Note 5 - Loans Acquired

6 Months Ended

Jun. 30, 2013

NOTE 5: LOANS ACQUIRED

The Company evaluated loans acquired in its FDIC-assisted transactions for impairment in accordance with the provisions of ASC Topic 310-30. 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 June 30, 2013 and December 31, 2012:

	Loans Acquired
(in thousands)	June 30, 2013		December 31, 2012

Consumer:
Other consumer	$	872	$	1,847
Total consumer		872		1,847
Real estate:
Construction		18,444		19,172
Single family residential		73,313		90,795
Other commercial		126,022		160,148
Total real estate		217,779		270,115
Commercial:
Commercial		8,585		18,950
Agricultural		--		2,694
Total commercial		8,585		21,644
Total loans acquired (1) (2)	$	227,236	$	293,606

(1)

These loans were not classified as non-performing assets at June 30, 2013 or December 31, 2012, 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 $163.7 million and $210.8 million of loans covered by FDIC loss share agreements at June 30, 2013 and December 31, 2012, 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 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 three and six months ended June 30, 2013 and 2012, is shown below:

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2013			2012			2013			2012

Impact on net interest income	$	3,150		$	3,004		$	6,097		$	6,189
Non-interest income		(3,062	)		(2,737	)		(5,890	)		(5,516	)
Net impact to pre-tax income		88			267			207			673
Net impact, net of taxes	$	53		$	162		$	126		$	409

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 $19.5 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $16.9 million. Of the remaining adjustments, the Company expects to recognize $5.5 million of interest income and a $5.5 million reduction of non-interest income, resulting in no impact to pre-tax income, during the remainder of 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 three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30, 2013						Six Months Ended June 30, 2013
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans

Beginning balance	$	49,396		$	260,282		$	58,066		$	293,606
Additions		--			--			--			--
Accretable yield adjustments		--			--			--			--
Accretion		(7,861	)		7,861			(16,531	)		16,531
Payments and other reductions, net		--			(40,907	)		--			(82,901	)
Balance, ending	$	41,535		$	227,236		$	41,535		$	227,236

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans

Beginning balance	$	36,860		$	129,755		$	42,833		$	158,075
Additions		--			--			--			--
Accretable yield adjustments		--			--			--			--
Accretion		(4,994	)		4,994			(10,967	)		10,967
Payments and other reductions, net		--			(20,560	)		--			(54,853	)
Balance, ending	$	31,866		$	114,189		$	31,866		$	114,189

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 June 30, 2013 or December 31, 2012.

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 three and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2013		2012		2013		2012

Beginning balance	$	5,256	$	3,699	$	4,854	$	3,419
FDIC true-up provision recorded on new acquisitions		--		--		--		--
Amortization expense		38		38		81		66
Adjustments related to changes in expected losses		283		250		642		502
Balance, ending	$	5,577	$	3,987	$	5,577	$	3,987