8,105		$	25,731		$	3,754		$	3,789		$	41,379

Six Months Ended June 30, 2017
Balance, beginning of period ⁽⁴⁾	$	7,739		$	21,817		$	3,779		$	2,951		$	36,286
Provision for loan losses ⁽³⁾	945			5,834			1,407			1,679			9,865
Charge-offs	(641		)	(2,368		)	(1,945		)	(2,167		)	(7,121		)
Recoveries	62			448			513			1,326			2,349
Net charge-offs	(579		)	(1,920		)	(1,432		)	(841		)	(4,772		)
Balance, June 30, 2017 ⁽⁴⁾	$	8,105		$	25,731		$	3,754		$	3,789		$	41,379

Period-end amount allocated to:
Loans individually evaluated for impairment	$	3,636		$	1,888		$	—		$	—		$	5,524
Loans collectively evaluated for impairment	4,469			23,843			3,754			3,789			35,855
Balance, June 30, 2017 ⁽⁴⁾	$	8,105		$	25,731		$	3,754		$	3,789		$	41,379

Period-end amount allocated to:
Loans individually evaluated for impairment	$	—		$	338		$	—		$	—		$	338
Loans collectively evaluated for impairment	7,007			26,943			3,784			3,596			41,330
Balance, December 31, 2017⁽⁵⁾	$	7,007		$	27,281		$	3,784		$	3,596		$	41,668

______________________

(3)

Provision for loan losses of $714,000 and $1,464,000 attributable to loans acquired was excluded from this table for the three and six months ended June 30, 2017 (total provision for loan losses for the three and six months ended June 30, 2017 was $7,023,000 and $11,330,000, respectively). There were $758,000 and $2.0 million in charge-offs for loans acquired during the three and six months ended June 30, 2017, respectively, resulting in an ending balance in the allowance related to loans acquired of $391,000.


(4)	Allowance for loan losses at June 30, 2017, March 31, 2017 and December 31, 2016 includes $391,000, $435,000 and $954,000, allowance for loans acquired, respectively, (not shown in the table above). The total allowance for loan losses at June 30, 2017, March 31, 2017 and December 31, 2016 was $41,770,000, $38,300,000 and $37,240,000, respectively.


(5)	Allowance for loan losses at December 31, 2017 includes $418,000 allowance for loans acquired (not shown in the table above). The total allowance for loan losses at December 31, 2017 was $42,086,000.

The Company’s recorded investment in loans, excluding loans acquired, related to each balance in the allowance for loan losses by portfolio segment on the basis of the Company’s impairment methodology was as follows:



(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
June 30, 2018
Loans individually evaluated for impairment	$	9,082	$	28,139	$	238	$	3,804	$	41,263
Loans collectively evaluated for impairment	1,415,834		5,070,788		180,114		425,462		7,092,198
Balance, end of period	$	1,424,916	$	5,098,927	$	180,352	$	429,266	$	7,133,461

December 31, 2017
Loans individually evaluated for impairment	$	7,610	$	31,538	$	170	$	4,605	$	43,923
Loans collectively evaluated for impairment	965,909		4,208,074		185,252		302,451		5,661,686
Balance, end of period	$	973,519	$	4,239,612	$	185,422	$	307,056	$	5,705,609