Loss Sharing Agreements and FDIC Indemnification Assets

3 Months Ended

Jun. 30, 2012

Loss Sharing Agreements and FDIC Indemnification Assets:

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 six months ended June 30, 2012 was $348,000 and $775,000, respectively.  The amount accreted to yield during the three and six months ended June 30, 2011 was $668,000 and $1.4 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 six months ended June 30, 2012 was $104,000 and $262,000, respectively.  The amount accreted to yield during the three and six months ended June 30, 2011 was $247,000 and $523,000, 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.  The Bank recorded the fair value of the acquired loans at their estimated fair value on the acquisition date.  The Company’s estimates of its cash flows to be collected regarding the Sun Security assets has not materially changed.  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, 2012 was $373,000 and $652,00, 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 Bank recorded the fair value of the acquired loans at their estimated fair value on the acquisition date.  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 six months ended June 30, 2012 was $194,000. 

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, 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 $10.0 million, 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 six months ended June 30, 2011, similar such adjustments totaling $7.9 million and $11.3 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 six months ended June 30, 2012, this resulted in a corresponding adjustment of $7.1 million and $8.0 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 $14.0 million and the remaining adjustment to the indemnification assets that will affect non-interest income (expense) is $(11.6) million.  Of the remaining adjustments, we expect to recognize $9.0 million of interest income and $(7.7) 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			Six Months Ended
	June 30, 2012			June 30, 2012
Impact on net interest income/
net interest margin (in basis points)	$8,017	86	bps	$14,180	80	bps
Non-interest income	(6,619)			(11,150)
Net impact to pre-tax income	$1,398			$3,030
Net impact net of taxes	$909			$1,970
Impact to diluted earnings per common share	$0.07			$0.14

	Three Months Ended			Six Months Ended
	June 30, 2011			June 30, 2011
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

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, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $326.3 million since the transaction date because of $196.9 million of repayments from borrowers, $54.7 million in transfers to foreclosed assets and $74.7 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.

Vantus Bank Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the Vantus Bank transaction at June 30, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $206.7 million since the transaction date because of $167.4  million of repayments from borrowers, $14.0 million in transfers to foreclosed assets and $25.3 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.

Sun Security Bank Indemnification Asset.  The following tables present the balances of the FDIC indemnification asset related to the Sun Security Bank transaction at June 30, 2012 and December 31, 2011.  At June 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 $76.0 million since the transaction date because of $52.8 million of repayments by the borrower, $6.1 million in transfers to foreclosed assets and $17.1 million of charge-offs to customer loan balances.

InterBank Indemnification Asset.  The following table presents the balances of the FDIC indemnification asset related to the InterBank transaction at June 30, 2012.  At June 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 $8.3 million since the transaction date because of $6.6 million of repayments by the borrower and $1.7 million of charge-offs to customer loan balances.

	June 30, 2012
		Foreclosed
	Loans	Assets
Initial basis for loss sharing determination,
net of activity since acquisition date	$109,907	$17,168
Non-credit premium/(discount), net of activity since acquisition date	(588)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(4,379)	--
Original estimated fair value of assets, net of activity since
acquisition date	(91,407)	(11,094)
Expected loss remaining	13,533	6,074
Assumed loss sharing recovery percentage	81%	80%
Estimated loss sharing value	10,847	4,890
Indemnification asset to be amortized resulting from
change in expected losses	3,857	--
Accretable discount on FDIC indemnification asset	(1,487)	--
FDIC indemnification asset	$13,217	$4,890

	December 31, 2011
		Foreclosed
	Loans	Assets
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

	June 30, 2012
		Foreclosed
	Loans	Assets
Initial basis for loss sharing determination,
net of activity since acquisition date	$124,844	$4,422
Non-credit premium/(discount), net of activity since acquisition date	(240)	--
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(8,415)	--
Original estimated fair value of assets, net of activity since
acquisition date	(107,485)	(3,253)
Expected loss remaining	8,704	1,169
Assumed loss sharing recovery percentage	80%	80%
Estimated loss sharing value	6,918	935
Indemnification asset to be amortized resulting from
change in expected losses	6,732	--
Accretable discount on FDIC indemnification asset	(1,247)	--
FDIC indemnification asset	$12,403	$935

	December 31, 2011
		Foreclosed
	Loans	Assets
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

	June 30, 2012
		Foreclosed
	Loans	Assets
Initial basis for loss sharing determination,
net of activity since acquisition date	$158,464	$13,877
Non-credit premium/(discount), net of activity since acquisition date	(3,221)	--
Original estimated fair value of assets, net of activity since
acquisition date	(110,478)	(9,152)
Expected loss remaining	44,765	4,725
Assumed loss sharing recovery percentage	77%	80%
Estimated loss sharing value	34,448	3,780
Indemnification asset to be amortized resulting from
change in expected losses	971	--
Accretable discount on FDIC indemnification asset	(4,087)	(561)
FDIC indemnification asset	$31,332	$3,219

	December 31, 2011
		Foreclosed
	Loans	Assets
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
Indemnification asset to be amortized resulting from
change in expected losses	55,382	10,101
Accretable discount on FDIC indemnification asset	(5,457)	(1,811)
FDIC indemnification asset	$49,925	$8,290

	June 30, 2012
		Foreclosed
	Loans	Assets
Initial basis for loss sharing determination,
net of activity since acquisition date	$384,986	$6,628
Non-credit premium/(discount), net of activity since acquisition date	2,911	--
Original estimated fair value of assets, net of activity since
acquisition date	(276,976)	(4,770)
Expected loss remaining	110,921	1,858
Assumed loss sharing recovery percentage	81%	80%
Estimated loss sharing value	89,669	1,487
Accretable discount on FDIC indemnification asset	(8,311)	(223)
FDIC indemnification asset	$81,358	$1,264

	April 27, 2012
		Foreclosed
	Loans	Assets
Initial basis for loss sharing determination,
net of activity since acquisition date	$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

The carrying amount of assets covered by the loss sharing agreement related to the InterBank transaction at April 27, 2012 (the acquisition date), consisted of impaired loans required to be accounted for in accordance with FASB ASC 310-30, other loans not subject to the specific criteria of FASB ASC 310-30, but accounted for under the guidance of FASB ASC 310-30 (FASB ASC 310-30 by Policy Loans) and other assets as shown in the following table:

		FASB ASC
	FASB	310-30
	ASC	by
	310-30	Policy
	Loans	Loans	Other	Total
Loans	$4,363	$281,095	$--	$285,458
Foreclosed assets	--	--	6,216	6,216
Estimated loss reimbursement from the FDIC	--	--	83,989	83,989
Total covered assets	$4,363	$281,095	$90,205	$375,663

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC 310-30 loans acquired was $19.3 million, the cash flows expected to be collected were $4.8 million including interest, and the estimated fair value of the loans was $4.4 million.  These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments.  At April 27, 2012, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows were primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated.  Because of the short time period between the closing of the transaction and June 30, 2012, certain amounts related to the FASB ASC 310-30 loans are preliminary estimates.  The Company has not yet finalized its analysis of these loans and, therefore, adjustments to the estimated recorded carrying values may occur.

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC 310-30 by Policy Loans acquired in the acquisition was $374.0 million, of which $96.4 million of cash flows were not expected to be collected, and the estimated fair value of the loans was $281.1 million.  A majority of these loans were valued as of their acquisition dates based on the liquidation value of the underlying collateral, because the expected cash flows were primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated.

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

	TeamBank	Vantus Bank	Sun Security Bank	InterBank
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	$--	$--
Balance, April 1, 2012	$14,514	$19,702	$10,317	$--
Additions	--	--	--	46,078
Accretion	(4,620)	(5,124)	(4,482)	(2,851)
Reclassification from nonaccretable difference	1,509	3,304	3,940	--
Balance, June 30, 2012	$11,403	$17,882	$9,775	$43,227

	TeamBank	Vantus Bank	Sun Security Bank	InterBank
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	$--	$--
Balance, January 1, 2012	$14,662	$21,967	$12,769	$--
Additions	--	--	--	46,078
Accretion	(9,090)	(10,340)	(7,082)	(2,851)
Reclassification from nonaccretable difference	5,831	6,255	4,088	--
Balance, June 30, 2012	$11,403	$17,882	$9,775	$43,227

(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 June 30, 2012, totaling $2.5 million, $2.9 million and $3.4 million, respectively, and for the three months ended June 30, 2011, totaling $2.5 million, $581,000 and $0, respectively.

(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 six months ended June 30, 2012, totaling $2.9 million, $3.7 million, and $3.4 million, respectively, and for the six months ended June 30, 2011, totaling $2.8 million, $1.8 million and $0, respectively.