GSBC

Business Context and Reporting Period

Company: Great Southern Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company operates primarily through its subsidiary, Great Southern Bank, engaging in originating residential and commercial real estate loans, construction loans, and consumer loans. Funding is derived from public deposits, brokered deposits, and borrowings from the Federal Home Loan Bank (FHLBank). The Company also operates insurance, travel, and investment service segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income for the three months ended September 30, 2010, decreased 77.4% to $6.2 million compared to $27.4 million in the same period in 2009. For the nine months, net income decreased 70.7% to $17.5 million from $59.8 million. This decline is primarily attributed to the absence of one-time gains ($89.8 million) recorded in 2009 related to FDIC-assisted acquisitions of TeamBank and Vantus Bank.
• Non-Interest Income: Non-interest income decreased significantly ($44.5 million for the quarter; $78.3 million for the nine months) due to the lack of acquisition-related gains in 2010. This was partially offset by $8.9 million in gains from the sale of available-for-sale securities.
• Net Interest Income: Net interest income increased 26.7% for the quarter and 33.4% for the nine months. This improvement was driven by a reduction in interest expense on deposits and borrowings, and an increase in accretable yield from FDIC-acquired loan pools ($4.2 million impact in Q3).
• Asset Composition: Total assets decreased $238.3 million to $3.40 billion. Net loans decreased $168.9 million, largely due to repayments in acquired loan portfolios and a reduction in construction loans. Available-for-sale securities decreased $68.0 million due to sales to realize gains and eliminate lower-yielding blocks.
• Non-Performing Assets: Non-performing assets (excluding FDIC-covered assets) increased to $75.3 million (2.21% of total assets) from $65.0 million at year-end 2009. Non-performing loans increased to $30.2 million, with construction and land development loans comprising 48.8% of this total.

Guidance, Outlook, and Risks

• Loan Growth Outlook: Management does not expect significant loan portfolio growth in the near term due to the current lending environment and economic conditions. The portfolio may continue to shrink due to net repayments.
• Interest Rate Risk: The Company maintains a slightly negative one-year interest rate sensitivity gap. While interest rate floors on prime-based loans have protected yields in the low-rate environment, they limit the immediate benefit of rising rates. Management expects net interest margin to remain somewhat compressed due to elevated funding costs relative to asset yields.
• Regulatory Impact: The Dodd-Frank Act is expected to increase operating costs and may impact deposit insurance assessments and capital requirements. New overdraft regulations effective in 2010 are expected to reduce earnings by approximately $0.01 to $0.02 per diluted share per quarter.
• Capital Position: The Company is "well capitalized" with a Tier 1 risk-based capital ratio of 16.30% and a total risk-based capital ratio of 17.56%. Participation in the Treasury's Capital Purchase Program (CPP) restricts common stock repurchases and dividend increases above $0.18 per share until December 2011 or repayment of CPP funds.
• FDIC Loss Sharing: Significant assets are covered by FDIC loss sharing agreements (TeamBank and Vantus Bank). Adjustments to expected cash flows on these loans resulted in a $14.4 million increase to accretable yield and a corresponding $12.0 million reduction in the indemnification asset in Q3 2010.

Investor Verification Checklist

• One-Time Gains: Verify the impact of the $89.8 million one-time gain in 2009 on year-over-year earnings comparisons.
• FDIC Indemnification Asset: Review the valuation and amortization of the $124.6 million FDIC indemnification asset and the sensitivity of future income to changes in expected cash flows on acquired loans.
• Non-Performing Loans: Assess the concentration of non-performing loans in the construction and land development sector ($14.7 million) and the adequacy of the allowance for loan losses ($40.1 million).
• Interest Rate Floors: Evaluate the risk of refinancing on the $625 million of prime-based loans currently at interest rate floors if market rates rise.
• Liquidity Position: Confirm the sustainability of the high cash balance ($477.5 million) and its impact on net interest margin suppression.
• Regulatory Compliance: Monitor the implementation of Dodd-Frank regulations and their potential impact on capital requirements and operating expenses.