Note 8: Loss Sharing Agreements and FDIC Indemnification Assets

3 Months Ended

Sep. 30, 2012

Notes

Note 8: Loss Sharing Agreements and FDIC Indemnification Assets

NOTE 8: 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 at least 80% protection against losses. 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.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.  A discount was recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield during the three and nine months ended September 30, 2012 was $267,000 and $1.0 million, respectively.  The amount accreted to yield during the three and nine months ended September 30, 2011 was $588,000 and $2.0 million, 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 at least 80%  protection against losses. 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.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.  A discount was recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield during the three and nine months ended September 30, 2012 was $76,000 and $338,000, respectively.  The amount accreted to yield during the three and nine months ended September 30, 2011 was $217,000 and $740,000, respectively.

On October 7, 2011, 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 Sun Security Bank, a full service bank headquartered in Ellington, Missouri.  A detailed discussion of this transaction is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, under the section titled “Item 8. Financial Statements and Supplementary Information.” 

The loans and foreclosed assets purchased in the Sun Security Bank transaction are covered by a loss sharing agreement between the FDIC and Great Southern Bank.  Under the loss sharing agreement, the FDIC has agreed to cover 80% of the losses on the loans (excluding approximately $4 million of consumer loans) and foreclosed assets purchased subject to certain limitations.  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 Great Southern.  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.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.  A discount was recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield during the three and nine months ended September 30, 2012 was $500,000 and $1.2 million, respectively.

On April 27, 2012, 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 Inter Savings Bank, FSB (“InterBank”), a full service bank headquartered in Maple Grove, Minnesota.  Established in 1965, InterBank operated four locations in three counties in the Minneapolis-St. Paul area.  Great Southern Bank assumed deposits with a fair value of $456.3 million at no premium and purchased loans with a fair value of $285.5 million and foreclosed assets with a fair value of $6.2 million at a discount of $59.9 million. 

The loans and foreclosed assets purchased in the InterBank transaction are covered by a loss sharing agreement between the FDIC and Great Southern Bank.  Under the loss sharing agreement, the FDIC has agreed to cover 80% of the losses on the loans (excluding approximately $60,000 of consumer loans) and foreclosed assets purchased subject to certain limitations.  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 Great Southern.  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.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.  The Company’s estimates of its cash flows to be collected regarding the InterBank assets has not materially changed.  A premium was recorded in conjunction with the fair value of the acquired loans and the amount amortized to yield during the three and nine months ended September 30, 2012 was $(68,000) and $126,000, 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 nine months ended September 30, 2012, increases in expected cash flows related to the TeamBank, Vantus Bank and Sun Security Bank acquired loan portfolios resulted in adjustments of $8.8 million and $18.8 , respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the three and nine months ended September 30, 2011, similar such adjustments totaling $13.2 million and $24.5 million, respectively, 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 nine months ended September 30, 2012, this resulted in a corresponding adjustment of $7.0 million and $15.0 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. 

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 remaining accretable yield adjustment that will affect interest income is $12.8 million and the remaining adjustment to the indemnification assets that will affect non-interest income (expense) is $(11.0) million.  Of the remaining adjustments, we expect to recognize $3.5 million of interest income and $(2.9) million of non-interest income (expense) in the remainder of 2012.  Additional adjustments may be recorded in future periods from the 2009, 2011 and 2012 acquisitions, as the Company continues to estimate expected cash flows from the acquired loan pools.

The impact of adjustments on the Company’s financial results is shown below:

	Three Months Ended		Nine Months Ended
	September 30, 2012		September 30, 2012
(In Thousands, Except Per Share Data and Basis Points Data)
Impact on net interest income/
net interest margin (in basis points)	$9,956	109 bps	$24,136	90 bps
Non-interest income	(8,169)		(19,319)
Net impact to pre-tax income	$1,787		$4,817
Net impact net of taxes	$1,162		$3,131
Impact to diluted earnings per common share	$0.09		$0.23

	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011
(In Thousands, Except Per Share Data and Basis Points Data)
Impact on net interest income/
net interest margin (in basis points)	$14,233	184 bps	$39,715	171 bps
Non-interest income	(12,717)		(35,470)
Net impact to pre-tax income	$1,516		$4,245
Net impact net of taxes	$986		$2,759
Impact to diluted earnings per common share	$0.07		$0.20

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 September 30, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $333.3 million since the transaction date because of $204.1 million of repayments from borrowers, $54.9 million in transfers to foreclosed assets and $74.3 million in charge-offs to customer loan balances.  Based upon the collectability analyses performed during the acquisition, we expected certain levels of foreclosures and charge-offs and actual results have been better than our expectations.  As a result, cash flows expected to be received from the acquired loan pools have increased, resulting in adjustments that were made to the related accretable yield as described above.

	September 30, 2012
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$102,895	$15,372
Non-credit premium/(discount), net of activity since acquisition date	(321)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(4,199)	--
Original estimated fair value of assets, net of activity since
acquisition date	(87,873)	(10,682)
Expected loss remaining	10,502	4,690
Assumed loss sharing recovery percentage	80%	80%
Estimated loss sharing value	8,421	3,783
Indemnification asset to be amortized resulting from
change in expected losses	3,541	--
Accretable discount on FDIC indemnification asset	(1,034)	--
FDIC indemnification asset	$10,928	$3,783

	December 31, 2011
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$164,284	$16,225
Non-credit premium/(discount), net of activity since acquisition date	(1,363)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(6,093)	--
Original estimated fair value of assets, net of activity since
acquisition date	(128,875)	(10,342)
Expected loss remaining	27,953	5,883
Assumed loss sharing recovery percentage	80%	80%
Estimated loss sharing value	22,404	4,712
Indemnification asset to be amortized resulting from
change in expected losses	5,726	--
Accretable discount on FDIC indemnification asset	(2,719)	--
FDIC indemnification asset	$25,411	$4,712

Vantus Bank Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the Vantus Bank transaction at September 30, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $215.2 million since the transaction date because of $175.1  million of repayments from borrowers, $14.3 million in transfers to foreclosed assets and $25.8 million in charge-offs to customer loan balances.  Based upon the collectability analyses performed during the acquisition, we expected certain levels of foreclosures and charge-offs and actual results have been better than our expectations.  As a result, cash flows expected to be received from the acquired loan pools have increased, resulting in adjustments that were made to the related accretable yield as described above.

	September 30, 2012
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$116,304	$4,532
Non-credit premium/(discount), net of activity since acquisition date	(165)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(7,065)	--
Original estimated fair value of assets, net of activity since
acquisition date	(105,050)	(3,359)
Expected loss remaining	4,024	1,173
Assumed loss sharing recovery percentage	79%	80%
Estimated loss sharing value	3,174	938
Indemnification asset to be amortized resulting from
change in expected losses	5,652	--
Accretable discount on FDIC indemnification asset	(910)	--
FDIC indemnification asset	$7,916	$938

	December 31, 2011
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$149,215	$3,410
Non-credit premium/(discount), net of activity since acquisition date	(503)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(11,267)	--
Original estimated fair value of assets, net of activity since
acquisition date	(123,036)	(2,069)
Expected loss remaining	14,409	1,341
Assumed loss sharing recovery percentage	80%	80%
Estimated loss sharing value	11,526	1,073
Indemnification asset to be amortized resulting from
change in expected losses	9,014	--
Accretable discount on FDIC indemnification asset	(1,946)	--
FDIC indemnification asset	$18,594	$1,073

Sun Security Bank Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the Sun Security Bank transaction at September 30, 2012 and December 31, 2011.  At September 30, 2012, the Company concluded that the assumptions utilized to determine the preliminary fair value of loans, foreclosed assets and the FDIC indemnification asset had not materially changed since the analysis performed at acquisition on October 7, 2011.  Expected cash flows and the present value of future cash flows related to these assets also did not materially change since the analysis performed at acquisition on October 7, 2011.  Gross loan balances (due from the borrower) were reduced approximately $90.6 million since the transaction date because of $58.7 million of repayments by the borrower, $9.6 million in transfers to foreclosed assets and $22.3 million of charge-offs to customer loan balances.

	September 30, 2012
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$143,853	$10,224
Non-credit premium/(discount), net of activity since acquisition date	(1,506)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(1,571)	--
Original estimated fair value of assets, net of activity since
acquisition date	(101,951)	(5,641)
Expected loss remaining	38,825	4,583
Assumed loss sharing recovery percentage	76%	81%
Estimated loss sharing value	29,664	3,698
Indemnification asset to be amortized resulting from
change in expected losses	1,224	--
Accretable discount on FDIC indemnification asset	(3,284)	(561)
FDIC indemnification asset	$27,604	$3,137

	December 31, 2011
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$217,549	$20,964
Non-credit premium/(discount), net of activity since acquisition date	(2,658)	--
Original estimated fair value of assets, net of activity since
acquisition date	(144,626)	(8,338)
Expected loss remaining	70,265	12,626
Assumed loss sharing recovery percentage	79%	80%
Estimated loss sharing value	55,382	10,101
Accretable discount on FDIC indemnification asset	(5,457)	(1,811)
FDIC indemnification asset	$49,925	$8,290

InterBank Indemnification Asset.  The following table presents the balances of the FDIC indemnification asset related to the InterBank transaction at September 30, 2012.  At September 30, 2012, the Company concluded that the assumptions utilized to determine the preliminary fair value of loans, foreclosed assets and the FDIC indemnification asset had not materially changed since the analysis performed at acquisition on April 27, 2012.  Expected cash flows and the present value of future cash flows related to these assets also did not materially change since the analysis performed at acquisition on April 27, 2012.  Gross loan balances (due from the borrower) were reduced approximately $22.4 million since the transaction date because of $20.5 million of repayments by the borrower and $1.9 million of charge-offs to customer loan balances.

	September 30, 2012
		Foreclosed
	Loans	Assets
(In Thousands)
Initial basis for loss sharing determination,
net of activity since acquisition date	$370,853	$3,410
Non-credit premium/(discount), net of activity since acquisition date	2,978	--
Original estimated fair value of assets, net of activity since
acquisition date	(269,889)	(2,849)
Expected loss remaining	103,942	561
Assumed loss sharing recovery percentage	81%	80%
Estimated loss sharing value	84,087	449
Accretable discount on FDIC indemnification asset	(7,811)	(93)
FDIC indemnification asset	$76,276	$356

	April 27, 2012
		Foreclosed
	Loans	Assets
	(In Thousands)
Initial basis for loss sharing determination	$393,274	$9,908
Non-credit premium/(discount), net of activity since acquisition date	3,105	--
Original estimated fair value of assets, net of activity since
acquisition date	(285,458)	(6,216)
Expected loss remaining	110,921	3,692
Assumed loss sharing recovery percentage	81%	80%
Estimated loss sharing value	89,669	2,954
Accretable discount on FDIC indemnification asset	(8,411)	(223)
FDIC indemnification asset	$81,258	$2,731

Changes in the accretable yield for acquired loan pools were as follows for the three and nine months ended September 30, 2012 and 2011:

				Sun Security
	TeamBank	Vantus Bank		Bank		InterBank
(In Thousands)
Balance, July 1, 2011	$23,145	$26,883		$--		$--
Accretion	(11,263)	(6,855)		--		--
Reclassification from nonaccretable difference(1)	7,700	5,651		--		--
Balance, September 30, 2011	$19,582	$25,679		$--		$--
Balance July 1, 2012	$11,403	$17,882		$9,775		$--
Additions	--	--		--		43,227
Accretion	(4,709)	(6,980)		(3,668)		(4,303)
Reclassification from nonaccretable difference(1)	5,863	4,510		2,902		--
Balance, September 30, 2012	$12,557	$15,412		$9,009		$38,924
Balance, January 1, 2011	$36,765		$35,796		$--	$--
Accretion	(32,786)		(22,365)		--	--
Reclassification from nonaccretable difference(2)	15,603		12,248		--	--
Balance, September 30, 2011	$19,582		$25,679		$--	$--
Balance January 1, 2012	$14,662		$21,967		$12,769	$--
Additions	--		--		--	46,078
Accretion	(13,799)		(17,320)		(10,750)	(7,154)
Reclassification from nonaccretable difference(2)	11,694		10,765		6,990	--
Balance, September 30, 2012	$12,557		$15,412		$9,009	$38,924

(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 for TeamBank, Vantus Bank, and Sun Security Bank for the three months ended September 30, 2012, totaling $3.1 million, $4.0 million and $1.8 million, respectively, and for the three months ended September 30, 2011, totaling $6.7 million, $6.6 million and $0, respectively.

(2) 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 for TeamBank, Vantus Bank, and Sun Security Bank for the nine months ended September 30, 2012, totaling $6.0 million, $7.6 million, and $5.2 million, respectively, and for the nine months ended September 30, 2011, totaling $13.8 million, $10.7 million and $0, respectively.