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Note 4: Acquired Loans, Loss Sharing Agreements and FDIC Indemnification Assets

12 Months Ended

Dec. 31, 2018

Note 4: Acquired Loans, Loss Sharing Agreements and FDIC Indemnification Assets

TeamBank

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.

The loans, commitments and foreclosed assets purchased in the TeamBank transaction were covered by a loss sharing agreement between the FDIC and Great Southern Bank. This agreement originally was to extend for ten years for 1-4 family real estate loans and for five years for other loans. The five-year period ended March 31, 2014 and the ten-year period was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. See “Loss Sharing Agreements” below. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

Vantus Bank

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.

The loans, commitments and foreclosed assets purchased in the Vantus Bank transaction were covered by a loss sharing agreement between the FDIC and Great Southern Bank. This agreement originally was to extend for ten years for 1-4 family real estate loans and for five years for other loans. The five-year period ended September 30, 2014 and the ten-year period was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. See “Loss Sharing Agreements” below. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

Sun Security Bank

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.

The loans and foreclosed assets purchased in the Sun Security Bank transaction were covered by a loss sharing agreement between the FDIC and Great Southern Bank. This agreement originally was to extend for ten years for 1-4 family real estate loans and for five years for other loans but was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC. See “Loss Sharing Agreements” below. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

InterBank

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.

The loans and foreclosed assets purchased in the InterBank transaction were covered by a loss sharing agreement between the FDIC and Great Southern Bank. This agreement originally was to extend for ten years for 1-4 family real estate loans and for five years for other loans but was terminated early, effective June 9, 2017, by mutual agreement of Great Southern Bank and the FDIC. See “Loss Sharing Agreements” below. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. A premium was recorded in conjunction with the fair value of the acquired loans and the amount amortized to yield during 2018, 2017 and 2016 was $175,000, $269,000 and $359,000, respectively.

Valley Bank

On June 20, 2014, Great Southern Bank entered into a purchase and assumption agreement with the FDIC to purchase a substantial portion of the loans and investment securities, as well as certain other assets, and assume all of the deposits, as well as certain other liabilities, of Valley Bank, a full-service bank headquartered in Moline, Illinois, with significant operations in Iowa. This transaction did not include a loss sharing agreement.

Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. A premium was recorded in conjunction with the fair value of the acquired loans and the amount amortized to yield during 2018, 2017 and 2016 was $11,000, $217,000 and $491,000, respectively.

Loss Sharing Agreements

On April 26, 2016, Great Southern Bank executed an agreement with the FDIC to terminate the loss sharing agreements for Team Bank, Vantus Bank and Sun Security Bank, effective immediately. The agreement required the FDIC to pay $4.4 million to settle all outstanding items related to the terminated loss sharing agreements. As a result of entering into the termination agreement, assets that were covered by the terminated loss sharing agreements were reclassified as non-covered assets effective April 26, 2016. All rights and obligations of the Bank and the FDIC under the terminated loss sharing agreements, including the settlement of all existing loss sharing and expense reimbursement claims, have been resolved and terminated.

On June 9, 2017, Great Southern Bank executed an agreement with the FDIC to terminate the loss sharing agreements for InterBank, effective immediately. Pursuant to the termination agreement, the FDIC paid $15.0 million to the Bank to settle all outstanding items related to the terminated loss sharing agreements. The Company recorded a pre-tax gain on the termination of $7.7 million. As a result of entering into the termination agreement, assets that were covered by the terminated loss sharing arrangements were reclassified as non-covered assets effective June 9, 2017. All rights and obligations of the Bank and the FDIC under the terminated loss sharing agreements, including the settlement of all existing loss sharing and expense reimbursement claims, have been resolved and terminated.

The termination of the loss sharing agreements for the TeamBank, Vantus Bank, Sun Security Bank and InterBank transactions has no impact on the yields for the loans that were previously covered under these agreements. All post-termination recoveries, gains, losses and expenses related to these previously covered assets are recognized entirely by Great Southern Bank since the FDIC no longer shares in such gains or losses. Accordingly, the Company’s earnings are positively impacted to the extent the Company recognizes gains on any sales or recoveries in excess of the carrying value of such assets. Similarly, the Company’s future earnings are negatively impacted to the extent the Company recognizes expenses, losses or charge-offs related to such assets.

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 years ended December 31, 2018, 2017 and 2016, improvements in expected cash flows related to the acquired loan portfolios resulted in adjustments to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. The increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements, when applicable, until they were terminated or expired. This resulted in corresponding adjustments during the years ended December 31, 2017 and 2016, to the indemnification assets (which during 2017 were reduced to $-0- due to the termination of the loss sharing agreements). The amounts of these adjustments were as follows:

	Year Ended December 31,
	2018	2017	2016
	(In Thousands)

Increase in accretable yield due to increased
cash flow expectations	$ 5,202	$ 1,333		$ 10,598
Decrease in FDIC indemnification asset
as a result of accretable yield increase	—	—		(2,744)

The adjustments, along with those made in previous years, impacted the Company’s Consolidated Statements of Income as follows:

	Year Ended December 31,
	2018	2017	2016
	(In Thousands)

Interest income	$ 5,134	$ 5,014		$ 16,393
Noninterest income	—	(634)		(7,033)

Net impact to pre-tax income	$ 5,134	$ 4,380		$ 9,360

On an on-going basis the Company estimates the cash flows expected to be collected from the acquired loan pools. For each of the loan portfolios acquired, the cash flow estimates have increased, based on payment histories and reduced credit loss expectations. This resulted in increased income that has been spread, on a level-yield basis, over the remaining expected lives of the loan pools (and, therefore, has decreased over time). Increases in expected cash flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC (when such agreements were in place), which were recorded as indemnification assets. Therefore, the expected indemnification assets had also been reduced, resulting in adjustments to be amortized on a comparable basis over the remainder of the loss sharing agreements or the remaining expected lives of the loan pools, whichever was shorter. Additional estimated cash flows totaling approximately $5.2 million were recorded in the year ended December 31, 2018 related to these loan pools, with no corresponding reduction in expected reimbursement from the FDIC as the remaining loss sharing agreements were terminated in 2017.

Because these adjustments to accretable yield will be recognized generally over the remaining lives of the loan pools, they will impact future periods as well. As of December 31, 2018, the remaining accretable yield adjustment that will affect interest income was $2.7 million. Of the remaining adjustments affecting interest income, we expect to recognize $2.0 million of interest income during 2019. Additional adjustments to accretable yield may be recorded in future periods from the FDIC-assisted transactions, as the Company continues to estimate expected cash flows from the acquired loan pools. As there is no longer, nor will there be in the future, indemnification asset amortization related to TeamBank, Vantus Bank, Sun Security Bank or InterBank due to the termination or expiration of the related loss sharing agreements for those transactions, there is no remaining indemnification asset or related adjustments that will affect non-interest income (expense).

TeamBank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the TeamBank transaction at December 31, 2018 and 2017. Through December 31, 2018, gross loan balances (due from borrowers) were reduced approximately $425.6 million since the transaction date because of $293.0 million of repayments by the borrowers, $61.7 million of transfers to foreclosed assets and $70.9 million of charge-downs to customer loan balances. Based upon the collectability analyses performed at the time of 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.

	December 31, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 10,602	$ —
Reclassification from nonaccretable discount
to accretable discount due to change in	(399)	—
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date	(10,106)	—

Expected loss remaining	$ 97	$ —

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 13,668	$ 35
Reclassification from nonaccretable discount
to accretable discount due to change in	(589)	—
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date	(12,948)	(35)

Expected loss remaining	$ 131	$ —

Vantus Bank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the Vantus Bank transaction at December 31, 2018 and 2017. Through December 31, 2018, gross loan balances (due from borrowers) were reduced approximately $317.5 million since the transaction date because of $271.9 million of repayments by the borrowers, $16.7 million of transfers to foreclosed assets and $28.9 million of charge-downs to customer loan balances. Based upon the collectability analyses performed at the time of 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.

	December 31, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 14,097	$ —
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(58)	—
Original estimated fair value of assets, net of
activity since acquisition date	(13,809)	—

Expected loss remaining	$ 230	$ —

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 18,965	$ 15
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(131)	—
Original estimated fair value of assets, net of
activity since acquisition date	(18,605)	(15)

Expected loss remaining	$ 229	$ —

Sun Security Bank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the Sun Security Bank transaction at December 31, 2018 and 2017. Through December 31, 2018, gross loan balances (due from borrowers) were reduced approximately $213.3 million since the transaction date because of $153.9 million of repayments by the borrowers, $28.6 million of transfers to foreclosed assets and $30.8 million of charge-downs to customer loan balances. Based upon the collectability analyses performed at the time of 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.

	December 31, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 21,171	$ 91
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(342)	—
Original estimated fair value of assets, net of
activity since acquisition date	(20,171)	(61)

Expected loss remaining	$ 658	$ 30

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 26,787	$ 306
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(494)	—
Original estimated fair value of assets, net of
activity since acquisition date	(25,348)	(299)

Expected loss remaining	$ 945	$ 7

InterBank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the InterBank transaction at December 31, 2018 and 2017. Through December 31, 2018, gross loan balances (due from borrowera) were reduced approximately $308.2 million since the transaction date because of $265.8 million of repayments by the borrowers, $20.0 million of transfers to foreclosed assets and $22.4 million of charge-offs to customer loan balances. Based upon the collectability analyses performed at the time of 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.

	December 31, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 85,106	$ 121
Noncredit premium/(discount), net of
activity since acquisition date	99	—
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(1,695)	—
Original estimated fair value of assets, net of
activity since acquisition date	(74,436)	(106)

Expected loss remaining	$ 9,074	$ 15

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 112,399	$ 2,012
Noncredit premium/(discount), net of
activity since acquisition date	274	—
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(972)	—
Original estimated fair value of assets, net of
activity since acquisition date	(98,321)	(1,785)

Expected loss remaining	$ 13,380	$ 227

Valley Bank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the Valley Bank transaction at December 31, 2018 and 2017. Through December 31, 2018, gross loan balances (due from borrowera) were reduced approximately $139.7 million since the transaction date because of $127.7 million of repayments by the borrowers, $4.0 million of transfers to foreclosed assets and $8.0 million of charge-offs to customer loan balances. Based upon the collectability analyses performed at the time of 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.

	December 31, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis, net of activity
since acquisition date	$ 53,470	$ 1,233
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(169)	—
Original estimated fair value of assets, net of
activity since acquisition date	(49,124)	(1,233)
Expected loss remaining	$ 4,177	$ —

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis, net of activity
since acquisition date	$ 59,997	$ 1,673
Noncredit premium/(discount), net of
activity since acquisition date	11	—
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)	(411)	—
Original estimated fair value of assets, net of
activity since acquisition date	(54,442)	(1,667)
Expected loss remaining	$ 5,155	$ 6

Changes in the accretable yield for acquired loan pools were as follows for the years ended December 31, 2018, 2017 and 2016:

			Sun
	TeamBank	Vantus Bank	Security Bank	InterBank	Valley Bank
	(In Thousands)

Balance, January 1, 2016	3,805	3,360	5,924	16,347	8,316
Accretion	(1,834)	(1,877)	(3,832)	(13,964)	(11,933)
Reclassification from nonaccretable difference(1)	506	1,064	2,185	6,129	8,414

Balance, December 31, 2016	2,477	2,547	4,277	8,512	4,797
Accretion	(1,563)	(1,373)	(2,251)	(7,505)	(5,823)
Reclassification from nonaccretable difference(1)	1,157	676	875	4,067	3,721

Balance, December 31, 2017	2,071	1,850	2,901	5,074	2,695
Accretion	(1,042)	(1,196)	(1,667)	(8,349)	(3,892)
Reclassification from nonaccretable difference(1)	327	778	1,008	8,269	4,260

Balance, December 31, 2018	$ 1,356	$ 1,432	$ 2,242	$ 4,994	$ 3,063

(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, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2018, totaling $312,000, $778,000, $756,000, $4.1 million and $3.5 million, respectively; for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2017, totaling $1.1 million, $663,000, $850,000, $3.5 million and $3.0 million, respectively; and for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the year ended December 31, 2016, totaling $506,000, $1.0 million, $1.8 million, $2.7 million and $1.6 million, respectively.