Note 5 - Loans Acquired

9 Months Ended

Sep. 30, 2015

Loans Acquired [Abstract]

Loans Acquired [Text Block]

NOTE 5: LOANS ACQUIRED

On September 15, 2015, the Company entered into an agreement with the FDIC to terminate all loss share agreements which were entered into in 2010 and 2012 in conjunction with the Company’s acquisition of substantially all of the assets (“covered assets”) and assumption of substantially all of the liabilities of four failed banks in FDIC-assisted transactions. Under the early termination, all rights and obligations of the Company and the FDIC under the FDIC loss share agreements, including the clawback provisions and the settlement of loss share and expense reimbursement claims, have been resolved and terminated.

Under the terms of the agreement, the FDIC made a net payment of $2,368,000 to the bank as consideration for the early termination of the loss share agreements. The early termination was recorded in the Company’s financial statements by removing the FDIC Indemnification Asset, receivable from FDIC, the FDIC True-up liability and recording a one-time, pre-tax charge of $7,476,000. As a result, the Company reclassified loans previously covered by FDIC loss share to loans acquired, not covered by FDIC loss share. Foreclosed assets previously covered by FDIC loss share were reclassified to foreclosed assets not covered by FDIC loss share.

During the first quarter of 2015, the Company evaluated $769.9 million of net loans ($774.8 million gross loans less $4.9 million discount) purchased in conjunction with the acquisition of Liberty, 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 $10.7 million of net loans ($15.7 million gross loans less $5.0 million discount) purchased in conjunction with the acquisition of Liberty 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.

Also during the first quarter of 2015, the Company evaluated $1.13 billion of net loans ($1.15 billion gross loans less $23.7 million discount) purchased in conjunction with the acquisition of Community First, 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 $7.0 million of net loans ($10.1 million gross loans less $3.1 million discount) purchased in conjunction with the acquisition of Community First for impairment in accordance with the provisions of ASC Topic 310-30.

The following table reflects the carrying value of all acquired loans as of September 30, 2015 and December 31, 2014:

	Loans Acquired
(in thousands)	September 30, 2015		December 31, 2014
Consumer:
Other consumer	$	100,080	$	8,514
Total consumer		100,080		8,514
Real estate:
Construction		116,302		46,911
Single family residential		618,031		175,970
Other commercial		988,831		390,877
Total real estate		1,723,164		613,758
Commercial:
Commercial		164,942		56,134
Agricultural		25,630		4,507
Total commercial		190,572		60,641
Other		-		-
Total loans acquired (1)	$	2,013,816	$	682,913

 (1) Loans acquired are reported net of a $954,000 allowance at September 30, 2015. Loans acquired include $106.9 million (net of a $954,000 allowance) of loans covered by FDIC loss share agreements at December 31, 2014.

Nonaccrual acquired loans, excluding purchased credit impaired loans accounted for under ASC Topic 310-30, segregated by class of loans, are as follows (see Note 4, Loans an Allowance for Loan Losses, for discussion of nonaccrual loans):

(In thousands)	September 30, 2015		December 31, 2014
Consumer:
Other consumer	$	167	$	29
Total consumer		167		29
Real estate:
Construction		133		105
Single family residential		5,274		2,018
Other commercial		6,836		271
Total real estate		12,243		2,394
Commercial:
Commercial		1,165		291
Agricultural		13		3
Total commercial		1,178		294
Other		-		-
Total	$	13,588	$	2,717

An age analysis of past due acquired loans, 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
September 30, 2015
Consumer:
Other consumer	$	992	$	123	$	1,115	$	98,965	$	100,080	$	44
Total consumer		992		123		1,115		98,965		100,080		44
Real estate:
Construction		6,229		4,671		10,900		105,402		116,302		442
Single family residential		8,560		3,965		12,525		605,506		618,031		1,022
Other commercial		10,007		7,813		17,820		971,011		988,831		904
Total real estate		24,796		16,449		41,245		1,681,919		1,723,164		2,368
Commercial:
Commercial		3,503		3,858		7,361		157,581		164,942		379
Agricultural		412		10		422		25,208		25,630		10
Total commercial		3,915		3,868		7,783		182,789		190,572		389
Other		-		-		-		-		-		-
Total	$	29,703	$	20,440	$	50,143	$	1,963,673	$	2,013,816	$	2,801
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		-
Total	$	5,691	$	9,460	$	15,151	$	560,829	$	575,980	$	599

The following table presents a summary of acquired loans by credit risk rating, segregated by class of loans (see Note 4, Loans an Allowance for Loan Losses, for discussion of loan risk rating). Loans accounted for under ASC Topic 310-30 are all included in Risk Rate 1-4 in this table.

(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
September 30, 2015
Consumer:
Other consumer	$	99,732	$	-	$	-	$	348	$	-	$	100,080
Total consumer		99,732		-		-		348		-		100,080
Real estate:
Construction		109,987		78		6,237		-		-		116,302
Single family residential		603,543		1,791		10,953		1,739		4		618,031
Other commercial		957,247		6,370		25,214		-		-		988,831
Total real estate		1,670,778		8,239		42,404		1,739		4		1,723,164
Commercial:
Commercial		156,319		133		8,469		21		-		164,942
Agricultural		25,328		-		302		-		-		25,630
Total commercial		181,647		133		8,771		21		-		190,572
Other		-		-		-		-		-		-
Total	$	1,952,157	$	8,372	$	51,175	$	2,108	$	4	$	2,013,816
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 were individually evaluated and recorded at estimated fair value, including estimated credit losses, at the time of acquisition. These loans 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 loans acquired in the Liberty acquisition on February 27, 2015, as of the date of acquisition.

(in thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	774,777		$	15,716
Non-accretable difference (expected losses and foregone interest)		-			(4,978	)
Cash flows expected to be collected at acquisition		774,777			10,738
Accretable yield		(4,869	)		12
Basis in acquired loans at acquisition	$	769,908		$	10,750

The following is a summary of the loans acquired in the Community First acquisition on February 27, 2015, as of the date of acquisition.

(in thousands)	Not Impaired			Impaired
Contractually required principal and interest at acquisition	$	1,153,255		$	10,143
Non-accretable difference (expected losses and foregone interest)		-			(3,247	)
Cash flows expected to be collected at acquisition		1,153,255			6,896
Accretable yield		(23,712	)		104
Basis in acquired loans at acquisition	$	1,129,543		$	7,000

The amount of the estimated cash flows expected to be received from the purchased credit impaired loans in excess of the fair values recorded for 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 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 loans. For those loans previously covered by FDIC loss share, the increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which was recorded as indemnification assets.  The estimated adjustments to the indemnification assets were amortized on a level-yield basis over the remainder of the loss sharing agreements or the remaining expected lives of the loans, whichever was shorter. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization in future quarters.

The impact of the adjustments on the Company’s financial results for the three and nine months ended September 30, 2015 and 2014 is shown below:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2015			2014			2015			2014
Impact on net interest income	$	9,699		$	4,974		$	19,024		$	18,216
Non-interest income (1)		(2,033	)		(3,724	)		(7,718	)		(17,570	)
Net impact to pre-tax income		7,666			1,250			11,306			646
Net impact, net of taxes	$	4,658		$	760		$	6,871		$	393

 (1) Negative non-interest income resulted from the amortization of the FDIC indemnification assets. Because the Company’s loss share agreements with the FDIC have been terminated, there will be no further indemnification asset amortization in future quarters.

These adjustments will be recognized over the remaining lives of the loans for purchased credit impaired loans. The accretable yield adjustments recorded in future periods will change as the Company continues to evaluate expected cash flows from the purchased credit impaired loans.

Changes in the carrying amount of the accretable yield for all purchased impaired loans were as follows for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	15,048		$	160,094		$	20,635		$	169,098
Additions		-			-			(116	)		17,750
Accretable yield adjustments		575			-			6,018			-
Accretion		(9,744	)		9,744			(20,658	)		20,658
Payments and other reductions, net		(4,476	)		(129,985	)		(4,476	)		(167,633	)
Balance, ending	$	1,403		$	39,853		$	1,403		$	39,853

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(In thousands)	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Beginning balance	$	31,290		$	192,093		$	41,385		$	234,785
Additions		234			3,404			234			3,404
Accretable yield adjustments		(877	)		-			4,534			-
Accretion		(6,063	)		6,063			(21,569	)		21,569
Payments and other reductions, net		-			(12,960	)		-			(71,158	)
Balance, ending	$	24,584		$	188,600		$	24,584		$	188,600

Purchased impaired loans are evaluated on an individual borrower basis. Because some loans evaluated by the Company, previously 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 $954,000 allowance for loan losses for covered purchased impaired loans.  During 2015, the Company recorded a provision totaling $737,000 to cover impairment in the estimated credit quality of acquired loans, not covered by loss share. Non-covered loans were subsequently charged-off and the allowance was used during 2015. Because of the termination of the loss share agreements, the allowance for previously covered loans was reclassified to allowance for acquired non-covered loans, resulting in a total allowance on acquired non-covered loans of $954,000 at September 30, 2015.

The purchase and assumption agreements for the FDIC-assisted acquisitions allowed for the FDIC to recover a portion of the funds previously paid out under the indemnification agreement in the event losses failed to reach the expected loss level under a claw back provision (“true-up provision”). The amount of the true-up provision for each acquisition was measured and recorded at Day 1 fair values. It was 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, then discounted back to net present value.

Under the terms of the loss share termination agreement, the FDIC made a net payment of $2.4 million to the bank as consideration for early termination. The early termination was recorded in the Company’s financial statements by removing the FDIC indemnification asset, receivable from FDIC, the FDIC true-up provision and recording a one-time, pre-tax charge of $7.5 million.

The following table presents a summary of the changes in the FDIC true-up provision for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015			2014		2015			2014
Beginning balance	$	8,921		$	7,768	$	8,308		$	6,768
Amortization expense		27			42		107			126
Adjustments related to changes in expected losses		187			278		720			1,194
Loss share termination agreement		(9,135	)		-		(9,135	)		-
Balance, ending	$	-		$	8,088	$	-		$	8,088