Accounting for Certain Loans Acquired with Deteriorated Credit Quality

In June 2010 and May 2016, the Company acquired certain loans that had deteriorated credit quality (ASC 310-30 loans). Loan accounting specific to these purchased credit impaired loans addresses differences between contractual cash flows expected to be collected from the initial investment in loans if those differences are attributable, at least in part, to credit quality. Several factors were considered when evaluating whether a loan was considered a purchased credit impaired loan, including the delinquency status of the loan, updated borrower credit status, geographic information, and updated loan-to-values (“LTV”). U.S. GAAP allows purchasers to aggregate purchased credit impaired loans acquired in the same fiscal quarter in one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows.

Loan pools are periodically reassessed to determine expected cash flows. In determining the expected cash flows, the timing of cash flows and prepayment assumptions for smaller, homogeneous loans are based on statistical models that take into account factors such as the loan interest rate, credit profile of the borrowers, the years in which the loans were originated, and whether the loans are fixed or variable rate loans. Prepayments may be assumed on large individual loans that consider similar prepayment factors listed above for smaller homogeneous loans. The re-assessment of purchased credit impaired loans resulted in the following changes in the accretable yield during the three months ended December 31, 2016 and 2015:



	Three Months Ended December 31,
	2016			2015
	(dollars in thousands)
Balance at beginning of period	$	38,124		$	44,489
Accretion	(2,938		)	(2,329		)
Reclassification from (to) nonaccretable difference	4,572			(278		)
Balance at end of period	$	39,758		$	41,882

The reclassification from nonaccretable difference noted in the table above represents instances where specific pools of loans are expected to perform better over the remaining lives of the loans than expected at the prior re-assessment date. The reclassification to nonaccretable difference noted in the table above represents instances where specific pools of loans are estimated to have a shortfall in the expected future cash flows compared to the contractual cash flows at the prior re-assessment date.

The following table provides purchased credit impaired loans at December 31, 2016 and September 30, 2016:



	December 31, 2016						September 30, 2016
	Outstanding Balance ¹		Recorded Investment ²		Carrying Value ³		Outstanding Balance ¹		Recorded Investment ²		Carrying Value ³
	(dollars in thousands)
Residential real estate	$	72,421	$	61,846	$	60,980	$	76,696	$	65,737	$	64,830
Commercial real estate	127,464		42,885		41,988		129,615		44,448		43,676
Commercial non real estate	11,482		2,902		2,902		11,588		3,196		3,196
Agriculture	18,696		14,958		14,958		19,174		15,254		15,254
Consumer	957		817		817		1,033		896		896
Total lending	$	231,020	$	123,408	$	121,645	$	238,106	$	129,531	$	127,852

¹Represents the legal balance of ASC 310-30 loans.
² Represents the book balance of ASC 310-30 loans.
³ Represents the book balance of ASC 310-30 loans net of the related allowance for loan and lease losses.

Due to reduced cash flows of the purchased credit impaired loans, the allowance recognized on previous impairments was $0.1 million for the three months ended December 31, 2016. For the three months ended December 31, 2015, the allowance recognized on previous impairments was reduced by $0.2 million due to improved cash flows of the purchased impaired loans.