NOTE 7: ACQUIRED LOANS, LOSS SHARING AGREEMENTS AND FDIC INDEMNIFICATION ASSETS

9 Months Ended

Sep. 30, 2020

Notes

NOTE 7: ACQUIRED LOANS, LOSS SHARING AGREEMENTS AND FDIC INDEMNIFICATION ASSETS

NOTE 7: FDIC-ASSISTED ACQUIRED LOANS

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 related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

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 related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

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 related loss sharing agreement was terminated early, effective April 26, 2016, by mutual agreement of Great Southern Bank and the FDIC.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

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 related loss sharing agreement was terminated early, effective June 9, 2017, by mutual agreement of Great Southern Bank and the FDIC.  Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.

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.

The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at September 30, 2020 and December 31, 2019.

								Sun Security
		TeamBank			Vantus Bank			Bank			InterBank			Valley Bank
		(In Thousands)
September 30, 2020
Gross loans receivable	$	6,019		$	8,502		$	14,479		$	49,483		$	32,435
Balance of accretable discount due to change in expected losses		(108	)		(40	)		(212	)		(1,761	)		(815	)
Net carrying value to loans receivable		(5,882	)		(8,449	)		(14,163	)		(46,722	)		(30,913	)
Expected loss remaining	$	29		$	13		$	104		$	1,000		$	707
December 31, 2019
Gross loans receivable	$	7,304		$	9,899		$	17,906		$	60,430		$	41,032
Balance of accretable discount due to change in expected losses		(159	)		(89	)		(374	)		(5,143	)		(1,803	)
Net carrying value to loans receivable		(7,118	)		(9,797	)		(17,392	)		(54,442	)		(38,452	)
Expected loss remaining	$	27		$	13		$	140		$	845		$	777

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.

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 months ended September 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $0 and $5.1 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis.  During the nine months ended September 30, 2020 and 2019, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $0 and $10.4 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis.  

Because the balance of 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 September 30, 2020, the remaining accretable yield

adjustment that will affect interest income is $2.9 million.  Of the remaining adjustments affecting interest income, we expect to recognize $932,000 of interest income during the three months ending December 31, 2020.  

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

		Three Months Ended			Three Months Ended
		September 30, 2020			September 30, 2019
		(In Thousands, Except Per Share Data and Basis Points Data)
Impact on net interest income/
net interest margin (in basis points)	$	1,229	9 bps	$	2,251	20 bps
Net impact to pre-tax income	$	1,229		$	2,251
Net impact net of taxes	$	949		$	1,738
Impact to diluted earnings per share	$	0.07		$	0.12

		Nine Months Ended			Nine Months Ended
		September 30, 2020			September 30, 2019
		(In Thousands, Except Per Share Data and Basis Points Data)
Impact on net interest income/
net interest margin (in basis points)	$	4,632	12 bps	$	5,162	15 bps
Net impact to pre-tax income	$	4,632		$	5,162
Net impact net of taxes	$	3,576		$	3,985
Impact to diluted earnings per share	$	0.25		$	0.28

Changes in the accretable yield for acquired loan pools were as follows for the three and nine months ended September 30, 2020 and 2019:

								Sun Security
		TeamBank			Vantus Bank			Bank			InterBank			Valley Bank
		(In Thousands)
Balance, July 1, 2020	$	918		$	954		$	1,893		$	5,252		$	4,123
Accretion		(94	)		(238	)		(238	)		(1,599	)		(658	)
Change in expected accretable yield(1)		178			88			79			808			92
Balance, September 30, 2020	$	1,002		$	804		$	1,734		$	4,461		$	3,557
Balance, July 1, 2019	$	1,350		$	1,227		$	1,859		$	8,465		$	5,544
Accretion		(196	)		(259	)		(414	)		(2,371	)		(1,257	)
Change in expected accretable yield(1)		(9	)		305			872			2,840			1,565
Balance, September 30, 2019	$	1,145		$	1,273		$	2,317		$	8,934		$	5,852

(1) Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses.  The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the three months ended September 30, 2020, totaling $178,000, $88,000, $79,000, $808,000 and $92,000, respectively, and for the three months ended September 30, 2019, totaling $(21,000), $132,000, $565,000, $(644,000) and $482,000, respectively.

								Sun Security
		TeamBank			Vantus Bank			Bank			InterBank			Valley Bank
		(In Thousands)
Balance, January 1, 2020	$	1,157		$	1,123		$	1,948		$	8,277		$	4,578
Accretion		(334	)		(657	)		(831	)		(5,563	)		(2,398	)
Change in expected accretable yield(1)		179			338			617			1,747			1,377
Balance, September 30, 2020	$	1,002		$	804		$	1,734		$	4,461		$	3,557
Balance, January 1, 2019	$	1,356		$	1,432		$	2,242		$	4,994		$	3,063
Accretion		(811	)		(738	)		(1,195	)		(6,350	)		(3,243	)
Change in expected accretable yield(1)		600			579			1,270			10,290			6,032
Balance, September 30, 2019	$	1,145		$	1,273		$	2,317		$	8,934		$	5,852

(1) Represents increases (decreases) in estimated cash flows expected to be received from the acquired loan pools, partially due to lower estimated credit losses.  The amounts also include changes in expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank for the nine months ended September 30, 2020, totaling $179,000, $338,000, $617,000, $1.7 million and $1.4 million, respectively, and for the nine months ended September 30, 2019, totaling $526,000, $406,000, $812,000, $4.0 million and $2.7 million, respectively.