Great Southern Bancorp, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results. Great Southern is a one-bank holding company operating primarily in Missouri, Iowa, Kansas, Minnesota, Nebraska, and Arkansas. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total interest income | $43.0 | $50.2 | $133.9 | $143.1 |
| Net interest income | $38.5 | $43.3 | $119.1 | $120.5 |
| Provision for loan losses | $2.7 | $8.4 | $14.6 | $36.1 |
| Non-interest income | $0.9 | $2.1 | $6.2 | $44.0 |
| Non-interest expense | $27.2 | $29.2 | $81.7 | $82.3 |
| Net income | $8.4 | $7.1 | $25.1 | $36.3 |
| Diluted EPS | $0.61 | $0.51 | $1.80 | $2.62 |
| Net interest margin | 4.64% | 4.75% | 4.60% | 4.47% |
Q3 net income increased 18.8%, mainly reflecting lower loan-loss provision and operating expense, partly offset by lower net interest and non-interest income. Nine-month net income fell 30.9%; 2012 included a $31.3 million pre-tax gain on the InterBank FDIC-assisted acquisition. The 2013 effective tax rate was 13.5% for the nine-month period, aided mainly by tax credits and tax-exempt income.
Cash from operations was $93.8 million and investing activities provided $187.9 million for the first nine months; financing activities used $346.0 million, primarily reflecting deposit outflows. Cash and cash equivalents declined $64.3 million to $339.8 million.
Financial position, funding, and capital
- Total assets were $3.60 billion, down 8.9% from year-end 2012. Net loans were $2.33 billion, up $9.1 million; excluding FDIC-covered loans and loans held for sale, loans grew $119.2 million, led by commercial real estate, commercial business, and consumer lending.
- Deposits were $2.85 billion, down $300.7 million, or 9.5%. Available-for-sale securities fell $226.0 million to $581.0 million, principally from mortgage-backed security paydowns and sales; proceeds helped fund loans and deposit outflows.
- Reported obligations included $127.8 million of FHLB advances, $135.8 million of customer reverse-repurchase agreements and short-term borrowings combined, $50.0 million of structured repurchase agreements, and $30.9 million of subordinated debentures.
- Stockholders’ equity was $375.6 million, or 10.4% of assets. The Bank’s Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 15.1%, 16.4%, and 10.0%; management reported the Bank and holding company were well capitalized under then-current standards.
- Available liquidity included $339.8 million cash, $101.6 million in unpledged securities, a $376.5 million FHLB line, and a $393.4 million Federal Reserve line. The company also reported $102.8 million in loan-origination commitments, $313.3 million in unused lines and unadvanced loans, and $28.6 million in letters of credit.
Credit quality and material changes
- The allowance for loan losses was $39.5 million, down $1.2 million since year-end. Nine-month net charge-offs were $15.8 million versus $37.0 million in 2012; the provision was $14.6 million versus $36.1 million. The allowance was 2.01% of loans excluding FDIC-covered loans.
- Non-performing assets excluding FDIC-covered assets were $63.2 million, or 1.75% of assets, down from $72.6 million at year-end. This comprised $21.4 million of non-performing loans and $41.8 million of foreclosed assets. Total foreclosed assets reported on the balance sheet were $55.6 million, including $13.8 million of FDIC-supported assets.
- Troubled debt restructurings were $48.1 million, or 2.0% of loans, versus $46.8 million at year-end. Of the September balance, $45.6 million was accruing; approximately $1.4 million of restructurings modified in the prior 12 months subsequently defaulted during the nine-month period.
- FDIC-acquired loan cash-flow estimates materially affect reported results. For the first nine months, related adjustments raised interest income by $26.5 million and reduced non-interest income by $22.0 million, a net $4.5 million pre-tax benefit. Management expected remaining 2013 recognition of $5.7 million in interest income and $5.0 million of negative non-interest income/expense impact. Further estimate changes remain possible.
- Available-for-sale securities declined in value as market rates rose; accumulated other comprehensive income fell $12.9 million. Management considered the debt-security unrealized losses temporary and recorded no other-than-temporary impairment in the 2013 period.
Outlook, commentary, risks, and unusual items
- Management did not expect significant overall loan-portfolio growth under then-current lending conditions. It expected 2013 provision expense and net charge-offs to remain below 2012 levels, while noting that credit losses are difficult to predict.
- Management described improving employment, housing, and commercial real estate conditions in its markets, but highlighted economic, real estate, credit, funding, interest-rate, regulatory, and competitive uncertainties. It also warned FDIC loss-sharing protection is time-limited and subject to servicing requirements; retained acquired loans could require higher reserves after coverage expires.
- Eleven Missouri banking centers were consolidated on October 25, 2013. Management expected $1.2–$1.5 million of annual pre-tax expense savings and $0.3–$0.6 million of one-time fourth-quarter 2013 costs. The affected premises, with about $1.5 million carrying value, were to be marketed for sale.
- On October 25, 2013, the Bank purchased 119 loans with $86.1 million par value for $87.9 million, a 2.125% premium. The portfolio was primarily multifamily real estate loans; management estimated a 4.3% average yield, potentially 4.7% if balances remained beyond initial maturities.
- The company’s $57.9 million SBLF preferred stock carried a 1.0% dividend rate for Q3 2013; the Q4 rate was expected to be approximately 1.0%. The preferred-stock terms constrain dividends and repurchases under specified conditions. A Missouri class-action suit challenging overdraft fees remained pending; management could not estimate the probability or amount of potential loss.
Most important facts for investors to verify
- Whether the decline in deposits and the associated use of cash and securities are stabilizing, and how available liquidity compares with funding needs and commitments.
- Whether loan quality continues to improve, particularly TDRs, non-performing commercial real estate loans, potential problem loans, and foreclosed property valuations.
- The assumptions behind FDIC-acquired loan cash-flow estimates, future accretion and indemnification-asset amortization, and the effect of loss-sharing expirations and the InterBank clawback.
- Whether the bank-center consolidation delivers projected savings without greater-than-expected costs, and whether the post-quarter loan purchase meets yield and credit expectations.
- The ultimate exposure from the overdraft-fee litigation, and the effect of SBLF terms and upcoming Basel III capital requirements on capital distributions.