Note 5 - Loans Acquired

12 Months Ended

Dec. 31, 2012

Loans Acquired [Text Block]

NOTE 5: LOANS ACQUIRED

The Company evaluated loans purchased in conjunction with the acquisition of Truman and Excel described in Note 2, Acquisitions, for impairment in accordance with the provisions of ASC Topic 310-30.  Loans acquired in previous FDIC-assisted transactions were evaluated in the same manner.  All loans acquired, whether or not covered by FDIC loss share agreements, 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.  The following table reflects the carrying value of all acquired impaired loans as of December 31, 2012 and 2011:

	Loans Acquired At December 31,
(in thousands)	2012		2011
Consumer:
Other consumer	$	1,847	$	23
Total consumer		1,847		23
Real estate:
Construction		19,172		23,515
Single family residential		90,795		26,825
Other commercial		160,148		102,198
Total real estate		270,115		152,538
Commercial:
Commercial		18,950		5,514
Agricultural		2,694		--
Total commercial		21,644		5,514
Total loans acquired (1) (2)	$	293,606	$	158,075

(1)  These loans were not classified as non-performing assets at December 31, 2012 or December 31, 2011, as the loans are accounted for on a pooled basis and the pools are considered to be performing.  Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased impaired loans.  The loans are grouped in pools sharing common risk characteristics and were treated in the aggregate when applying various valuation techniques.

(2)  Included in loans acquired were $210.8 million and $158.1 million of loans covered by FDIC loss share agreements at December 31, 2012 and December 31, 2011, respectively.

The acquired loans were grouped into pools based on common risk characteristics and were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date.  These loan pools 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 non-covered loan portfolio, with most focus being placed on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics.

The following is a summary of the covered impaired loans acquired in the acquisitions during 2012, as of the dates of acquisition.

(in thousands)	Truman			Excel
Contractually required principal and interest at acquisition	$	90,227		$	121,850
Non-accretable difference (expected losses and foregone interest)		(25,308	)		(29,258	)
Cash flows expected to be collected at acquisition		64,919			92,592
Accretable yield		(7,778	)		(14,445	)
Basis in acquired loans at acquisition	$	57,141		$	78,147

The following is a summary of the non-covered impaired loans acquired in the acquisitions during 2012, as of the dates of acquisition.

(in thousands)	Truman			Excel
Contractually required principal and interest at acquisition	$	99,065		$	30,048
Non-accretable difference (expected losses and foregone interest)		(12,248	)		(5,170	)
Cash flows expected to be collected at acquisition		86,817			24,878
Accretable yield		(13,422	)		(3,726	)
Basis in acquired loans at acquisition	$	73,395		$	21,152

As of the respective acquisition dates, the estimates of contractually required payments receivable, including interest, for all covered and non-covered impaired loans acquired in the Truman and Excel transactions were $341.2 million.  The cash flows expected to be collected as of the acquisition dates for these loans were $269.2 million, including interest.  These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments.

The amount of the estimated cash flows expected to be received from the acquired loan pools in excess of the fair values recorded for the loan pools 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 loan pools, and adjustments may or may not be required.  Beginning in the fourth quarter of 2011, the cash flows estimate has increased on the loans acquired in 2010 based on payment histories and reduced loss expectations of the loan pools.  This has resulted in increased interest income that is spread on a level-yield basis over the remaining expected lives of the loan pools.  Because these particular loan pools are covered by FDIC loss share, the increases in expected cash flows also reduce the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as indemnification assets.  The estimated adjustments to the indemnification assets are amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever is shorter.

The impact of the adjustments on the Company’s financial results for the years ended December 31, 2012 and 2011 is shown below:

(In thousands)	2012			2011
Impact on net interest income	$	11,751		$	1,124
Non-interest income		(10,755	)		(978	)
Net impact to pre-tax income		997			146
Net impact, net of taxes	$	606		$	89

Because these adjustments will be recognized over the remaining lives of the loan pools and the remainder of the loss sharing agreements, respectively, they will impact future periods as well.  The current estimate of the remaining accretable yield adjustment that will positively impact interest income is $19.2 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $16.8 million.  Of the remaining adjustments, the Company expects to recognize $9.6 million of interest income and a $9.1 million reduction of non-interest income for a net addition to pre-tax income of approximately $540,000 during 2013.  The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the acquired loan pools.

Changes in the carrying amount of the accretable yield for all purchased impaired and non-impaired loans were as follows for the years ended December 31, 2012, 2011 and 2010.

(in thousands)	Accretable Yield			Carrying Amount of Loans
Balance, January 1, 2010	$	--		$	--
Additions		40,451			259,335
Accretion		(4,204	)		4,204
Payments and other reductions, net		--			(31,939	)
Balance, December 31, 2010	$	36,247		$	231,600
Additions		--			--
Accretable yield adjustments		23,704			--
Accretion		(17,118	)		17,118
Payments and other reductions, net		--			(90,643	)
Balance, December 31, 2011	$	42,833		$	158,075
Additions		39,371			229,835
Accretable yield adjustments		--			--
Accretion		(24,138	)		24,138
Payments and other reductions, net		--			(118,442	)
Balance, December 31, 2012	$	58,066		$	293,606

No pools evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows.  There were no allowances for loan losses related to the purchased impaired loans at December 31, 2012 or 2011.

The purchase and assumption agreements for the FDIC-assisted acquisitions allow for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses fail to reach the expected loss level under a claw back provision (“true-up provision”).  The amount of the true-up provision for each acquisition is measured and recorded at Day 1 fair values.  It is calculated as the difference between management’s estimated losses on covered loans and covered foreclosed assets and the loss threshold contained in each loss share agreement, multiplied by the applicable clawback provisions contained in each loss share agreement.  This true-up amount, which is payable to the FDIC upon termination of the applicable loss share agreement, is then discounted back to net present value.  To the extent that actual losses on covered loans and covered foreclosed assets are less than estimated losses, the applicable true-up provision payable to the FDIC upon termination of the loss share agreements will increase. To the extent that actual losses on covered loans and covered foreclosed assets are more than estimated losses, the applicable true-up provision payable to the FDIC upon termination of the loss share agreements will decrease.

The following table presents a summary of the changes in the FDIC true-up provision for the years ended December 31, 2012, 2011 and 2010.

(in thousands)	Tune-up Provision
Balance, January 1, 2010	$	--
FDIC true-up provision recorded on new acquisitions		3,188
Amortization expense		58
Adjustments related to changes in expected losses		--
Balance, December 31, 2010	$	3,246
FDIC true-up provision recorded on new acquisitions		--
Amortization expense		131
Adjustments related to changes in expected losses		42
Balance, December 31, 2011	$	3,419
FDIC true-up provision recorded on new acquisitions		328
Amortization expense		138
Adjustments related to changes in expected losses		969
Balance, December 31, 2012	$	4,854