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

6 Months Ended

Jun. 30, 2019

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. 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. 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. 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. 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.

Loss Sharing Agreements. The termination of the loss sharing agreements for the TeamBank, Vantus Bank, Sun Security Bank and InterBank transactions has 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 earnings are negatively impacted to the extent the Company recognizes expenses, losses or charge-offs related to such assets.

The following table presents the balances of the acquired loans related to the various FDIC-assisted transactions at June 30, 2019 and December 31, 2018.

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

June 30, 2019
Gross loans receivable	$ 9,347	$ 12,096	$ 19,266		$ 73,696		$ 50,488
Balance of accretable discount due to change in expected losses	(190)	(32)	(269)		(2,691)		(1,832)
Net carrying value to loans receivable	(9,123)	(11,834)	(18,555)		(64,863)		(46,769)
Expected loss remaining	$ 34	$ 230	$ 442		$ 6,142		$ 1,887


December 31, 2018
Gross loans receivable	$ 10,602	$ 14,097	$ 21,171		$ 85,205		$ 53,470
Balance of accretable discount due to change in expected losses	(399)	(58)	(342)		(1,695)		(169)
Net carrying value to loans receivable	(10,106)	(13,809)	(20,171)		(74,436)		(49,124)
Expected loss remaining	$ 97	$ 230	$ 658		$ 9,074		$ 4,177

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 June 30, 2019 and 2018, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $3.7 million and $725,000, respectively, to the accretable yield to be spread over the estimated remaining lives of the loans on a level-yield basis. During the six months ended June 30, 2019 and 2018, improvements in expected cash flows (reclassification of discounts from non-accretable to accretable) related to the acquired loan portfolios resulted in adjustments of $5.3 million 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.

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 June 30, 2019, the remaining accretable yield adjustment that will affect interest income is $5.1 million. Of the remaining adjustments affecting interest income, we expect to recognize $2.0 million of interest income during the remainder of 2019. 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 to income of adjustments on the Company’s financial results is shown below:

	Three Months Ended		Three Months Ended
	June 30, 2019		June 30, 2018
	(In Thousands, Except Per Share Data
	and Basis Points Data)

Impact on net interest income/
net interest margin (in basis points)	$ 1,399	12 bps	$ 1,070	10 bps
Net impact to pre-tax income	$ 1,399		$ 1,070
Net impact net of taxes	$ 1,080		$ 831
Impact to diluted earnings per share	$ 0.08		$ 0.06

	Six Months Ended		Six Months Ended
	June 30, 2019		June 30, 2018
	(In Thousands, Except Per Share Data
	and Basis Points Data)

Impact on net interest income/
net interest margin (in basis points)	$ 2,911	13 bps	$ 2,227	11 bps
Net impact to pre-tax income	$ 2,911		$ 2,227
Net impact net of taxes	$ 2,247		$ 1,729
Impact to diluted earnings per share	$ 0.16		$ 0.12

Changes in the accretable yield for acquired loan pools were as follows for the three and six months ended June 30, 2019 and 2018:

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

Balance, April 1, 2019	$ 1,399	$ 1,302	$ 2,444	$ 7,948	$ 4,329
Accretion	(180)	(261)	(340)	(1,951)	(1,132)
Change in expected
accretable yield⁽¹⁾	131	186	(245)	2,468	2,347

Balance, June 30, 2019	$ 1,350	$ 1,227	$ 1,859	$ 8,465	$ 5,544

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 (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 June 30, 2019, totaling $68,000, $186,000, $(336,000), $468,000 and $839,000, respectively, and for the three months ended June 30, 2018, totaling $115,000, $235,000, $236,000, $518,000 and $404,000, respectively.

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

Balance, January 1, 2019	$ 1,356	$ 1,432	$ 2,242	$ 4,994	$ 3,063
Accretion	(615)	(478)	(781)	(3,979)	(1,985)
Change in expected
accretable yield⁽¹⁾	609	273	398	7,450	4,466

Balance, June 30, 2019	$ 1,350	$ 1,227	$ 1,859	$ 8,465	$ 5,544

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 ended June 30, 2019, totaling $546,000, $273,000, $247,000, $4.6 million and $2.2 million, respectively, and for the six months ended June 30, 2018, totaling $98,000, $419,000, $(167,000), $2.9 million and $1.7 million, respectively.