Note 5 - Loans Acquired

12 Months Ended

Dec. 31, 2014

Loans Acquired [Abstract]

Loans Acquired [Text Block]

NOTE 5: LOANS ACQUIRED

During the third quarter of 2014, the Company evaluated $308.2 million of net loans ($316.1 million gross loans less $7.9 million discount) purchased in conjunction with the acquisition of Delta Trust, 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 $3.5 million of net loans ($10.7 million gross loans less $7.2 million discount) purchased in conjunction with the acquisition of Delta Trust 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.

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. 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. 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.  See Note 2, Acquisitions and Note 5, Loans Acquired, for further discussion of loans acquired.

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

	Loans Acquired At December 31,
(in thousands)	2014		2013
Consumer:
Credit cards	$	-	$	8,116
Other consumer		8,514		15,242
Total consumer		8,514		23,358
Real estate:
Construction		46,911		29,936
Single family residential		175,970		87,861
Other commercial		390,877		449,285
Total real estate		613,758		567,082
Commercial:
Commercial		56,134		71,857
Agricultural		4,507		-
Total commercial		60,641		71,857
Total loans acquired (1)	$	682,913	$	662,297

(1)  Loans acquired include $106.9 million (net of $1.0 million allowance) and $146.7 million of loans covered by FDIC loss share agreements at December 31, 2014 and 2013, respectively.

Nonaccrual acquired loans, excluding loans and loans covered by loss share accounted for under ASC Topic 310-30, at December 31, 2014, segregated by class of loans, are as follows (see Note 4, Loans an Allowance for Loan Losses, for discussion of nonaccrual loans):

(In thousands)	2014
Consumer:
Other consumer	$	29
Total consumer		29
Real estate:
Construction		105
Single family residential		2,018
Other commercial		271
Total real estate		2,394
Commercial:
Commercial		291
Agricultural		3
Total commercial		294
Total	$	2,717

An age analysis of past due acquired loans, excluding loans covered by loss share, at December 31, 2014, segregated by class of loans, is as follows (see Note 4, Loans an 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
December 31, 2014
Consumer:
Other consumer	$	70	$	34	$	104	$	8,407	$	8,511	$	5
Total consumer		70		34		104		8,407		8,511		5
Real estate:
Construction		292		105		397		36,450		36,847		-
Single family residential		3,804		2,906		6,710		138,383		145,093		594
Other commercial		1,415		5,994		7,409		326,759		334,168		-
Total real estate		5,511		9,005		14,516		501,592		516,108		594
Commercial:
Commercial		110		421		531		46,730		47,261		-
Agricultural		-		-		-		4,100		4,100		-
Total commercial		110		421		531		50,830		51,361		-
Other		-		-		-		-				-
Total	$	5,691	$	9,460	$	15,151	$	560,829	$	575,980	$	599

The following table presents a summary of acquired loans, excluding loans covered by loss share, at December 31, 2014, by credit risk rating, segregated by class of loans (see Note 4, Loans an Allowance for Loan Losses, for discussion of loan risk rating).

(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
December 31, 2014
Consumer:
Other consumer	$	8,479	$	-	$	32	$	-	$	-	$	8,511
Total consumer		8,479		-		32		-		-		8,511
Real estate:
Construction		27,430		78		9,339		-		-		36,847
Single family residential		135,240		683		7,311		1,854		5		145,093
Other commercial		317,965		605		15,598		-		-		334,168
Total real estate		480,635		1,366		32,248		1,854		5		516,108
Commercial:
Commercial		43,585		69		3,607		-		-		47,261
Agricultural		3,030		-		1,070		-		-		4,100
Total commercial		46,615		69		4,677		-		-		51,361
Total	$	535,729	$	1,435	$	36,957	$	1,854	$	5	$	575,980

Loans acquired as a part of the Metropolitan and Delta Trust transactions 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 following is a summary of the non-covered loans acquired in the Delta acquisition on August 31, 2014, as of the date of acquisition.

(in thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	316,103		$	10,726
Non-accretable difference (expected losses and foregone interest)		-			(7,023	)
Cash flows expected to be collected at acquisition		316,103			3,703
Accretable yield		(7,949	)		(177	)
Basis in acquired loans at acquisition	$	308,154		$	3,526

The following is a summary of the non-covered loans acquired in the Metropolitan acquisition on November 25, 2013, as of the date of acquisition.

(in thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	442,009		$	52,830
Non-accretable difference (expected losses and foregone interest)		-			(21,962	)
Cash flows expected to be collected at acquisition		442,009			30,868
Accretable yield		(12,989	)		(2,516	)
Basis in acquired loans at acquisition	$	429,020		$	28,352

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 loans acquired in the Delta Trust, Metropolitan, Truman and Excel transactions were $836.0 million.  The cash flows expected to be collected as of the acquisition dates for these loans were $742.1 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 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.  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, 2014 and 2013 is shown below:

(In thousands)	2014			2013
Impact on net interest income	$	26,400		$	18,905
Non-interest income		(20,540	)		(18,106	)
Net impact to pre-tax income		5,860			799
Net impact, net of taxes	$	3,561		$	486

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 $17.0 million and the remaining adjustment to the indemnification assets that will reduce non-interest income is $10.6 million.  Of the remaining adjustments, the Company expects to recognize $9.1 million of interest income and a $7.9 million reduction of non-interest income for a net addition to pre-tax income of approximately $1.2 million during 2015.  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 years ended December 31, 2014, 2013 and 2012.

(in thousands)	Accretable Yield			Carrying Amount of Loans
Balance, January 1, 2012	$	42,833		$	158,075
Additions		39,371			229,835
Accretion		(24,138	)		24,138
Payments and other reductions, net		-			(118,442	)
Balance, December 31, 2012		58,066			293,606
Additions		2,516			28,352
Accretable yield adjustments		17,380			-
Accretion		(36,577	)		36,577
Payments and other reductions, net		-			(123,750	)
Balance, December 31, 2013		41,385			234,785
Additions		177			3,526
Accretable yield adjustments		9,104			-
Accretion		(30,031	)		30,031
Payments and other reductions, net		-			(99,122	)
Balance, December 31, 2014	$	20,635		$	169,098

Purchased impaired loans on the FDIC-assisted transactions are evaluated in pools with similar characteristics.  Because some pools evaluated by the Company, covered by loss share agreements, were determined to have experienced impairment in the estimated credit quality or cash flows during 2014, the Company recorded a provision to establish a $1.0 million allowance for loan losses for covered purchased impaired loans.  For Metropolitan and Delta Trust, purchased impaired loans are evaluated on an individual borrower basis.  No loans, not covered by loss share, evaluated by the Company were determined to have experienced further impairment.  Therefore, there were no allowances for loan losses related to the non-covered purchased impaired loans at December 31, 2014 or 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 years ended December 31, 2014, 2013 and 2012, which is included in other assets on the balance sheet.

(in thousands)	FDIC True-up Provision
Balance, January 1, 2012	$	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
Amortization expense		160
Adjustments related to changes in expected losses		1,754
Balance, December 31, 2013		6,768
Amortization expense		168
Adjustments related to changes in expected losses		1,372
Balance, December 31, 2014	$	8,308