Business context and reporting period
Great Southern Bancorp, Inc. is a one-bank holding company; Great Southern Bank operates primarily across Missouri, Iowa, Kansas, Minnesota, Nebraska and Arkansas, with commercial loan offices in Texas and Oklahoma. This unaudited Form 10-Q covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015.
On January 29, 2016, the Bank acquired 12 Fifth Third branches in the St. Louis area, adding approximately $229 million of deposits and $158 million of loans. The company also consolidated 14 branches and sold two others during the quarter.
Financial performance and condition
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Interest income | $45.7 million | $47.9 million; down 4.5% |
| Net interest income | $41.1 million | $44.1 million; down 6.8% |
| Net interest margin | 4.26% | 4.82%; down 56 basis points |
| Provision for loan losses | $2.1 million | $1.3 million |
| Non-interest income | $5.0 million | $(0.1) million |
| Non-interest expense | $30.9 million | $27.2 million; up 13.5% |
| Net income | $9.8 million | $11.7 million; down 16.0% |
| Diluted earnings per share | $0.70 | $0.83 |
| Efficiency ratio | 67.08% | 61.82% |
The increase in non-interest income largely reflects lower acquisition-related amortization expense than in Q1 2015. Results also included $1.3 million of Fifth Third acquisition-related expenses and $584,000 of impairment expense related to the subsequent FDIC loss-sharing termination.
At March 31, total assets were $4.31 billion, up 5.1% from year-end; net loans were $3.53 billion, up 5.6%; and deposits were $3.47 billion, up 6.1%. Stockholders’ equity was $405.2 million, or 9.4% of assets. Available-for-sale securities were $249.5 million, down 5.1% from year-end.
Cash and cash equivalents were $221.7 million. Operating cash flow was $27.6 million, investing cash flow was $4.2 million, and financing cash flow was $(9.3) million; cash increased $22.5 million during the quarter. Available funding included $512.7 million of FHLBank capacity, $602.9 million of Federal Reserve capacity, and $62.9 million of unpledged securities. Management stated liquidity was sufficient for depositor needs and customer credit requirements.
Funding balances shifted materially: FHLBank advances fell to $31.5 million from $263.5 million, while short-term borrowings rose to $216.3 million from $1.3 million. Repurchase-agreement funding was $135.1 million, and subordinated debentures were $25.8 million. The filing attributes the shift partly to lower-cost overnight FHLBank borrowings.
The allowance for loan losses was $37.0 million, down from $38.1 million at year-end. Q1 net charge-offs were $3.2 million, versus $664,000 a year earlier; non-performing loans were $13.3 million, and non-performing assets excluding specified acquired assets were $43.0 million, or 1.00% of assets. Troubled debt restructurings totaled $44.4 million. Bank and holding-company regulatory capital ratios exceeded applicable well-capitalized thresholds.
Material changes versus the prior comparable period
- Net income and diluted EPS declined, primarily due to lower net interest income, higher operating expenses and a larger loan-loss provision; higher non-interest income partly offset these pressures.
- Net interest margin fell 56 basis points. Management attributed the decline, in part, to lower loan yields and the prior-year recovery of $891,000 on acquired loans. Excluding acquired-loan yield accretion, management said margin declined 14 basis points year over year.
- Average loans increased to $3.50 billion from $3.14 billion, while interest income on loans fell $1.9 million. Higher average deposit and borrowing costs also contributed to weaker spread income.
- Quarter-end assets and deposits rose, largely reflecting the Fifth Third acquisition and organic loan growth. The acquisition added goodwill of approximately $4.2 million and a core deposit intangible of approximately $4.4 million.
- Operating cash flow rose to $27.6 million from $14.5 million; investing cash flow changed from a $51.7 million use to a $4.2 million source, in part because of the acquisition and securities activity.
Outlook, commentary, risks and unusual items
- Management expects the Fifth Third branch transaction to be accretive to earnings over time; the filing does not quantify expected accretion.
- For the remainder of 2016, management expected to recognize approximately $7.5 million of acquired-loan interest income accretion and $(4.1) million of related non-interest income/expense adjustments. These estimates are subject to revisions as expected cash flows are updated.
- Management expected the effective tax rate generally to be 24%–26%, depending on tax-credit usage, tax-exempt income and pretax earnings.
- Interest-rate models indicated rising rates would generally benefit net interest income and falling rates would generally hurt it, though management expected no material effect in the first 12 months after a rate change. Loan rate floors, deposit repricing, competition and reinvestment yields could alter outcomes.
- On April 26, 2016, after quarter-end, the Bank terminated the TeamBank, Vantus and Sun Security FDIC loss-sharing agreements for a $4.4 million FDIC settlement. The Bank will bear future gains and losses on those assets without FDIC sharing. The termination did not change the stated loan-yield accretion. The filing reports $584,000 of related impairment in Q1.
- Key risks include credit deterioration, real estate values, interest rates, access to deposits and wholesale funding, acquisition integration and cost savings, regulatory changes, competition, and valuation of acquired loans and foreclosed property. A Missouri class-action case challenges fees for the Bank’s automated overdraft program; management said the potential outcome or loss could not yet be estimated.
- The filing reported no material change in risk factors and no material weakness in disclosure controls; management concluded disclosure controls were effective as of March 31, 2016.
Important facts for investors to verify
- Track whether loan growth and Fifth Third integration deliver earnings accretion, while monitoring acquisition costs and deposit retention.
- Assess whether margin pressure, deposit repricing and reliance on short-term borrowings persist; verify the company’s liquidity and funding mix in subsequent filings.
- Monitor charge-offs, non-performing and potential-problem loans, commercial real estate exposures, foreclosed assets and adequacy of the allowance.
- Verify actual recognition of the projected acquired-loan accretion and related FDIC-indemnification adjustments, including the effects of the April 26 termination.
- Reconcile the FDIC termination disclosure: one part of the filing reports $61.5 million of covered loans at March 31, while MD&A reports $65.1 million. Confirm the correct figure and the affected asset balance.