Great Southern Bancorp, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; balance-sheet comparisons are to December 31, 2015. The unaudited company is a one-bank holding company operating primarily in Missouri and neighboring states.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $40.7m | $42.0m | $81.8m | $86.1m |
| Provision for loan losses | $2.3m | $1.3m | $4.4m | $2.6m |
| Non-interest income | $8.9m | $3.5m | $13.9m | $3.4m |
| Non-interest expense | $29.8m | $27.9m | $60.7m | $55.2m |
| Net income | $12.5m | $12.0m | $22.3m | $23.7m |
| Diluted EPS | $0.89 | $0.85 | $1.59 | $1.67 |
| Net interest margin | 4.10% | 4.53% | 4.18% | 4.67% |
- Q2 net income increased 4.4%; first-half net income declined 5.6%. First-half diluted EPS fell 4.8%.
- Q2 and first-half non-interest income included $2.7m of realized gains on an investment sale required by Federal Reserve regulations. Lower acquisition-related amortization expense also lifted reported non-interest income versus 2015.
- Net interest margin declined 43 basis points in Q2 and 49 basis points for the first half. Management attributed the declines mainly to lower loan yields and higher rates paid on deposits and borrowings. Excluding additional acquired-loan yield accretion, the declines were 4 and 8 basis points, respectively.
Financial position, cash flow and credit
- Total assets were $4.41bn, up 7.4% from year-end; net loans were $3.66bn, up 9.4%. Loan growth included organic originations and loans acquired in the Fifth Third transaction.
- Deposits were $3.38bn, up $115.4m. Cash and cash equivalents were $203.7m. Stockholders’ equity was $414.2m, or 9.4% of assets; tangible common equity to assets was 9.1%.
- Funding mix shifted materially: FHLBank advances fell to $31.5m from $263.5m, while short-term borrowings rose to $401.3m from $1.3m. Reverse-repurchase agreements were $121.8m; subordinated debentures were $25.8m. Management said lower-cost overnight FHLBank funding replaced advances.
- Six-month operating cash flow was $49.6m, investing cash outflow $122.2m, and financing cash inflow $77.1m. Cash increased $4.5m to $203.7m.
- The allowance for loan losses was $38.1m, approximately unchanged from year-end. Provision expense rose to $4.4m from $2.6m, and six-month net charge-offs were $4.4m versus $1.3m. Non-performing assets excluding FDIC-assisted acquired assets were $33.8m, or 0.77% of assets, down from $44.0m, or 1.07%, at year-end. Potential problem loans increased to $14.7m from $12.8m.
- The Bank reported regulatory capital ratios above “well-capitalized” thresholds: CET1 10.3%, Tier 1 10.3%, total risk-based 11.2%, and leverage 9.5%. The Company also reported it was well capitalized.
Material developments, outlook and risks
- The January 2016 acquisition of 12 Fifth Third branches added approximately $229m in deposits and $158m in loans. Management expected the transaction to be accretive over time; integration, retention, cost savings and earnings benefits remain subject to execution.
- On April 26, the Bank terminated loss-sharing agreements for TeamBank, Vantus and Sun Security and received $4.4m from the FDIC to settle outstanding items. Going forward, Great Southern bears all gains and losses on those formerly covered assets. The InterBank loss-sharing agreement remains in place.
- Management expected to recognize about $4.0m of acquired-loan interest income accretion and $(1.8)m of related non-interest expense during the remainder of 2016. These are estimates, not earnings guidance; additional adjustments may occur as cash-flow expectations change.
- Management expected an effective tax rate typically of 26%–28%, subject to tax-credit use, tax-exempt income and pretax earnings. No full-year earnings or revenue guidance is provided.
- Interest-rate models indicated generally positive net-interest-income sensitivity to rising rates and negative sensitivity to falling rates, with no material modeled impact in the first 12 months; effects may be greater over 12–36 months. Deposit competition and access to brokered deposits and FHLBank funding are liquidity and margin risks. The filing reports $184.1m of commitments to fund loan originations, $733.5m of unused lines and unadvanced loans, and $35.1m of letters of credit.
- Other stated risks include credit and collateral deterioration, real-estate conditions, acquisition integration, cyber incidents, regulatory changes, and valuation uncertainty in acquired loans and foreclosed assets. A certified class-action case challenges the Bank’s automated overdraft fees under Missouri usury law; management could not estimate the probability or amount of a potential loss.
- Two banking-center consolidations were planned for August and October 2016, and a new Bellevue, Nebraska center was expected to open in Q4 2016. The filing says disclosure controls were effective and reports no material control changes.
Important facts for investors to verify
- Whether loan growth, deposit gathering and Fifth Third integration deliver expected returns without further pressure on margins or operating costs.
- How much of earnings depends on acquired-loan accretion, and how those cash-flow estimates and remaining FDIC-related adjustments evolve.
- Whether elevated short-term borrowing remains appropriate and sustainable, including the effect of refinancing, funding costs and deposit competition.
- Credit trends behind the higher provision and charge-offs, rising potential problem loans, and commercial real-estate exposures; note that reported non-performing metrics exclude acquired portfolios.
- Updates on the overdraft-fee class action, FDIC settlement consequences, and management’s estimated remainder-of-year accretion and tax-rate assumptions.