Great Southern Bancorp, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Great Southern is a bank holding company operating Great Southern Bank, with 104 banking centers across six states and commercial loan offices in Chicago, Dallas and Tulsa.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets, year-end | $4.41 billion | $4.55 billion | Down 3.0% |
| Net income | $51.6 million | $45.3 million | Up 13.7% |
| Diluted earnings per share | $3.64 | $3.21 | Up 13.4% |
| Net interest income | $155.2 million | $163.1 million | Down 4.8% |
| Net interest margin | 3.74% | 4.05% | Down 31 basis points |
| Deposits, year-end | $3.60 billion | $3.68 billion | Down 2.2% |
| Total borrowings, year-end | $324.1 million | $416.8 million | Down $92.7 million |
| Stockholders’ equity, year-end | $471.7 million | $429.8 million | Up $41.9 million |
Earnings and margins: Interest income was $183.1 million, versus $185.2 million. Noninterest income rose 35.1% to $38.5 million, while noninterest expense fell 5.1% to $114.3 million. The efficiency ratio improved to 58.99% from 62.86%. Return on average assets was 1.16% and return on average equity was 11.32%.
Fourth quarter: Net income was $12.2 million and diluted EPS was $0.86, compared with $11.8 million and $0.83 in fourth-quarter 2016.
Cash flow: Operating activities provided $62.8 million; investing activities provided $81.4 million; financing activities used $181.7 million. Cash and cash equivalents ended the year at $242.3 million, down from $279.8 million.
Loans and credit: Net loans were approximately $3.73 billion, down 0.9%. Excluding FDIC-acquired loans and mortgage loans held for sale, gross loans increased $248.9 million, or 6.1%, led by construction, multifamily and commercial real estate lending. The allowance for loan losses was $36.5 million; provision expense was $9.1 million and net charge-offs were $10.0 million, or 0.26% of average loans. Nonperforming assets declined to $27.8 million from $39.3 million; nonperforming assets were 0.63% of year-end assets.
Liquidity and capital: The year-end loan-to-deposit ratio was 103.82%. The Bank reported $242.3 million of cash and cash equivalents, $46.4 million of unpledged securities, and available secured lines of $570.5 million at the FHLBank and $528.9 million at the Federal Reserve. The Bank was well capitalized: CET1 12.3%, Tier 1 12.3%, total capital 13.2% and leverage 11.7%. The Company’s total capital ratio was 14.1%. These figures exceeded applicable minimums.
Material changes and unusual items
- Net income increased despite lower net interest income, primarily because noninterest income rose and expenses declined. A $7.7 million pretax gain from terminating the InterBank FDIC loss-sharing agreements was a key nonrecurring contributor. The FDIC paid $15.0 million in settlement; all loss-sharing agreements had been terminated by year-end.
- Higher funding costs and the 2016 issuance of $75 million of subordinated notes contributed to margin pressure. Deposit interest expense rose 18.5%; net interest margin fell 31 basis points. Acquired-loan yield accretion added $5.0 million to 2017 interest income, versus $16.4 million in 2016.
- Core loan growth was offset by $73.5 million of reductions in acquired loans, unusually large loan paydowns, and a $137.1 million decline in consumer auto loans. The company tightened auto underwriting in late 2016 and expects auto balances to decline further through 2018.
- Deposits declined, including lower retail certificates and brokered deposits, while transaction accounts increased. FHLBank advances rose to $127.5 million; short-term borrowings fell substantially.
- The 2017 provision for income taxes included the effects of the Tax Cuts and Jobs Act, enacted December 22, 2017. The company remeasured deferred taxes and recorded a net tax-expense reduction of approximately $250,000. Management estimated a 2018 effective tax rate of 15.5%–17.5%, versus 26.7% in 2017; the filing cautions that tax accounting remained provisional.
- Common dividends declared were $0.94 per share, up from $0.88. No shares were repurchased in 2017. The company paid special employee bonuses in January 2018 following tax reform.
Outlook, commentary and risks
- Management expected to continue limiting land-development lending, while anticipating commercial real estate and construction growth if economic conditions remained strong. No formal earnings or revenue guidance was provided.
- Management described regional economic and commercial property conditions as generally improving, but noted expectations that multifamily supply could outpace demand in 2018, pressuring vacancies and rent growth.
- Credit concentration is a key risk: commercial and residential construction, commercial real estate, multifamily and other commercial lending together represented approximately 78.1% of the loan portfolio. Commercial real estate and construction lending carry property-value, project-completion, borrower cash-flow and refinancing risks.
- Other risks include rising deposit and borrowing costs, competition for deposits, reliance at times on brokered deposits and FHLBank funding, regional economic weakness, consumer-auto credit deterioration, interest-rate sensitivity, cyber and operational events, regulation and litigation. The company noted that approximately 45.9% of loans had adjustable rates and that deposit pricing could pressure margins.
- CECL, effective for the company beginning January 1, 2020, may require a one-time increase to the loan-loss allowance; the impact was not yet determined. The company reported no material unresolved litigation outcome; a certified-class overdraft-fee case ended in the Bank’s favor after the plaintiff’s appeal period expired.
Important facts for investors to verify
- How much of 2017 earnings growth and the improved efficiency ratio depended on the one-time $7.7 million FDIC termination gain, and how earnings perform as acquired-loan accretion declines.
- Whether core loan growth, especially in construction and commercial real estate, is accompanied by stable underwriting, collateral values, delinquencies and loss provisions.
- Trends in auto-loan delinquencies, repossessions and charge-offs after tighter underwriting and the planned portfolio reduction.
- Deposit retention, brokered funding usage, borrowing costs and the effect on net interest margin as rates and competition change.
- The final accounting and ongoing earnings impact of tax reform, and the eventual CECL allowance and capital effects.
- Liquidity capacity and capital levels under stress, including the availability and terms of secured borrowing lines and the company’s ability to sustain dividends.