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Loss Sharing Agreements and FDIC Indemnification Assets | 3 Months Ended
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Sep. 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 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. 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, 2011 was $588,000 and $2.0 million, respectively. The amount accreted to yield during the three and nine months ended September 30, 2010 was $909,000 and $1.6 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. 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, 2011 was $217,000 and $740,000, respectively. The amount accreted to yield during the three and nine months ended September 30, 2010 was $336,000 and $886,000, 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, 2011, increases in expected cash flows related to both acquired loan portfolios resulted in adjustments of $13.2 million and $24.5 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 nine months ended September 30, 2011, this resulted in corresponding adjustments of $11.6 million and $21.6 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 is shown below:
| Three Months Ended
| September 30, 2011 |  | September 30, 2010
| (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 |  | $4,236 | 57 bps
Non-interest income | (12,717) |  |  | (3,564) |
Net impact to pre-tax income | $1,516 |  |  | $672 |
Net impact net of taxes | $986 |  |  | $437 |
Impact to diluted earnings per common share | $0.07 |  |  | $0.05 |
| Nine Months Ended
| September 30, 2011 |  | September 30, 2010
| (In Thousands, Except Per Share Data)
| and Basis Points Data)
Impact on net interest income/ |  |  |  |  |
net interest margin (in basis points) | $39,715 | 171 bps |  | $4,236 | 19 bps
Non-interest income | (35,470) |  |  | (3,564) |
Net impact to pre-tax income | $4,245 |  |  | $672 |
Net impact net of taxes | $2,759 |  |  | $437 |
Impact to diluted earnings per common share | $0.20 |  |  | $0.03 |
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 $24.2 million of accretable yield adjustment affecting interest income and $(20.9) million of adjustment to the indemnification assets affecting non-interest income is expected to be recognized over the next year, with $8.8 million of interest income and $(7.8) 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 September 30, 2011 and December 31, 2010. Gross loan balances (due from the borrower) were reduced approximately $261.0 million since the transaction date because of $182.9 million of repayments from borrowers, $13.2 million in transfers to foreclosed assets and $64.9 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, 2011
|  |  | Foreclosed
| Loans |  | Assets
| (In Thousands)
Initial basis for loss sharing determination, |  |  |
net of activity since acquisition date | $174,792 |  | $16,882
Non-credit premium/(discount), net of activity since acquisition date | (1,871) |  | —
Reclassification from nonaccretable discount to accretable discount |  |  |
due to change in expected losses (net of accretion to date) | (10,455) |  | —
Original estimated fair value of assets, net of activity since |  |  |
acquisition date | (132,920) |  | (6,949)
Expected loss remaining | 29,546 |  | 9,933
Assumed loss sharing recovery percentage | 81% |  | 79%
Expected loss remaining | 23,838 |  | 7,887
Indemnification asset to be amortized resulting from |  |  |
change in expected losses | 9,891 |  | —
Accretable discount on FDIC indemnification asset | (3,383) |  | —
FDIC indemnification asset | $30,346 |  | $7,887
| 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 September 30, 2011 and December 31, 2010. Gross loan balances (due from the borrower) were reduced approximately $166.9 million since the transaction date because of $137.7 million of repayments from borrowers, $4.1 million in transfers to foreclosed assets and $25.1 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, 2011
|  |  | Foreclosed
| Loans |  | Assets
| (In Thousands)
Initial basis for loss sharing determination, |  |  |
net of activity since acquisition date | $164,609 |  | $10,431
Non-credit premium/(discount), net of activity since acquisition date | (691) |  | —
Reclassification from nonaccretable discount to accretable discount |  |  |
due to change in expected losses (net of accretion to date) | (13,792) |  | —
Original estimated fair value of assets, net of activity since |  |  |
acquisition date | (134,111) |  | (6,763)
Expected loss remaining | 16,015 |  | 3,668
Assumed loss sharing recovery percentage | 80% |  | 80%
Expected loss remaining | 12,812 |  | 2,934
Indemnification asset to be amortized resulting from |  |  |
change in expected losses | 11,034 |  | —
Accretable discount on FDIC indemnification asset | (2,337) |  | (109)
FDIC indemnification asset | $21,509 |  | $2,825
| 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 September 30, 2011 and 2010:
| TeamBank |  | Vantus Bank
| (In Thousands)
Balance, July 1, 2010 | $24,204 |  | $30,444
Accretion | (4,708) |  | (6,077)
Reclassification from nonaccretable difference(1) | 680 |  | 2,502
Balance, September 30, 2010 | $20,176 |  | $26,869
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
(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 and Vantus Bank for the three months ended September 30, 2010 totaling $3.6 million and $10.8 million, respectively, and for the three months ended September 30, 2011 totaling $6.7 million and $6.6 million, respectively.
Changes in the accretable yield for acquired loan pools were as follows for the nine months ended September 30, 2011 and 2010:
| TeamBank |  | Vantus Bank
| (In Thousands)
Balance, January 1, 2010 | $31,300 |  | $39,023
Accretion | (11,804) |  | (14,656)
Reclassification from nonaccretable difference(1) | 680 |  | 2,502
Balance, September 30, 2010 | $20,176 |  | $26,869
Balance, January 1, 2011 | $36,765 |  | $35,796
Accretion | (32,786) |  | (22,365)
Reclassification from nonaccretable difference(1) | 15,603 |  | 12,248
Balance, September 30, 2011 | $19,582 |  | $25,679
(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 and Vantus Bank for the nine months ended September 30, 2010 totaling $3.6 million and $10.8 million, respectively, and for the nine months ended September 30, 2011 totaling $13.8 million and $10.7 million, respectively.

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