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

6 Months Ended

Jun. 30, 2018

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

NOTE 7: FDIC-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 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.

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.

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.

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 at the time of acquisition in conjunction with the fair value of the acquired loans and the amount amortized to yield during the three months ended June 30, 2018 and 2017 was $47,000 and $70,000, respectively. The amount amortized to yield during the six months ended June 30, 2018 and 2017 was $100,000 and $146,000, respectively.

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 the three months ended June 30, 2018 and 2017 was $0 and $63,000, respectively. The amount amortized to yield during the six months ended June 30, 2018 and 2017 was $11,000 and $143,000, 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 have 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 will be 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 three and six months ended June 30, 2018, improvements in expected cash flows related to the acquired loan portfolios resulted in adjustments of $725,000 and $2.5 million, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the three and six months ended June 30, 2017, similar such adjustments totaling $-0- and $155,000, respectively, were made to the accretable yield. 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.

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. 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 $1.4 million of interest income during the remainder of 2018. 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.

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

	Three Months Ended		Three Months Ended
	June 30, 2018		June 30, 2017
	(In Thousands, Except Per Share Data
	and Basis Points Data)

Impact on net interest income/
net interest margin (in basis points)	$ 1,070	10 bps	$ 1,282	12 bps
Non-interest income	—		—
Net impact to pre-tax income	$ 1,070		$ 1,282
Net impact net of taxes	$ 831		$ 817
Impact to diluted earnings per share	$ 0.06		$ 0.06

	Six Months Ended		Six Months Ended
	June 30, 2018		June 30, 2017
	(In Thousands, Except Per Share Data
	and Basis Points Data)

Impact on net interest income/
net interest margin (in basis points)	$ 2,227	11 bps	$ 3,262	16 bps
Non-interest income	—		(634)
Net impact to pre-tax income	$ 2,227		$ 2,628
Net impact net of taxes	$ 1,729		$ 1,674
Impact to diluted earnings per share	$ 0.12		$ 0.12

TeamBank Loans and Foreclosed Assets. The following tables present the balances of the acquired loans and foreclosed assets related to the TeamBank transaction at June 30, 2018 and December 31, 2017. Through June 30, 2018, gross loan balances (due from the borrower) were reduced approximately $424.0 million since the transaction date because of $291.3 million of repayments from borrowers, $61.7 million in transfers to foreclosed assets and $71.0 million in 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.

	June 30, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 12,154	$ 35
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	(11,543)	(35)

Expected loss remaining	$ 117	$ —

	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 expected losses (net of accretion to date)	(589)	—
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 June 30, 2018 and December 31, 2017. Through June 30, 2018, gross loan balances (due from the borrower) were reduced approximately $315.0 million since the transaction date because of $269.3 million of repayments from borrowers, $16.7 million in transfers to foreclosed assets and $29.0 million in 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.

	June 30, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 16,515	$ 15
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(91)	—
Original estimated fair value of assets, net of activity since
acquisition date	(16,195)	(15)

Expected loss remaining	$ 229	$ —

	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 June 30, 2018 and December 31, 2017. Through June 30, 2018, gross loan balances (due from the borrower) were reduced approximately $211.5 million since the transaction date because of $152.0 million of repayments from borrowers, $28.6 million in transfers to foreclosed assets and $30.9 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.

	June 30, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 22,971	$ 383
Reclassification from nonaccretable discount to accretable discount due to change in expected losses (net of accretion to date)	(453)	—
Original estimated fair value of assets, net of activity since
acquisition date	(21,757)	(292)

Expected loss remaining	$ 761	$ 91

	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 table presents the balances of the acquired loans and foreclosed assets related to the InterBank transaction at June 30, 2018 and December 31, 2017. Through June 30, 2018, gross loan balances (due from the borrower) were reduced approximately $297.4 million since the transaction date because of $255.3 million of repayments by the borrower, $19.7 million in 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.

	June 30, 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 95,851	$ 1,477
Non-credit premium/(discount), net of activity since acquisition date	174	—
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(1,413)	—
Original estimated fair value of assets, net of activity since
acquisition date	(82,987)	(1,292)

Expected loss remaining	$ 11,625	$ 185

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis for loss sharing determination,
net of activity since acquisition date	$ 112,399	$ 2,012
Non-credit 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 June 30, 2018 and December 31, 2017. Through June 30, 2018, gross loan balances (due from the borrower) were reduced approximately $136.9 million since the transaction date because of $125.0 million of repayments by the borrower, $4.0 million in transfers to foreclosed assets and $7.9 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.

	June 30 2018
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis, net of activity since acquisition date	$ 56,313	$ 1,637
Non-credit premium/(discount), net of activity since acquisition date	—	—
Reclassification from nonaccretable discount to accretable discount
due to change in expected losses (net of accretion to date)	(412)	—
Original estimated fair value of assets, net of activity since
acquisition date	(51,649)	(1,631)

Expected loss remaining	$ 4,252	$ 6

	December 31, 2017
		Foreclosed
	Loans	Assets
	(In Thousands)

Initial basis, net of activity since acquisition date	$ 59,997	$ 1,673
Non-credit 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 three and six months ended June 30, 2018 and 2017:

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

Balance, April 1, 2017	$ 2,496	$ 2,354	$ 3,795	$ 6,910	$ 4,400
Accretion	(312)	(383)	(574)	(1,885)	(1,470)
Change in expected
accretable yield⁽¹⁾	119	209	465	389	383

Balance, June 30, 2017	$ 2,303	$ 2,180	$ 3,686	$ 5,414	$ 3,313

Balance, April 1, 2018	$ 1,827	$ 1,755	$ 2,069	$ 6,904	$ 3,416
Accretion	(215)	(338)	(424)	(1,827)	(1,066)
Change in expected
accretable yield⁽¹⁾	130	235	410	833	624

Balance, June 30, 2018	$ 1,742	$ 1,652	$ 2,055	$ 5,910	$ 2,974

(1)

Represents increases 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 June 30, 2018, totaling $115,000, $235,000, $236,000, $518,000 and $404,000, respectively, and for the three months ended June 30, 2017, totaling $119,000, $209,000, $465,000, $389,000 and $383,000, respectively.

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

Balance, January 1, 2017	$ 2,477	$ 2,547	$ 4,277	$ 8,512	$ 4,797
Accretion	(967)	(739)	(1,196)	(4,162)	(3,394)
Change in expected
accretable yield⁽¹⁾	793	372	605	1,064	1,910

Balance, June 30, 2017	$ 2,303	$ 2,180	$ 3,686	$ 5,414	$ 3,313

Balance, January 1, 2018	$ 2,071	$ 1,850	$ 2,901	$ 5,074	$ 2,695
Accretion	(442)	(617)	(854)	(3,650)	(2,197)
Change in expected
accretable yield⁽¹⁾	113	419	8	4,486	2,476

Balance, June 30, 2018	$ 1,742	$ 1,652	$ 2,055	$ 5,910	$ 2,974

(1) Represents increases 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 six months endedJune 30, 2018, totaling $98,000, $419,000, $(167,000), $2.9 million and $1.7 million, respectively, and for the six months ended June 30, 2017, totaling $793,000, $367,000, $605,000, $1.1 million and $1.8 million, respectively.