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Loss Sharing Agreements and FDIC Indemnification Assets
 3 Months Ended
Mar. 31, 2012
Loss Sharing Agreements and FDIC Indemnification Assets [Abstract]  
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 months ended March 31, 2012 and 2011 was $427,000 and $748,000, 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 months ended March 31, 2012 and 2011 was $158,000 and $276,000, 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 months ended March 31, 2012 was $282,000. 

 

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 months ended March 31, 2012, increases in expected cash flows related to the TeamBank and Vantus Bank acquired loan portfolios resulted in adjustments of $1.2 million to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the three months ended March 31, 2011, similar such adjustments totaling $3.4 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 months ended March 31, 2012, this resulted in a corresponding adjustment of $920,000 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.  The impact of adjustments on the Company’s financial results is shown below:

 

 

Three Months Ended

 

March 31, 2012

March 31, 2011

 

(In Thousands, Except Per Share Data

 

and Basis Points Data)

Impact on net interest income/

 

 

 

 

net interest margin (in basis points)

$6,163

72 bps

$12,667

162 bps

Non-interest income

(4,531)

 

(11,262)

 

Net impact to pre-tax income

$1,632

 

$1,405

 

Net impact net of taxes

$1,061

 

$ 913

 

Impact to diluted earnings per

   common share

$0.08

 

$0.07

 

 

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 $13.2 million and the remaining adjustment to the indemnification assets that will affect non-interest income (expense) is $(11.1) million.  Of the remaining adjustments, we expect to recognize $7.9 million of interest income and $(6.7) million of non-interest income (expense) in the remainder of 2012.  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 March 31, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $301.5 million since the transaction date because of $177.2 million of repayments from borrowers, $50.4 million in transfers to foreclosed assets and $73.9 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.

 

 

March 31, 2012

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

$134,297

 

$18,143

Non-credit premium/(discount), net of activity since acquisition date

(936)

 

--

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

(4,361)

 

--

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

(110,799)

 

(12,643)

 

 

 

 

Expected loss remaining

18,201

 

5,500

Assumed loss sharing recovery percentage

80%

 

80%

 

 

 

 

Estimated loss sharing value

14,609

 

4,404

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

4,048

 

--

Accretable discount on FDIC indemnification asset

(2,133)

 

--

FDIC indemnification asset

$16,524

 

$4,404

 

 

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 March 31, 2012 and December 31, 2011. Gross loan balances (due from the borrower) were reduced approximately $195.6 million since the transaction date because of $158.2 million of repayments from borrowers, $12.2 million in transfers to foreclosed assets and $25.2 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.

 

 

March 31, 2012

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

$135,970

 

$5,151

Non-credit premium/(discount), net of activity since acquisition date

(345)

 

--

Reclassification from nonaccretable discount to accretable discount

 

 

 

due to change in expected losses (net of accretion to date)

(8,851)

 

--

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

(114,104)

 

(3,956)

 

 

 

 

Expected loss remaining

12,670

 

1,195

Assumed loss sharing recovery percentage

80%

 

80%

 

 

 

 

Estimated loss sharing value

10,136

 

956

Indemnification asset to be amortized resulting from

 

 

 

change in expected losses

7,080

 

--

Accretable discount on FDIC indemnification asset

(1,601)

 

--

FDIC indemnification asset

$15,615

 

$956

 

 

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 March 31, 2012 and December 31, 2011.  At March 31, 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.  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 $49.1 million since the transaction date because of $34.6 million of repayments by the borrower, $6.1 million in transfers to foreclosed assets and $8.4 million of charge-downs to customer loan balances.

 

 

March 31, 2012

 

 

 

Foreclosed

 

Loans

 

Assets

 

(In Thousands)

Initial basis for loss sharing determination,

 

 

 

net of activity since acquisition date

$191,398

 

$12,429

Non-credit premium/(discount), net of activity since acquisition date

(2,379)

 

--

Original estimated fair value of assets, net of activity since

 

 

 

acquisition date

(128,157)

 

(7,184)

 

 

 

 

Expected loss remaining

60,862

 

5,245

Assumed loss sharing recovery percentage

79%

 

80%

 

 

 

 

Estimated loss sharing value

47,868

 

4,196

Accretable discount on FDIC indemnification asset

(4,716)

 

(761)

FDIC indemnification asset

$43,152

 

$3,435

 

 

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

 

 

Changes in the accretable yield for acquired loan pools were as follows for the three months ended March 31, 2012 and 2011:

 

 

 

 

 

 

Sun Security

 

 

TeamBank

 

Vantus Bank

 

Bank

 

 

(In Thousands)

 

 

 

 

 

 

 

 

Balance, January 1, 2011

$36,765

 

$35,796

 

$--

 

Accretion

(10,669)

 

(8,146)

 

--

 

Reclassification from nonaccretable difference(1)

1,191

 

4,232

 

--

 

Balance, March 31, 2011

$27,287

 

$31,882

 

$--

 

 

 

 

 

 

 

 

Balance January 1, 2012

$14,662

 

$21,967

 

$12,769

 

Accretion

(4,470)

 

(5,215)

 

(2,452)

 

Reclassification from nonaccretable difference(1)

4,322

 

2,950

 

--

 

 

 

 

 

 

 

 

Balance, March 31, 2012

$14,514

 

$19,702

 

$10,317

 

 

 

 

 

 

 

 

(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

March 31, 2012, totaling $400,000 and $750,000, respectively, and for the three months

ended March 31, 2011, totaling $391,000 and $1.6 million, respectively.