LOANS ACQUIRED

The Company accounts for its acquisitions under ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the loans acquired is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820, Fair Value Measurement. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

The Company evaluates non-impaired loans acquired in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount on these loans is accreted into interest income over the weighted average life of the loans using a constant yield method. The Company evaluates purchased impaired loans in accordance with the provisions of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased loans are considered impaired if there is evidence of credit deterioration since origination and if it is probable that not all contractually required payments will be collected.

For impaired loans accounted for under ASC Topic 310-30, the Company continues to estimate cash flows expected to be collected on purchased credit impaired loans. The Company evaluates, at each balance sheet date, whether the present value of the purchased credit impaired loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in the consolidated statement of income. For any significant increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the remaining life of the purchased credit impaired loan.

The following table reflects the carrying value of all loans acquired as of March 31, 2019 and December 31, 2018:



	Loans Acquired
(In thousands)	March 31, 2019		December 31, 2018
Consumer:
Other consumer	$	11,979	$	15,658
Real estate:
Construction	404,512		429,605
Single family residential	533,917		566,188
Other commercial	1,730,472		1,848,679
Total real estate	2,668,901		2,844,472
Commercial:
Commercial	374,033		430,914
Agricultural	1,274		1,739
Total commercial	375,307		432,653
Total loans acquired ⁽¹⁾	$	3,056,187	$	3,292,783

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(1) Loans acquired are reported net of a $1,312,000 and $95,000 allowance at March 31, 2019 and December 31, 2018, respectively.

Nonaccrual loans acquired, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 4, Loans and Allowance for Loan Losses, for discussion of nonaccrual loans):



(In thousands)	March 31, 2019		December 31, 2018

Consumer:
Other consumer	$	149	$	140
Real estate:
Construction	130		114
Single family residential	6,342		6,603
Other commercial	8,973		1,167
Total real estate	15,445		7,884
Commercial:
Commercial	3,117		13,578
Agricultural	20		38
Total commercial	3,137		13,616
Total	$	18,731	$	21,640

An age analysis of past due loans acquired segregated by class of loans, is as follows (see Note 4, Loans and Allowance for Loan Losses, for discussion of past due loans):



(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing

March 31, 2019
Consumer:
Other consumer	$	94	$	77	$	171	$	11,808	$	11,979	$	—
Real estate:
Construction	5		8,122		8,127		396,385		404,512		—
Single family residential	5,058		2,583		7,641		526,276		533,917		24
Other commercial	305		8,267		8,572		1,721,900		1,730,472		—
Total real estate	5,368		18,972		24,340		2,644,561		2,668,901		24
Commercial:
Commercial	7,265		6,673		13,938		360,095		374,033		—
Agricultural	—		—		—		1,274		1,274		—
Total commercial	7,265		6,673		13,938		361,369		375,307		—

Total	$	12,727	$	25,722	$	38,449	$	3,017,738	$	3,056,187	$	24



(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

December 31, 2018
Consumer:
Other consumer	$	337	$	49	$	386	$	15,272	$	15,658	$	2
Real estate:
Construction	8,283		27		8,310		421,295		429,605		—
Single family residential	4,706		3,049		7,755		558,433		566,188		—
Other commercial	168		577		745		1,847,934		1,848,679		—
Total real estate	13,157		3,653		16,810		2,827,662		2,844,472		—
Commercial:
Commercial	1,302		9,542		10,844		420,070		430,914		—
Agricultural	31		5		36		1,703		1,739		—
Total commercial	1,333		9,547		10,880		421,773		432,653		—

Total	$	14,827	$	13,249	$	28,076	$	3,264,707	$	3,292,783	$	2

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



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

March 31, 2019
Consumer:
Other consumer	$	11,715	$	—	$	264	$	—	$	—	$	11,979
Real estate:
Construction	369,267		27,475		7,770		—		—		404,512
Single family residential	520,159		2,049		11,373		336		—		533,917
Other commercial	1,675,051		11,894		43,527		—		—		1,730,472
Total real estate	2,564,477		41,418		62,670		336		—		2,668,901
Commercial:
Commercial	352,779		3,739		17,515		—		—		374,033
Agricultural	1,208		—		66		—		—		1,274
Total commercial	353,987		3,739		17,581		—		—		375,307

Total	$	2,930,179	$	45,157	$	80,515	$	336	$	—	$	3,056,187



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

December 31, 2018
Consumer:
Other consumer	$	15,380	$	—	$	278	$	—	$	—	$	15,658
Real estate:
Construction	393,122		27,621		8,862		—		—		429,605
Single family residential	553,460		2,081		10,299		348		—		566,188
Other commercial	1,822,179		9,137		17,363		—		—		1,848,679
Total real estate	2,768,761		38,839		36,524		348		—		2,844,472
Commercial:
Commercial	401,300		12,416		17,198		—		—		430,914
Agricultural	1,642		—		97		—		—		1,739
Total commercial	402,942		12,416		17,295		—		—		432,653

Total	$	3,187,083	$	51,255	$	54,097	$	348	$	—	$	3,292,783

Loans acquired were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans are systematically reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition. Techniques used in determining risk of loss are similar to the Company’s legacy loan portfolio, with most focus being placed on those loans which include the larger loan relationships and those loans which exhibit higher risk characteristics.

In addition to the accretable yield on loans acquired not considered to be impaired, the amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for the purchased credit impaired loans is referred to as the accretable yield. The accretable yield is recognized as interest income over the estimated lives of the loans. Each quarter, the Company estimates the cash flows expected to be collected from the acquired purchased credit impaired loans, and adjustments may or may not be required. This has resulted in an increase in interest income that is spread on a level-yield basis over the remaining expected lives of the loans. These adjustments will be recognized over the remaining lives of the purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three months ended March 31, 2019 and 2018.



	Three Months Ended March 31, 2019						Three Months Ended March 31, 2018
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	1,460		$	4,050		$	620		$	17,116
Additions	—			—			—			—
Accretable yield adjustments	17			—			1,134			—
Accretion	(9		)	9			(385		)	385
Payments and other reductions, net	—			(408		)	—			104
Balance, ending	$	1,468		$	3,651		$	1,369		$	17,605

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows, the Company recorded a provision and established an allowance for loan loss for loans acquired resulting in a total allowance on loans acquired of $1,312,000 at March 31, 2019 and $95,000 at December 31, 2018. The provision on loans acquired for the three months ended March 31, 2019 and 2018 was $2,464,000 and $68,000, respectively.