Note 5 - Loans Acquired

6 Months Ended

Jun. 30, 2014

NOTE 5:

LOANS ACQUIRED

During the fourth quarter of 2013, the Company evaluated $429.0 million of net loans ($442.0 million gross loans less $13.0 million discount) purchased in conjunction with the acquisition of Metropolitan, described in Note 2, Acquisitions, in accordance with the provisions of ASC Topic 310-20, Nonrefundable Fees and Other Costs. The fair value discount is being accreted into interest income over the weighted average life of the loans using a constant yield method. These loans are not considered to be impaired loans. The Company evaluated the remaining $28.4 million of net loans ($52.8 million gross loans less $24.5 million discount) purchased in conjunction with the acquisition of Metropolitan for impairment 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.

The Company evaluated all of the loans purchased in conjunction with its previous FDIC-assisted transactions in accordance with the provisions of ASC Topic 310-30. All loans acquired in the FDIC transactions, both covered and not covered, were deemed to be impaired loans. 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. These loans were not classified as nonperforming assets at June 30, 2014 or December 31, 2013, as the loans are accounted for on a pooled basis and the pools are considered to be performing. See Note 2, Acquisitions, for further discussion of loans acquired

The following table reflects the carrying value of all acquired loans as of June 30, 2014 and December 31, 2013:

	Loans Acquired
(in thousands)	June 30, 2014		December 31, 2013

Consumer:
Credit Cards	$	5,820	$	8,116
Other consumer		9,649		15,242
Total consumer		15,469		23,358
Real estate:
Construction		48,019		58,954
Single family residential		138,142		169,599
Other commercial		275,739		338,529
Total real estate		461,900		567,082
Commercial:
Commercial		43,122		71,857
Total commercial		43,122		71,857
Total loans acquired (1)	$	520,491	$	662,297

(1)	Included in loans acquired were $121.5 million and $146.7 million of loans covered by FDIC loss share agreements at June 30, 2014 and December 31, 2013, respectively.

Loans acquired as a part of the Metropolitan transaction were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. The loans acquired in FDIC assisted transactions were grouped into pools based on common risk characteristics and the pools were recorded at their estimated fair values, which incorporated estimated credit losses at the acquisition date. These loans and 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 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.

The amount of the estimated cash flows expected to be received from the acquired loan pools and purchased credit impaired loans in excess of the fair values recorded for the loan pools and 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 loan pools and purchased credit impaired loans, 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, 2014 and 2013, is shown below:

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2014			2013			2014			2013

Impact on net interest income	$	5,856		$	3,150		$	13,247		$	6,097
Non-interest income		(6,410	)		(3,062	)		(13,850	)		(5,890	)
Net impact to pre-tax income		(554	)		88			(603	)		207
Net impact, net of taxes	$	(337	)	$	53		$	(366	)	$	126

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 $25.1 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $18.6 million. Of the remaining adjustments, the Company expects to recognize $9.6 million of interest income and a $10.6 million reduction of non-interest income, for a net reduction to pre-tax income of approximately $1.0 million during the remainder of 2014. 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 loans were as follows for the three and six months ended June 30, 2014 and 2013.

	Three Months Ended June 30, 2014						Six Months Ended June 30, 2014
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans

Beginning balance	$	33,542		$	218,532		$	41,385		$	234,785
Additions	--			--				--			--
Accretable yield adjustments		3,928			--			5,411			--
Accretion	(6,180		)	6,180			(15,506		)	15,506
Payments and other reductions, net		--		(32,619		)		--		(58,198		)
Balance, ending	$	31,290		$	192,093		$	31,290		$	192,093

	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	$	55,187		$	260,282		$	58,066		$	293,606
Additions		--			--			--			--
Accretable yield adjustments		592			--			6,383			--
Accretion		(7,861	)		7,861			(16,531	)		16,531
Payments and other reductions, net		--			(40,907	)		--			(82,901	)
Balance, ending	$	47,918		$	227,236		$	47,918		$	227,236

Purchased impaired loans on the FDIC-assisted transactions are evaluated in pools with similar characteristics. No pools evaluated by the Company were determined to have experienced impairment in the estimated credit quality or cash flows. For Metropolitan, purchased impaired loans are evaluated on an individual borrower basis. No loans evaluated by the Company were determined to have experienced further impairment. Therefore, there were no allowances for loan losses related to the purchased impaired loans at June 30, 2014 or December 31, 2013.

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, 2014 and 2013.

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2014		2013		2014		2013

Beginning balance	$	7,253	$	5,256	$	6,768	$	4,854
FDIC true-up provision recorded on new acquisitions		--		--		--		--
Amortization expense		41		38		84		81
Adjustments related to changes in expected losses		474		283		916		642
Balance, ending	$	7,768	$	5,577	$	7,768	$	5,577