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Loss Sharing Agreements and FDIC Indemnification Assets
 3 Months Ended
Jun. 30, 2011
Loss Sharing Agreements and FDIC Indemnification Assets  
Loss Sharing Agreements and FDIC Indemnification Assets

NOTE 9: LOSS SHARING AGREEMENTS AND FDIC INDEMNIFICATION ASSETS

 

On March 20, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits (excluding brokered deposits) and acquire certain assets of TeamBank, N.A., a full service commercial bank headquartered in Paola, Kansas.  A detailed discussion of this transaction is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, under the section titled “Item 8. Financial Statements and Supplementary Information.”

 

The loans, commitments and foreclosed assets purchased in the TeamBank transaction are covered by a loss sharing agreement between the FDIC and Great Southern Bank which affords the Bank significant protection. Under the loss sharing agreement, the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $115.0 million, the FDIC has agreed to reimburse the Bank for 80% of the losses. On losses exceeding $115.0 million, the FDIC has agreed to reimburse the Bank for 95% of the losses.  Realized losses covered by the loss sharing agreement include loan contractual balances (and related unfunded commitments that were acquired), accrued interest on loans for up to 90 days, the book value of foreclosed real estate acquired, and certain direct costs, less cash or other consideration received by the Bank. This agreement extends for ten years for 1-4 family real estate loans and for five years for other loans. The value of this loss sharing agreement was considered in determining fair values of loans and foreclosed assets acquired. The loss sharing agreement is subject to the Bank following servicing procedures as specified in the agreement with the FDIC. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at their preliminary estimated fair value on the acquisition date.  A discount was recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield during the three and six months ended June 30, 2011 was $668,000 and $1.4 million, respectively.  The amount accreted to yield during the three and six months ended June 30, 2010 was $400,000 and $700,000, respectively.

On September 4, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss share with the FDIC to assume all of the deposits and acquire certain assets of Vantus Bank, a full service thrift headquartered in Sioux City, Iowa.  A detailed discussion of this transaction is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, under the section titled “Item 8. Financial Statements and Supplementary Information.”

The loans, commitments and foreclosed assets purchased in the Vantus Bank transaction are covered by a loss sharing agreement between the FDIC and Great Southern Bank which affords the Bank significant protection. Under the loss sharing agreement, the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $102.0 million, the FDIC has agreed to reimburse the Bank for 80% of the losses. On losses exceeding $102.0 million, the FDIC has agreed to reimburse the Bank for 95% of the losses. Realized losses covered by the loss sharing agreement include loan contractual balances (and related unfunded commitments that were acquired), accrued interest on loans for up to 90 days, the book value of foreclosed real estate acquired, and certain direct costs, less cash or other consideration received by the Bank. This agreement extends for ten years for 1-4 family real estate loans and for five years for other loans. The value of this loss sharing agreement was considered in determining fair values of loans and foreclosed assets acquired. The loss sharing agreement is subject to the Bank following servicing procedures as specified in the agreement with the FDIC. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at their preliminary estimated fair value on the acquisition date.  A discount was recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield during the three and six months ended June 30, 2011 was $247,000 and $523,000, respectively.  The amount accreted to yield during the three and six months ended June 30, 2010 was $300,000 and $550,000, respectively. 

 

Fair Value and Expected Cash Flows.  At the time of these acquisitions, the Company determined the fair value of the loan portfolios based on several assumptions. Factors considered in the valuations were projected cash flows for the loans, type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, current discount rates and whether or not the loan was amortizing. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. Management also estimated the amount of credit losses that were expected to be realized for the loan portfolios. The discounted cash flow approach was used to value each pool of loans. For non-performing loans, fair value was estimated by calculating the present value of the recoverable cash flows using a discount rate based on comparable corporate bond rates. This valuation of the acquired loans is a significant component leading to the valuation of the loss sharing assets recorded. 

 

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.  The Company continues to evaluate the fair value of the loans including cash flows expected to be collected.  Increases in the Company’s cash flow expectations are recognized as increases to the accretable yield while decreases are recognized as impairments through the allowance for loan losses.  During the three and six months ended June 30, 2011, increases in expected cash flows related to both acquired loan portfolios resulted in adjustments of $7.9 million and $11.3 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the year ended December 31, 2010, similar such adjustments totaling $58.9 million were made to the accretable yield.  The current year increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements.  During the three and six months ended June 30, 2011, this resulted in corresponding adjustments of $7.2 million and $10.1 million, respectively, to the indemnification assets to be 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.  During the second half of the year ended December 31, 2010, similar such adjustments totaling $51.8 million were made to the indemnification assets.  The impact of adjustments on the Company’s financial results for the current reporting period is shown below:

 

 

Three Months Ended

 

Six Months Ended

 

June 30, 2011

 

June 30, 2011

 

(In Thousands, Except Per Share and Basis Points Data)

 

 

 

 

 

 

Impact on net interest income/

 

 

 

 

 

net interest margin (in basis points)

    $                12,814 

166 bps

 

    $                25,481 

164 bps

Non-interest income

                    (11,491)

 

 

                    (22,753)

 

Net impact to pre-tax income

    $                  1,323 

 

 

    $                  2,728 

 

Net impact net of taxes

    $                     860 

 

 

    $                  1,773 

 

Impact to diluted earnings per common share

    $                    0.07 

 

 

    $                    0.13 

 

 

 

Because these adjustments will be recognized over the estimated remaining lives of the loan pools, they will impact future periods as well.  The majority of the remaining $25.3 million of accretable yield adjustment affecting interest income and $(22.1) million of adjustment to the indemnification assets affecting non-interest income is expected to be recognized over the next year, with $15.2 million of interest income and $(13.5) million of non-interest income (expense) expected to be recognized in the remainder of 2011.  Additional adjustments may be recorded in future periods as the Company continues to estimate expected cash flows from the acquired loan pools.

 

The loss sharing asset is measured separately from the loan portfolio because it is not contractually embedded in the loans and is not transferable with the loans should the Bank choose to dispose of them. Fair value was estimated using projected cash flows available for loss sharing based on the credit adjustments estimated for each loan pool (as discussed above) and the loss sharing percentages outlined in the Purchase and Assumption Agreement with the FDIC. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The loss sharing asset is also separately measured from the related foreclosed real estate.

 

TeamBank FDIC Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the TeamBank transaction at June 30, 2011 and December 31, 2010. Gross loan balances (due from the borrower) were reduced approximately $240.4 million since the transaction date through repayments by the borrower, transfers to foreclosed assets or charge-offs to customer loan balances.

 

 

June 30, 2011

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

    $             195,377  

 

    $               16,615  

Non-credit premium/(discount), net of activity since acquisition date

                     (2,459) 

 

                            —

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

                   (12,533) 

 

                            —

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

                 (141,353) 

 

                     (6,672) 

 

 

 

 

Expected loss remaining

                     39,032  

 

                       9,943  

Assumed loss sharing recovery percentage

                          84%

 

                          78%

 

 

 

 

Expected loss remaining

                     32,609  

 

                       7,792  

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

                     11,886  

 

                            —

Accretable discount on FDIC indemnification asset

                     (4,186) 

 

                            —

FDIC indemnification asset

    $               40,309  

 

    $                 7,792  

 

 

December 31, 2010

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

    $             219,289  

 

    $               15,921  

Non-credit premium/(discount), net of activity since acquisition date

                     (3,875) 

 

                            —

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

                   (21,071) 

 

                            —

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

                 (144,633) 

 

                     (5,463) 

 

 

 

 

Expected loss remaining

                     49,710  

 

                     10,458  

Assumed loss sharing recovery percentage

                          85%

 

                          78%

 

 

 

 

Expected loss remaining

                     42,275  

 

                       8,204  

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

                     20,011  

 

                            —

Accretable discount on FDIC indemnification asset

                     (6,077) 

 

                            —

FDIC indemnification asset

    $               56,209  

 

    $                 8,204  

 

Vantus Bank Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the Vantus Bank transaction at June 30, 2011 and December 31, 2010. Gross loan balances (due from the borrower) were reduced approximately $153.4 million since the transaction date through repayments by the borrower, transfers to foreclosed assets or charge-downs to customer loan balances.

 

 

June 30, 2011

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

    $             178,190  

 

    $                 9,347  

Non-credit premium/(discount), net of activity since acquisition date

                        (908) 

 

                            —

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

                   (12,735) 

 

                            —

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

                 (141,920) 

 

                     (5,677) 

 

 

 

 

Expected loss remaining

                     22,627  

 

                       3,670  

Assumed loss sharing recovery percentage

                          80%

 

                          80%

 

 

 

 

Expected loss remaining

                     18,101  

 

                       2,936  

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

                     10,187  

 

                            —

Accretable discount on FDIC indemnification asset

                     (2,829) 

 

                        (109) 

FDIC indemnification asset

    $               25,459  

 

    $                 2,827  

 

 

December 31, 2010

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

    $             208,080  

 

    $                 9,944  

Non-credit premium/(discount), net of activity since acquisition date

                     (1,431) 

 

                            —

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

                   (18,428) 

 

                            —

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

                 (160,163) 

 

                     (5,899) 

 

 

 

 

Expected loss remaining

                     28,058  

 

                       4,045  

Assumed loss sharing recovery percentage

                          80%

 

                          80%

 

 

 

 

Expected loss remaining

                     22,445  

 

                       3,236  

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

                     14,743  

 

                            —

Accretable discount on FDIC indemnification asset

                     (3,850) 

 

                        (109) 

FDIC indemnification asset

    $               33,338  

 

    $                 3,127  

 

Changes in the accretable yield for acquired loan pools were as follows for the three months ended June 30, 2011 and 2010:

 

 

TeamBank

 

Vantus Bank

 

(In Thousands)

 

 

 

 

Balance, April 1, 2010

    $                 27,681 

 

    $                34,939 

Accretion

                       (3,477)

 

                      (4,495)

 

 

 

 

Balance, June 30, 2010

    $                 24,204 

 

    $                30,444 

 

 

 

 

Balance, April 1, 2011

    $                 27,287 

 

    $                31,882 

Accretion

                     (10,854)

 

                      (7,364)

Reclassification from nonaccretable difference(1)

                         6,712 

 

                        2,365 

 

 

 

 

Balance, June 30, 2011

    $                 23,145 

 

    $                26,883 

 

(1) Represents increases in estimated cash flows expected to be received from the acquired

loan pools, primarily due to lower estimated credit losses.  The numbers also include

changes in expected accretion of the loan pools totaling $2.5 million and $581,000 for

TeamBank and Vantus Bank, respectively.

 

Changes in the accretable yield for acquired loan pools were as follows for the six months ended June 30, 2011 and 2010:

 

 

TeamBank

 

Vantus Bank

 

(In Thousands)

 

 

 

 

Balance, January 1, 2010

    $                 31,300 

 

    $                39,023 

Accretion

                       (7,096)

 

                      (8,579)

 

 

 

 

Balance, June 30, 2010

    $                 24,204 

 

    $                30,444 

 

 

 

 

Balance, January 1, 2011

    $                 36,765 

 

    $                35,796 

Accretion

                     (21,523)

 

                    (15,510)

Reclassification from nonaccretable difference(1)

                         7,903 

 

                        6,597 

 

 

 

 

Balance, June 30, 2011

    $                 23,145 

 

    $                26,883 

 

(1) Represents increases in estimated cash flows expected to be received from the acquired

loan pools, primarily due to lower estimated credit losses.  The numbers also include

changes in expected accretion of the loan pools totaling $2.8 million and $1.8 million for

TeamBank and Vantus Bank, respectively.